Subject:  GM, Ford, Chrysler get more desperate |
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Date Posted: 15:13:16 09/06/03 Sat
GM, Ford, Chrysler get more desperate
Carmakers dig deeper into pockets for greater incentives
Deirdre McMurdy
Financial Post
CREDIT: Jenelle Schneider, CanWest News Service
Jerry Jonasson, new vehicle sales manager at Southgate Chevrolet Oldsmobile in south Calgary, says General Motors' incentives are fuelling a record sales pace. Vehicles that normally would be available until November or December will be sold out by the end of September.
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Jerry Jonasson isn't a man prone to verbal flourishes or hyperbole.
Still, the new vehicle sales manager at Southgate Chev Olds, a General Motors dealership in Calgary, concedes he's never seen anything like the incentives and rebates on offer to customers -- not to mention the response.
"The impact on sales volumes has been terrific -- absolutely great," he says. "We're selling '03 models at a record pace. Vehicles we'd normally have on the lot until November or December, will be sold out by the end of September this year."
Anxious to bolster its sagging North American market share and pump up the volume of vehicle sales in an intensely competitive market, General Motors has been at the front of the pack when it comes to offering deals. It took an aggressive stance to address fears of fading consumer confidence after Sept. 11 and hasn't let up since.
Last week, it announced that its sales incentives on 2003 models to the 2004 model year. That means cash rebates of $1,000 to $4,500 on top of five-year interest-free loans for cars that haven't even been delivered to dealer's lots yet in some cases.
"No question, our corporate guys are throwing a lot of money at this," Mr. Jonasson muses. "Don't know how deep their bucket is, but it seems pretty deep."
Deep, perhaps. But increasingly desperate.
"It's unbelievable, but sales incentives this fall are twice what they were a year ago," says auto industry consultant, Dennis DesRosiers. "And there's no question that GM is driving the whole cycle."
Mr. DesRosiers says that GM's strategy is to optimize its advantage as the lowest-cost producer of the Big Three, and to squeeze either Ford or Daimler-Chrysler to the point where they have to start closing plants -- and withdrawing from the market.
"They can't go head-to-head with Honda or Toyota-even with these crazy discounts," he says. "So they're turning on the other two and trying to see who runs out of money first."
At the rate they're going, that might not take terribly long.
According to Carlos Gomes, senior economist at Scotiabank, Big Three automakers lost an average of US$180 per vehicle sold in the second quarter of 2003. That's partly a function of intense competition from foreign rivals, with players like Toyota, Hyundai and KIA biting chunks of the "bread-and-butter" compact market segment-and partly the cost of escalating incentives: they now average about $4,000 per vehicle.
Nevertheless, in August, Toyota Canada's sales surged by 21.5%, allowing it to eclipse DaimlerChrysler for the first time with a 10% share of the Canadian market. Not only that, Toyota made the gains with relatively unattractive offers of 1.9% to 3.9% financing on new vehicles.
"At current interest rates, money is relatively cheap, so these kind of financing deals are fairly sustainable," says Richard Cooper, a Canadian auto analyst at U.S.-based industry consultancy, J.D. Cooper.
"The catch is that consumers have become conditioned to expect these incentives.
"That not only undermines the urgency to act, it constantly forces automakers to raise the bar or sweeten the pot."
The pressure has led some, like DaimlerChrysler, to add variously extended warranties and a growing menu of options, such as free air conditioning, to their zero-interest financing packages.
To some extent, automakers should hope that lack of motivation translates into some pent-up demand as the U.S. economy strengthens and the stimulative effect of recent tax cuts and low interest rates kick in.
Craig Alexander, senior economist at the Toronto-Dominion Bank, says that car manufacturers should be able to sustain current financial incentive structures until late next year -- unless recent signs of a firming U.S. economy gain rapid momentum.
"We're not looking at the Fed to bump up rates until the fourth quarter of next year and even then by just 50 basis points or so," Mr. Alexander says.
"The game can continue until then, but when it's time to clawback all the goodies on the table, the effect could be quite devastating."
He adds that the Big Three North American car makers will have to get "very creative" to avoid the consequences of their own strategies, for example by paring 0% financing back to a more limited range of vehicles and models and offering fewer standard options.
Another future problem, identified by Mr. Cooper, is that "over-reliance on incentive sales takes a toll on customer loyalty."
"Loyalty overall -- with the exception of trucks -- has been diminished," he says. "But if you train customers to use more rational than emotional measures for buying your product, you definitely lose a certain clout."
Mr. DesRosiers is even more emphatic. He says it is a high-risk strategy for car makers "to sell the deal rather than the product."
"Consumers should not drink the Koolaid," he warns.
"It's a huge mistake to buy a vehicle because of the terms and then hate it for five years. And for the manufacturers, it's suicide to sell under those terms. The bad will and bitterness are huge in the aftermath."
Nevertheless, in a scramble to offset their razor-thin gross margins (often as little as $1,500 -- and negative once costs are covered) with volume, that same pressure has prompted car makers to develop and launch an unprecedented number of new model vehicles to generate buzz and entice consumers to buy. On average, manufacturers produce 50% more models than they did just five years ago.
The problem, however, is that the new products are often disappointing.
"The Big Three are spending all their dough on incentives to shore up their market share," notes Mr. DesRosiers. "They aren't spending on product improvement and quality, which is where Toyota is beating them."
Deirdre McMurdy is co-host of Global TV's MoneyWise.; dmcmurdy@globaltv.ca
© Copyright 2003 National Post
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