Chrysler's Increase in Incentives Not Paying Off So Far

DETROIT February 20, 2003; Sharon Silke Carty writing for Dow Jones reported that hesitancy by DaimlerChrysler AG's Chrysler unit to jump feet first into the incentives game may have hurt its fourth-quarter results, as savings from cost cutting were offset by increased marketing expenses and lower volume.

General Motors Corp. and Ford Motor Co. have been going head-to-head on incentives, matching one another on offers like $4,000 cash back or zero- percent financing. Chrysler has been a reluctant participant in the one- upmanship, lagging behind the other two by an average of $300 to $400 in incentives during the year. While Chrysler's incentives were up in the fourth quarter, they still were several hundred dollars behind Ford and GM.

The power of incentives has helped GM regularly increase its share of the market. But even though Chrysler upped its incentives level in the fourth quarter, volume was down.

"They were late coming in to the game," said David Healy, an analyst with Burnham Securities. "They are still $400 to $500 per vehicle less than Ford or GM."

Mr. Healy does not own shares of DaimlerChrysler, and his firm does not have an investment banking relationship with the company.

On Thursday, the Chrysler unit posted an operating profit of $1.38 billion for 2002, compared with an operating loss of $2.29 billion for the prior year. Revenue surpassed the company's goal of breakeven in 2002, and Chrysler sold 2.82 million cars and trucks worldwide during the year.

Marketing costs were up eight percentage points to 23.6% of revenue in the fourth quarter of 2002 from 15.6% in the fourth quarter of 2001. Marketing costs include the price of incentive programs.

But the company's volume was down 5% year-over-year, to 651,000 cars and trucks in 2002 from 687,000 vehicles in 2001.

Chrysler Chief Executive Dieter Zetsche said in January the company plans to hike incentive levels in an attempt to gain back market share. But according to CNW Market Research, the company's February incentive levels are $300 behind Ford and $700 behind GM.

Chrysler has already begun offering incentives on some of its 2004 models. The company is offering a choice of zero-percent financing or $1,000 back on the 2004 Chrysler Sebring sedan and convertible, the 300M and the Concorde. The same offer is available on the Dodge Stratus sedan and the Intrepid. Buyers interested in the Jeep Grand Cherokee can get $1,500 or zero-percent financing.

Prudential Securities Inc. analyst Michael Bruynesteyn also noted that Chrysler's cost savings were "dramatically offset" by the increase in marketing expenses and a drop in volume.

Mr. Bruynesteyn doesn't own shares in DaimlerChrysler, but Prudential has had an investment banking relationship with the company in the last 12 months.

Chrysler workers will receive profit-sharing checks of about $460. The company hasn't shared its profits with workers since 2000.

The company's forecast for 2003 was cautious, noting that it expects earnings to be higher for the year.

"However, a precondition for this anticipated increase is that conditions remain stable in the most important markets," the company said in a prepared statement.

This year, Chrysler's new Pacifica crossover vehicle and Dodge Durango are expected to be big hitters for the company. Sales of those vehicles, on top of further cost cutting, should help the company reach its goals, said Mr. Healy, the Burnham Securities analyst. He has a 2003 earnings estimate of $3.65 a share.