Quote Of The Day: Price Wars Edition

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.