U.S. Vehicle Price War Brewing

DETROIT June 9, 2006; Poornima Gupta writing for Reuters reported that soft U.S. vehicle sales in May, declining consumer confidence in the face of rising gasoline prices, and a weak sales forecast for the summer may spark a new rebate war among U.S. automakers, according to analysts.

With the companies gearing up to launch vehicles for the 2007 model year, most of them need to clear space on dealer lots that are now filled with 2006 models.

Mike Jackson, chief executive of dealership group AutoNation Inc., expects a form of clearance sale this summer.

"It is the end of the model year," said Jackson, who runs the largest public U.S. dealership group. "I think it is entirely appropriate."

Ford Motor Co., whose U.S. sales fell 6 percent in May, upped the ante last week by offering interest-free loans on most of its vehicles and an extra $1,000 in cash for gas. This is in addition to rebates of up to $4,000 on certain models.

"For the last several months, spending strategies among the Big Three diverged, with GM pulling back while Ford and Chrysler pushed on," Merrill Lynch analyst John Murphy said in a recent note to clients. "We think the distinction may become more blurred this summer with the return to big incentives at all three companies."

So far, General Motors Corp. has shied away from raising incentives, even in the face of weaker retail sales. The automaker currently has a limited gas-money promotion, similar to the one offered by Ford, in Florida and California.

Ford's new rebate program "could cause some manufacturers to increase their incentives programs on select models in response to Ford's actions," said Joseph Amaturo, an analyst with Calyon Securities.

While most analysts forecast an uptick in consumer rebates, all agree they will not rise to the levels of 2005, when GM shook the market by offering employee pricing discounts to all that were later matched by Ford and Chrysler Group.

GM Chief Executive Rick Wagoner said recently that the automaker would stick to its strategy of simpler pricing, but left the door open for future sales promotions.

GM's sales analysis manager, Paul Ballew, did indicate that Ford's new rebate program has put pressure on the automaker.

"Certainly Ford has done some things here recently that increased the temperature," Ballew said when reviewing GM's May sales results last week. "It is certainly an aggressive play on their part."

GM's U.S. sales fell 16 percent in May, with retail sales off 15 percent. More worrisome was a 13 percent decline in truck sales, including declines in popular pickup trucks such as Chevrolet Suburban and GMC Sierra, each of which saw sales fall 12 percent.

Chrysler, whose sales fell 14 percent in May, also witnessed a painful decline in pickup truck sales.

The pickup segment is extremely competitive, said Gary Dilts, Chrysler's senior vice president for sales.

"If you leave any vehicle, any model uncovered from an incentive position, you're going to feel it at the end of the month," he said, adding that Chrysler was studying Ford's program.

The weakness in the high-margin truck segment could prompt U.S. automakers to raise incentives, analysts said.

Another motivation could be rising inventories of unsold cars and trucks.

"Inventory levels remain a concern with both Chrysler, at 77 days' sales, and GM, at 84 days' sales, up from last year," Deutsche Bank analyst Rod Lache said.

He said the increase is especially concerning at GM, given relatively high inventories of high-margin products such as the Avalanche, Silverado pickup truck, Tahoe and Yukon SUVs.