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Low inventories, strong demand lift Detroit's Big 3 from pandemic rut

Pent-up demand for new cars and streamlined inventories helped catapult Detroit's Big 3 automakers from deep losses racked up during coronavirus shutdowns to unexpectedly large profits in the third quarter.

Ford Motor Co., General Motors Co. and Fiat Chrysler Automobiles NV all reported earnings that far surpassed analysts' estimates. Ford's operating profit for the quarter was more than double the S&P Capital IQ mean consensus estimate, a feat that was also achieved by FCA on its way to its best-ever quarterly profit. GM's operating profit surged 77.8% year over year.

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The impressive quarter will give the carmakers some respite and plump up their cash cushions with the longer-term economic impact of the coronavirus pandemic still unknown. It will also comfort executives who say investment in electrification has become too urgent to put off until later.

The jump in profit was achieved without significant revenue gains, reflecting stronger pricing power from refreshed product line-ups and a squeeze on inventory after lockdowns that shut factories, flipping the market into one in which the seller has had the upper hand. Another major factor was reduced costs from cash-conserving measures enacted to weather the turmoil coronavirus has inflicted, though many of these savings will not be repeated in future quarters.

"We expect [volume] for the year to be down about 18% for the U.S. for 2020 but in Q3, you started to see significant recovery in volume," said Lawrence Orlowski, director, corporate and government ratings at S&P Global. "Profitability and margins were way above expectations because of volume recovery and mix with strong demand for SUVs and pick-ups where GM, Ford and FCA have leadership."

Orlowski highlighted an increase in consumer confidence during the period, which tends to correlate strongly with new vehicle purchases, and higher demand among those who normally rely on public transport but are concerned about exposure to the virus.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

The strong profits also reflect a growing shift across the industry from maximizing sales volumes and market share to pursuing better margins and preserving brand value and residual prices, executives say. That is of growing importance to automakers as leasing gains popularity among consumers, a model under which the automaker sells the vehicle in the used market at the end of the contract.

"North America delivered a record adjusted EBIT margin despite shipments being down 8%," FCA CEO Mike Manley told analysts, noting that factory activity had returned to close to prepandemic levels. "[I]t is true to say that the momentum that we had in Q3 continues at least through the opening part of Q4. So I'm expecting the quarter to be a good one as well."

The range of measures taken to ensure a swift return to production, from worker safety to parts supply, mean that carmakers will be able to replenish the low levels of dealership inventories. U.S. automakers tend to sell more new cars straight off the lot with popular specs and colors available on the spot, hence the importance of the availability of a finished product. In contrast, European automakers rely more on a made-to-order model that implies a few weeks' waiting time for buyers.

"Our truck and full-size SUV plants are safely operating on 3 shifts, building every vehicle possible. Our dealers are doing a great job of maximizing sales and share despite tight supply," GM CEO Mary Barra said on an earnings call. Barra added that the company "will definitely be bringing EVs to market faster than what the plan was a year ago," with increased investment in this area. GM is expected to reveal more details about its electrification strategy at a Barclays automotive event on Nov. 19.

The resilience of the U.S. auto industry stretches beyond the Big 3 manufacturers. Bankruptcies across the sector in the year to date are at their lowest level in a decade, according to data from S&P Global Market Intelligence. Four of the five bankruptcies announced so far in 2020 have been in the automotive retail segment.

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Despite the challenging circumstances, automakers have managed to keep a number of key model updates and new launches on track in a market where ever-slicker SUV and pick-up designs have stepped up competition and put pressure on brand loyalty.

Ford is now preparing to launch the latest iteration of the F-150, long the U.S. truck segment leader. The model changeover will, however, create a 100,000 unit drag on sales in the fourth quarter, and feed into the company's estimate for anything between a $500 million loss and break even.

Fiat Chrysler's Dodge, Ram and Jeep brands increased their electrified offerings and held on to recent market share gains in the quarter. The company expects some of the third quarter's strength to spill into the fourth. Likewise, GM expects continued strong sales momentum in the fourth quarter and said its new Cadillac Escalade luxury SUV is sold out.

While the European passenger car market has been much weaker than the U.S. in 2020, its automakers posted similarly pleasing results, much of which drew upon their significant exposure to the Chinese market, which has proven the strongest in 2020.

The major Japanese manufacturers performed well for the same reason, with Honda Motor Co. Ltd., Toyota Motor Corp. and Nissan Motor Co. Ltd. ranking second to fourth respectively in China's car sales charts behind Volkswagen AG. Both Honda and Toyota posted quarterly profit about double that of analyst estimates.