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Detroit automakers in hard-sell bid to lure buyers

July 6, 2005

By Tom Brown

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

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 Wall Street analysts said the automakers can’t
price-cut their way to prosperity, and weaker market pricing
does not bode well for new vehicle launches in the fall.

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 and 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.

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 that
“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.




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