U.S. auto sales drop, but rays of stability seen

U.S. auto sales fell nearly 34 percent in May from a year earlier, but aggressive discounting helped steady results for the battered industry, according to monthly results released on Tuesday.

Industry-wide auto sales for the month reached nearly 10 million units on an annualized basis -- a better result than most economists had expected with the industry reeling from auto bankruptcies.

Chrysler spent all of May in bankruptcy after filing for court protection on April 30, while General Motors Corp prepared for a well-telegraphed bankruptcy filing throughout the month before initiating the process on Monday.

May represented the highest sales rate so for this year and industry executives seized on that development as early evidence that the U.S. auto market could be pulling out of its steepest slump since the early 1970s.

One month does not a recession end, but it was definitely a step in the right direction, said Al Castignetti, general manager of Nissan in the United States.

Sales were still far below the 14.3 million unit rate for the industry in May 2008 or the 17 million units in 2005 at the height of the recent credit-fueled boom -- a level most analysts believe is out of reach for many years.

GM aims to bring its costs down to a level that would allow it to break even at an industry-wide sales rate of 10 million vehicles as part of the bankruptcy process.

It's hard to know what the collateral impact is of the bankruptcies right now, so this may be just a short-term event, Mirko Mikelic, a portfolio manager at Fifth Third Bank, told Reuters Television. I wouldn't be saying this is maybe even the bottom. It just depends on what happens with the economy, the GDP and the unemployment numbers going forward.

The seasonally adjusted annual rate of auto sales is a key measure economists use to gauge U.S. economic health.

Ford Motor Co, the only American automaker to have avoided bankruptcy, had the strongest month among major automakers with a sales decline of 24 percent.

Sales for GM were off 30 percent and Chrysler sales dropped 47 percent.

Clearly we're starting to see both globally and in the United States, we think, the industry starting to make a turn for the better, GM sales analyst Mike DiGiovanni told analysts and reporters on a conference call.

Sales for Japan's Toyota Motor Corp and Honda Motor Co were off 41 and 42 percent, respectively.

Rival Nissan Motor Co, which spent more heavily on discounts, saw sales drop by only a third.

Nissan said it had seen more car shoppers in its showrooms than during any month since August of last year after running a heavily promoted sale in May that offered discounts and low-cost leases on vehicles like the Maxima.

FORD STEERS CLEAR

Ford executives said the company's performance in May had raised the automaker's confidence in a second-half recovery in the U.S. market as the economy begins to gain strength.

That rebound is crucial for Ford as it attempts to steer clear of the reliance on U.S. government funding that is now reshaping GM and Chrysler in bankruptcy.

For consumers and the industry, the next 90 days will be volatile and especially challenging. Frankly, we expect to see a lot of fire sales in the market, said Ford vice president of sales Ken Czubay. We are already anticipating wild swings in production from some of our competitors.

GM began what the Obama administration hopes will be a fast-track restructuring on Monday. The slimmed-down GM that will emerge will be 60 percent owned by the U.S. government.

The sale of most of Chrysler's assets to Italian automaker Fiat will take effect on Friday, clearing the way for the automaker to emerge from bankruptcy after about a month.

Chrysler remained the most aggressive of the major automakers in discounting, but incentives were up across the board, analysts said.

Industry-tracking service Edmunds.com estimated that major automakers had spent about $2.6 billion on discounts in May, up 5 percent from a month earlier. Incentive spending by the major Japanese automakers was at a record level, it said.

Ford said it had reduced incentive spending in May and officials believe market share for its Ford, Lincoln and Mercury brands grew to its highest level since 2006.

Chrysler in June is offering up to $6,000 cash on some models and zero percent financing through GMAC to prop up sales during its bankruptcy restructuring.

In addition to incentive programs underwritten by the major automakers, a number of the 789 Chrysler dealers who are set to lose their franchises this month resorted to fire sale discounts to clear out remaining inventory.

Terminating dealers have sold or redistributed all but about 3,000 of the 42,000 vehicles they had and are expected to complete the process this week, Chrysler said.

Chrysler, which has had its plants shut down for the bankruptcy, expects to have a majority of its factories producing vehicles again in the last week of June, U.S. sales executive Steve Landry said on a conference call.

Toyota and Ford both plan production increases.

Ford has added to its second-quarter production plan and set a third-quarter schedule with a year-over-year increase, while Toyota said it would raise its U.S. third-quarter production by 65,000 vehicles.

(Additional reporting by Soyoung Kim, Poornima Gupta, Nick Carey and Kevin Krolicki in Detroit, editing by Matthew Lewis)