By on February 10, 2011

Is the auto industry headed for a price war? Hyundai Motor USA CEO John Krafcik seems to think so, telling Reuters

I think we can officially say that a price war broke out in the industry. There is apparently a lot of pressure to deliver sales results. I would call this a step backward for the industry. This is short-term thinking in a long-term process that hurts manufacturers and consumers.

Krafcik says GM kicked off the rush for increased volume by cutting prices in January, and that Toyota (which  has increased its incentives by 37.5% since last January, according to TrueCar) “quickly” responded by matching The General’s price cuts. Honda, Nissan and Chrysler have also kept their incentives high, and Chrysler has told Automotive News [sub] that it plans on increasing sales by 45% this year. Says Krafcik

We’ll see if others decide to follow. It’s certainly not in our plan right now.

Krafcik has a point: though sales have recovered over the last year as the economy has come back from the depths of recession, industry-wide incentive spending is up 1.3% in the last 12 months. Rather than taking advantage of the economic recovery to bring incentives down and transaction prices up, automakers appear to be focused entirely on volume. That’s certainly the message GM has sent by announcing that it would no longer release its incentive data. And, as Krafcik points out, the industry has already suffered mightily from such short-term, unsustainable thinking… but not everyone shares his concern.

GM’s response: sales incentives are “targeted.”

Rick Scheidt, vice president of GM’s Chevrolet, argued that Chevrolet has become more strategic, offering few incentives on hot-selling models such as the Equinox and Cruze and higher ones on its Silverado pickup to match competitors.

“If you don’t participate, you aren’t going to be a big player,” said Scheidt. “Things are much more targeted now. I don’t think you can read that much into just one month.”

That critique was echoed by Edmunds’ head analyst Jessica Caldwell, who tells Reuters

GM was very aggressive in January, but I wouldn’t call it a price war. Toyota’s incentives were not extremely different from what it had been doing. In February, other brands may be more aggressive as a reaction (to GM).

What’s left out in this analysis is that Toyota was long a counterweight to the Detroit automakers’ incentive binges, maintaining strong price discipline without losing volume. That changed this time last year when, under attack from all sides during its recall scandal, the Japanese automaker began to boost incentives… and it has yet to take its foot off the accelerator. Toyota maintains that it “isn’t leading the industry,” but by relaxing its incentive discipline, it’s helping accelerate an incentive war.

It’s easy to forget how much overcapacity clean-up the industry went through in the last few years, but it’s foolishness to think overcapacity can’t come back. If manufacturers start cranking up production volumes and use incentives to clear unsold inventory, the industry could pull itself back out of its recovery. We hear reports from the NADA convention about the level of ego involved in sales teams of several large manufacturers… by one account, “it’s getting personal.” As good as low prices might be for consumers, let’s hope that sales bosses take their eye off volume long enough to make sure the entire industry doesn’t cut its own throat trying to outsell the next guy. The last thing America’s auto brands need now is to starve themselves of profit.

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20 Comments on “Quote Of The Day: Price Wars Edition...”

  • avatar

    Oh Hyundai, why would they cut their prices?  The Sonata blows everything in it’s price range out of the water in my opinion.

  • avatar

    Pricing power is very limited during this recovery. I am in a position of pricing commercial products and services and while our material costs, (metal, glass, vinyl, silicone, etc) has gone up, our segment competitors are keeping prices down. Truly a squeeze and we have to price for perfection. It appears the automotive world is in the same boat.

  • avatar
    Educator(of teachers)Dan

    Isn’t the “price vs cost to build” thing what got GM where it is today?

    • 0 avatar

      Based upon this quote:
      “If you don’t participate, you aren’t going to be a big player,” said Scheidt. “Things are much more targeted now. I don’t think you can read that much into just one month.”
      I’d say they’re headed back there.  On the other hand, Chrysler and Ford are close to GM’s incentives.

    • 0 avatar
      Educator(of teachers)Dan

      To quote Elvis Costello; “I tried to tell you that’s how you got killed before…”

  • avatar
    Philip Lane

    I know it’s almost cliche now to say something about the change in Hyundai’s image, but how weird is it that the man from Hyundai is the only guy who says he’s not planning to compete on price?

  • avatar

    It’s easy to forget how much overcapacity clean-up the industry went through in the last few years, but it’s foolishness to think overcapacity can’t come back.

    It can come back. It’ll be an interesting dynamic in the next year – a nascent recovery getting mildly hammered by higher gas prices with a dash of middle east unrest uncertainty thrown in. My hats off to those trying to forecast demand for models.

  • avatar

    Price wars?  I went to the car show in DC last week and couldn’t turn around without seeing a vehicle with a $35,000 sticker on it.

