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Analysts say the Big 3 automakers shouldn't lean too heavily on huge incentives to boost sales and market share.Discounts may haunt carmakers
If Big 3 can't wean themselves from costly incentives, vehicle value, profitability will suffer.
Dennis McLamore of Southfield speaks to Dean Sellers Ford sales consultant Jason Brewer about the Ford Family Plan, the automaker's response to GM's extension of employee discounts to all buyers.
GM to go haggle-free
Starting with its 2006 models, the world's biggest automaker plans to narrow the gap between sticker and actual selling prices to strengthen its brands, damaged by years of discounting. GM plans to cut the haggling over car prices. Will it work?
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By offering employee discounts to all comers, Detroit's automakers are luring back customers who had grown numb to their zero percent financing and generous cash rebate offers.
But the gains for General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler Group will be short-lived unless they can wean customers off ever-growing discounts and shift their focus to the vehicles' features and qualities, industry experts say.
That won't be easy. In the four years since GM launched its "Keep America Rolling" discounts after the September 11 attacks, U.S. automakers have grown reliant on incentives to sell vehicles. Efforts to curtail discounts have led to sharp sales declines, followed by splashier deals.
Wall Street analysts worry the latest plan will only take automakers further down an infernal spiral of price cuts, falling profitability and market-share losses.
"We fear Detroit will have once again simply set a lower price level for all of its products going forward, lowering the structural profitability of the industry," Merrill Lynch auto analyst John Casesa said.
After losing $1.1 billion in the first quarter, GM is cutting production and jobs. Its recovery effort also includes a new pricing strategy that mirrors the practice of its Japanese rivals.
Starting with its 2006 models, the world's biggest automaker plans to narrow the gap between sticker and actual selling prices to strengthen its brands, damaged by years of discounting.
But experts question if GM can kick the incentives habit. "How do you go from the biggest sale to 'now we have products on which we don't have rebates'?" says Mark McCready, pricing strategy director at Carsdirect.com, an online car-shopping site. "That's certainly a challenge for them."
GM originally scheduled the employee-discounts-for-all program to run for a month, through July 5, to clear out its large inventory of 2005 models. But it extended the plan, prompting Ford and Chrysler to follow suit last week.
"The simplicity of their message was driving a lot of traffic, and they were taking a lot of market share," said George Murphy, senior vice president of global brand marketing at the Chrysler Group.
Michael McClellan, a mortgage broker in Birmingham, says he reduced his monthly lease payment by around $100 by turning in his 2004 Buick Rainier three months ahead of schedule and leasing a 2005 model in June. "It was an absolute no-brainer for me," he said.
Buyers of 2005 GM models saved between $500 and $750 in June, on average, McCready estimates. "But GM got better results than if they had thrown another $1,000 rebate," he said.
GM's June sales surged 47 percent, its biggest monthly increase in 19 years.
Art Spinella, president of CNW Marketing Research in Bandon, Ore., says the plan succeeded beyond all expectations because it offered one low price to all, eliminating the haggling that goes on between dealers and customers. "They felt the price GM had set was fair. That's what consumers want. They don't want to find out tomorrow that their neighbor bought the same car for $1,000 less," he said.
So far, Japan's biggest automakers are watching the latest outbreak of the price war from the sidelines, but sticking with their approach. That has been to hold prices steady and offer customers value in the form of additional equipment as they replace models or new features at no extra cost.
In June, GM's super sale sapped demand for Ford and Chrysler vehicles. But Toyota Motor Corp.'s sales rose 14 percent, although its incentives were down slightly from May levels, according to Autodata Corp. Nissan Motor Co. and Honda Motor Co. also posted higher sales.
"After September 11, it was necessary to provide stronger incentives, and they worked in the short term. But over time, they undermine the value of the product," said Jim Press, president of Toyota Motor Sales USA. "You're selling the deal instead of the hardware, and that erodes brand equity."
The Japanese automakers also have increased incentives -- but far less than their Detroit rivals.
At the same time, they have moved slower to increase prices. Transaction prices on Toyota vehicles declined between 2002 and 2005, according to auto research site Edmunds.com, although they have risen at other major brands. But the Japanese automaker generates profits by whittling down its production costs.
"Generally, we try to pass on savings to our customers so that they get better value," Press said, although Toyota has increased sticker prices on some 2006 models.
Toyota and Honda incentives remain less than half of the industry average of $3,269 per vehicle. In June, GM's incentives totaled $4,458, a 9 percent rise over last year, according to Autodata.
Dean Sellers, general sales manager of Dean Sellers Ford in Troy, was relieved that Ford matched the GM plan. "At least now we're back on a fair playing field," he said.
But deals are only a short-term fix. "Manufacturers have to concentrate on building exciting products and gain market share that way," Sellers said. "It's a shame they have to give thousands of dollars away to gain market share."
With its 2006 lineup, GM is setting what it considers fair sticker prices -- mostly unchanged or lower from 2005 levels. For instance, the manufacturer suggested retail price on the 2006 Saturn Ion sedan is $12,825 -- or $2,455 less than the comparably equipped 2005 model.
Overall, however, GM's 2006 sticker prices are down only slightly. It has already announced rebates on some new models. Most industry experts and executives believe they will have to cut sticker prices more to reduce discounting.
Chrysler has tried to limit discounts by adding features while holding down prices since the early 2004 launch of the refreshed Dodge Grand Caravan with flat-folding Stow 'N Go seats. "It's hard to do it all at once," said Murphy.
"The success story is the 300," he said, "which has been out there for 16 months and only has $500 in incentives on it."
Detroit News staff writer Ed Garsten contributed to this story. You can reach Christine Tierney at (313) 222-1463 or ctierney@detnews.com.
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