Detroit automakers in bid to lure buyers

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Detroit automakers in bid to lure buyers
Wed Jul 6, 2005 6:55 PM ET

By Tom Brown

DETROIT (Reuters) - Chrysler's decision on Wednesday to jump into the
fray of hard-sell discounting signals the start of a full-scale price
war by Detroit's Big Three automakers.

The strategy may work over the short term, as it did for General
Motors Corp. last month when it moved the metal at an impressive clip
and cleared up GM's inventory problems.

But in a sign, perhaps, of the desperate times in Detroit, Chrysler
said late on Wednesday that it was bringing back Lee Iacocca, its
81-year-old former chief executive and onetime TV pitchman, to star in
ads pushing its cut-rate deals on new cars and trucks.

And Wall Street analysts said the once mighty U.S. automakers can not
price-cut their way to prosperity.

GM has been selling anybody a 2005 model car or truck at the same low
prices GM employees pay since June 1.

The world's largest automaker and its Detroit-based rivals face
stepped up competition from Asian car makers, as well as lessened
demand for gas-guzzling mid- and full-size pickups and sport utility
vehicles.

GM extended the employee discount program through Aug. 1 on Tuesday,
prompting Ford Motor Co. to say it was matching the program that
delivered blockbuster sales for GM in June.

The Chrysler arm of DaimlerChrysler launched its employee-price
program on Wednesday and, like its larger rivals, said it would shave
thousands of dollars off the sticker prices of most 2005 models.

The generous discount programs at all three automakers exclude some of
their hottest-selling models, such as the Ford Mustang, Chevrolet
Corvette and the Chrysler 300 sedan.

And it remains to be seen how the car makers will seek to
differentiate themselves, since their programs look almost identical,
with one price for all and no need for customers to haggle.

Company sources said higher advertising spending is a given across the
board and marketing efforts could dwarf those of earlier campaigns.
Chrysler alone said its U.S. media ad spending would total about $75
million this month, up about 30 percent over previous end-of-model
year promotions.

The big problem for GM -- apart from its ad spend rate after it lost
$1.1 billion in the first quarter -- is that it no longer stands alone
as the U.S. auto industry's answer to Wal-Mart Stores Inc. as the
undisputed discounter of choice.

"The impact on GM is likely to be negative," analyst Robert Barry of
Goldman Sachs said in a research note. "Part of the (GM) programs
appeal was uniqueness. Now employee pricing will become that much more
commonplace."

A GM spokesman played down the harm that could come from Ford and
Chrysler matching its incentives strategy, saying "they risk appearing
a day late and a dollar short."

Ford and Chrysler can clearly steal some of the General's thunder,
though, by getting more aggressive in the marketplace.

LONG-TERM PAIN

GM has disputed independent estimates about the cost of its consumer
incentives program.

Autodata Corp. of Woodcliff Lake, New Jersey, said GM's June
incentives increased about 11 percent over the previous month to an
industry-leading average of $4,458 per vehicle, however, and selling
cars by hacking thousands of dollars off invoice prices is not without
costs.

All of the domestic automakers could suffer more long-term pain than
gain from the escalation of Detroit's incentives war. Meanwhile, their
more nimble Japanese rivals continue to focus more on selling
products, putting a premium on sheet metal, rather than pitching the
latest deal.

"While we certainly understand GM's need to maintain volume, we are
concerned that this everyday low price strategy has only set the
domestic industry's starting price point a notch lower, and in the
long run, will further erode brand- equity and residual values,"
Merrill Lynch analyst John Casesa said in a note to clients.

He pointed out that Toyota Motor Corp.'s June U.S. incentives declined
$45 from May to an average of $1,090, while its sales were up 10
percent. Nissan Motor Co. Ltd. also lowered its incentives, while its
June sales rose 14 percent.