July 5, 2005

GM extends discounts that pumped up sales

DETROIT (Reuters) - General Motors Corp. on Tuesdaysaid it was extending its "Employee Discount for Everyone"consumer incentives program through Aug. 1, a move expected tointensify a U.S. auto industry price war.

Under the program, which was launched last month and wasdue to expire July 5, the world's largest automaker is sellinganybody a new car or truck at the same lower price a GMemployee would pay.

The marketing campaign, which could put a squeeze on profitmargins across the industry, drove GM's U.S. sales up 41percent in June, the company's best sales month in 19 years.

The campaign boosted GM's market share, offsetting salesdeclines that contributed to its $1.1 billion loss in the firstquarter.

The GM incentives also hurt its cross-town Detroit rivals,however, and the Chrysler unit of DaimlerChrysler has said it will respond by rolling out its ownemployee pricing program on Wednesday.

Ford Motor Co. may also match the GM program,although a spokesman said on Tuesday that no final decisionshad been made yet.

GM's program resonated with consumers because of itssimplicity and because it eliminated the haggling over pricesthat many consumers dread, according to analysts.

But selling cars by shaving thousands of dollars off theirinvoice prices is not without costs, and it can damage anybrand's residual values.

Paul Ballew, GM's head of global market and industryanalysis, told reporters and analysts on a conference call lastFriday that GM's cost of incentives were flat or up onlyslightly in June compared to May.

But Autodata Corp. of Woodcliff Lake, New Jersey, said GM'sJune incentives increased about 11 percent over the previousmonth to an industry-leading average of $4,458 per vehicle.

"This is just going to lead to lower sticker prices ingeneral," Autodata's Dave Lucas said of GM's program and themounting pressure on other automakers to match it.

"This will have ramifications across even the Japanese,"Lucas added. "They certainly will feel the pressure."

In a move quickly matched by both Ford and Chrysler, GMhelped spur demand for new cars and trucks after the Sept. 11,2001, attacks on the United States by offering across-the boardinterest-free financing.

Merrill Lynch analyst John Casesa said he expects GM tokeep using employee discounts until they stop working, much asit did with the zero-percent incentive.

As a result, investors should expect "an increasinglypromotional environment in the near-term," Casesa said in aresearch note.