Summer of subdued auto discounts forecast

Roland Jones Business news editor • Profile • E-mail

Summer is here and the Big Three U.S. automakers are revving up a new round of inducements to lure customers into car showrooms and clear out their inventories. But don’t expect another summer of generous incentives.

Faced with a declining market share, General Motors, Ford and Chrysler have ginned up sales for the past five years with a series of discount programs that culminated in GM’s “employee” price deal last summer, which offered consumers the same price traditionally given to company employees and their family members.

The incentive program worked, but sales plummeted as soon as the discounts expired in October. Although the discounts have proved popular with car buyers, they are a double-edged sword for automotive companies, sacrificing profit margin for the sake of sales volume. Critics also say sharp discounting cheapens brand image and hurts resale values.

“This year’s discounting doesn’t have the same fire-sale connotations that we saw last summer — it’s more subdued,” said Jack Nerad, automotive analyst at Kelley Blue Book, a vehicle information resource. He said this year’s incentives are aimed more at the traditional seasonal goal of clearing out vehicles from the previous model year.

So far, only Chrysler has rolled out a far-reaching incentive plan. The U.S. unit of DaimlerChrysler said Friday it plans to offer employee discounts to everyone on most 2006 models, beginning Saturday and lasting through July. In addition, Chrysler’s incentives give buyers the choice of zero percent financing for 36 months, or rebates that vary by model.

Slumping market share for Big 3
The Big Three U.S. automakers need to do something to move more cars off dealers’ lots. Their combined U.S. market share fell to 56 percent in the first quarter of this year, down from 58 percent the year before. At the same time, Japanese rivals Toyota and Honda had a combined share of 22 percent, up from 21 percent the year before.

Last year’s strong June will mean a sharp decline in market share this year, notes Jesse Toprak, executive director of pricing and market analysis for Edmunds.com, an automotive information site. Toprak expects the combined share for Chrysler, Ford and GM in the month just ending will be 55.5 percent, down from 63.1 percent in June 2005.

“Last summer, the domestics enjoyed great success because of the employee discount program,” said Toprak. “They haven’t yet found the silver bullet for 2006, but they sure could use it.”

Hardest hit will be GM, said Toprak. He predicts its sales will drop nearly 32 percent compared with June 2005. Even so, GM has vowed not to return to the discounting strategy it used last summer.

Mark LaNeve, GM’s vice president of vehicle sales for North America, said this week that the company has no intention of reviving last year’s employee pricing plan and instead will offer zero-percent financing for up to six years on many of its remaining 2006 models. Ford also plans to offer no-interest loans and $1,000 gasoline cards to buyers.

The employee-pricing plan, which amounts to a 5 percent discount, would probably not work as well as it did last year and in any case is not popular with GM dealers, LaNeve said. Employee pricing also would go against GM’s goal of trying to wean itself off incentives and increase its average sales price.

‘The right strategy’
“We don’t want to go to market that way,” said LaNeve, adding that GM is trying to improve its brand image so it can sell great products rather than great incentives. “We’re confident we’ve got the right strategy, and we’re going to continue down this path.”

Indeed, one reason for the less generous incentives this year is the success of certain 2007 model GM trucks, including the Chevy Tahoe, Chevy Suburban, GMC Yukon and Cadillac Escalade, all of which have been selling well without the aid of incentives, according to Tom Appel, editor of Consumer Guide Automotive.

“These are some real bright spots for GM,” said Appel. “The 2007 models of these trucks have really grabbed the imagination of the public, and they really have improved over 2006 and are slightly more fuel efficient, which is a big plus. But on the other hand there are big incentives on their 2006 predecessors, which are still unsold on dealers’ lots.”

Most of this year’s incentives will be targeted at selling SUVs and other gas-guzzlers that have seen sales suffer as pump prices have headed above $3 a gallon. GM, for example, is offering  interest-free loans of varying durations on 2006 Cadillac, Saab and Hummer models and some newer 2007 SUVs.

In the minivan category, a rebate war is brewing — especially between Ford and Chrysler — with rebates of up to $4,000 offered for some models.

“Sales numbers show that the minivan market is shrinking, and companies are fighting for a smaller and smaller piece of it,” Appel said. “I think the same thing is happening here as happened to the traditional truck and SUV market, where we are also seeing high incentives. People are moving to crossover vehicles like the Toyota Highlander instead.”

Crossover vehicles — which blend the ride and style of a passenger vehicle with the practicality of a SUV — are the fastest-growing segment of the U.S. vehicle market.

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