    • 0 avatar

      I agree…but sticker, schmicker.
      The reality is that manufacturers can slap $35,000 Monroney stickers on vehicles all day long, but I can see how the actual price paid could head south in the coming months. MSRPs seem to have crept up a bit in the last few years, gas prices are going up, trouble brewing in the Middle East and we’re in the throes of an unusually severe winter.
      I just got an email from a local dealer that is advertising rebates and discounts in the $4,500 range on pickups. Wouldn’t surprise me if we saw up to $7,500 near the end of the model year.

    • 0 avatar

      Stickers need to have some basis in reality.  As a casual observer, hoping to be two years away from buying any vehicle, I have to judge affordability based on sticker prices.
      Lets face it, prices in dealer ads are works of fiction far more often than not.

    • 0 avatar

      Lets face it, prices in dealer ads are works of fiction far more often than not.
      Yeah, got to love it. I still get steamed at one local dealer’s ads. Every vehicle’s advertised price includes an “active military discount” – which you only discover if you read the fine print. The closest military installation is well over 200 miles away.

  • avatar
    John Horner

    Any time demand is less than the available production capacity you can expect agressive price competition. Econ 101. Excess capacity is here to stay. For every potential unit of production shut down in the rust belt, two more units worth pop up in developing countries. Most markets do not get to a point of providing high, stable profits for the producers until there are at most two or three significant competitors. The auto business has more players today than it did twenty years ago and none of them have pricing power. Prices are going to be under pressure for the vast majority of vehicle sectors for a very, very long time. Any player who tries to sit on its hands and not be price competitive will get killed. Facts of competitive life.
    The car guys should talk to the poor chaps building flat panel televisions to see what a real price war looks like!

    • 0 avatar

      This is true. Though it could fudge up North American brands, price wars are a competition where the consumer wins.

    • 0 avatar

      Excellent post and all true.  The only problem with aggressive sales pricing in the automobile business is that it usually comes back to bite in form of reduced resale value… when compared to “asking price” rather than “transaction price”.  This further tarnishes a brand’s image and reduces it’s percieved value in the eyes of the consumer.  Not good in the long-run.

    • 0 avatar
      Bill Wade

      No kidding. I just picked up a 50″ Panasonic plasma for $550.

  • avatar
    John Horner

    ” … let’s hope that sales bosses take their eye off volume long enough to make sure the entire industry doesn’t cut its own throat trying to outsell the next guy.”
    That is only a few steps away from encouraging illegal price fixing. The idea of a capitalist system is that the various suppliers are supposed to aggressively compete and thereby give customers to lowest possible price.

  • avatar

    “There is apparently a lot of pressure to deliver sales results.”

    The dickens, you say!

    Still – it’s bad news. If this keeps up, Packard and Studebaker are finished.

  • avatar

    Price wars are just a race to the bottom. If I recall, Chrysler started it all with their “tent sales” in 1974, during a recession, and once it got out that if the OEM’s were still making money with the price cuts, consumers rightly assume that’s really what the products are worth, and when you start that sort of thing, all the “rich, Corinthian leather” in the world won’t ever let you go back. So, here we are almost 37 years later and nothing’s changed. By the way, I can’t take my eyes off the photo used in this article, the main reason I haven’t commented ’til now – the hand-lettered signs – that industry certainly did change – computer-manufactured and dumbed-down. I used to hand-letter signs all the time as part of my job back then and later, on the side for extra money.

  • avatar
    Mr Carpenter

    So let me get this straight.  The U.S. government illegally (certainly unconstitutionally) bailed out two major auto companies – GM and Chrysler – which had failed.  They also shafted the bond holders.  Then took over the bankruptcy and handed partial ownership to their cronies and friends in UAW places, as well as (in the case of Chrysler) handing partial ownership to FIAT of ITALY. 

    All of this, instead of allowing the bankruptcy courts to actually do things in an orderly fashion AS WRITTEN BY LAW.  

    So with all of this in mind, we can obviously see that making sure that the worst run companies can now cry for help because they are too big to fail, and receive it at the expense of the well run companies and taxpayers. 

    Then the same government makes sure to try to “diss” a major competitor by making up sh!t about unintended acceleration to try to increase “their guy’s” sales – and this is pretty well proven by the fact that another branch of the same government essentially came out a few days ago and said there were electronic gremlins in Toyotas. 

    So now that we STILL have massive production capacity overages available for the market in the US (because Chrysler survived and GM didnt’ get properly shrunk down due to interference with the free market and legal bankruptcy laws by a fascist government in Washington DC)…. we now have DECENTLY RUN companies which have been PUTTING JOBS INTO THE UNITED STATES held at a massive disadvantage because GM especially desires more market share and are planning to buy it with “incentives” which are no doubt paid for by we taxpayers, ultimately.

    Wake me up when I no longer live in the Twilight Zone, ‘mkay?

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