Skip to main content
Publish date:

Flag-Waving in Automaker Price War

Behind the ads, the Big Three are in a pitched battle for buyers' hearts and dollars.

Behind all those ads extolling the obvious patriotism of laying out $20,000 for a new American car, a cut-throat war for sales and market share is being fought among the nation's Big Three automakers.

The No. 1 U.S. automaker,

General Motors

(GM) - Get General Motors Company Report

, recently tightened what's becoming a stranglehold on rivals

Ford Motor

(F) - Get Ford Motor Company Report



, forcing them to make some tough decisions.

GM announced Wednesday it will extend through Nov. 18 its "0% financing" incentives launched shortly after the terrorist attacks. Ford and Chrysler, which followed GM's lead in September, say they're analyzing whether to match GM's latest move.

The incentives are getting cars off lots, but they're costing the companies dearly, and analysts expect decreased sales next year and even delays on future product rollouts. With the economy in a slump, the car companies were already offering fat cash-back discounts, and auto sales for the year through October are around 19 million on an annualized basis, says Scott Hill, an analyst at Bernstein. That's well above the average for a year of "normal" economic growth, he says.

TheStreet Recommends

Robbing Peter

"Clearly there's a disconnect. Ultimately those sales are going to collapse. All you're doing is stealing sales from a forward period of time," he said. The increase in consumer appetite for vehicles now means industrywide sales could fall to between 13 million and 14 million vehicles in 2002, as opposed to the 16 million the industry was projecting before Sept. 11, several analysts said.

Already, the Big Three are losing big bucks, hurt by the discounts and by tumbling fleet sales to rental car companies. General Motors on Thursday reported a loss for the July-September period of $368 million, or 41 cents a share, beating Wall Street expectations, but said it will fall short of its fourth-quarter target. Ford Motor on Wednesday posted post a quarterly loss for the second time this year. The company lost $692 million, or 38 cents per share, for the third quarter, and warned it could show a loss in the fourth quarter. The company cited interest-free financing and its program to replace faulty Firestone tires. Chrysler is scheduled to report earnings on Oct. 22, and analysts are expecting the troubled U.S. division of



to post a loss as well.

Hill estimated that total incentives were costing the companies $2,000 or more per automobile. To trim the fat, companies may cut overtime production and delay product launches, said ABN Amro analyst Gregory Kagay.


Industry production was down 10% in the third quarter vs. last year, partly due to temporary closures of plants after Sept. 11, and is expected to be down 5% in the fourth quarter vs. last year. Total production for next year is seen dropping 16% year over year, Kagay said. Already Ford has eliminated bonuses for its top executives and announced plans to cut its work force by 10%. Chrysler announced a major restructuring plan earlier this year that included 26,000 layoffs and reaching break-even by 2002. But that plan was based on annual industrywide sales of 16 million vehicles.

For GM the outlook is a little brighter.

"For the first time in 25 years, GM has the strongest product, and it's forcing their rivals to make this decision: Do I cede further share to GM by backing off incentives, or do I cede share in the future by continuing current incentives, draining my cash, and hampering further product rollouts?" said Hill.

The company's share of the light-vehicle market rose to 29.6% in September from 27.3% in August. Ford's share fell to 22.2% from 22.8%. Chrysler's share fell to 13% in September from 16% the previous year, according to Auto Data Corporation data.

Kagay expects GM will continue to pick up market share, but GM said it might be hard to keep up the current pace. The company says it will launch its year-end closeout incentive program after Nov. 15, but if it keeps grabbing share it might think about another extension of 0% financing, analysts said.

In the meantime, Chrysler may give up the fight for share. A spokesman for the company said that when considering whether to continue employing incentives, the company would give precedence to profits over market share. "We are not in a position to sacrifice profits if at all possible," he said. Ford said only that it is "assessing" GM's extension.