Panic in Detroit as Car Buyers Go Nuts

This price war has a winner, and it's GM.
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General Motors'

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ability to pick off market share in the auto industry's current price war is becoming a major problem for


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Lured by the cheap financing deals, consumers tossed frugality out the window this October where automobiles were concerned. Despite a decline in overall consumer spending for the month, analysts were projecting sales of cars and light trucks to total 20 million, just under the record 21 million sold in September 1986.

GM is leading the promotional charge and netting huge market share gains in the process. The company was the first to introduce the 0% incentives shortly after Sept. 11, and a couple of weeks ago extended its offer through Nov. 18. Ford and Chrysler, the U.S. division of



, followed suit in September and again last week. Chrysler now plans to offer 0% financing through Nov. 19, and Ford announced Monday that it would extend its program to Nov. 20.

Analysts say GM's rivals can't afford to play the game because they're losing margin and future sales volume. On the other hand, GM, which keeps gaining market share, has almost no reason to stop it.

"From an industry standpoint, it's unsustainable," says Scott Hill, analyst at Sanford Bernstein. "But if the

sales volume you're pulling forward is what belongs to your competitors, it's good."

The October sales figures were extraordinary. General Motors said car and truck sales rose 31.2% to 554,652 units. Ford's sales hit a monthly record in October, up 34% over the previous year to 418,243, while Chrysler saw sales increase a more modest 5% to 209,478. But booming sales now mean weaker sales when the incentives end. Already, analysts estimate that 2002 sales will total just 13 million vehicles, down from pre-Sept. 11 estimates of 16 million.

And while not every car that leaves a showroom gets 0% financing, on average, GM and Ford are losing an additional $200 to $300 in profit per hood compared with what they made on cash deals offered before Sept. 11. For Chrysler it's far worse. To wean consumers off incentives, the company launched a program this summer by which it rolled the price cuts implied by previous cash deals into its sale prices. In other words, if incentives would have cut the price of an automobile by $2,000, Chrysler simply lowered the price by as much. When GM began offering 0% financing, Chrysler felt it had to join in, meaning it is offering incentives on top of already reduced prices. Hill estimated Chrysler was losing 60% more per vehicle than GM or Ford.

And GM seems to have plenty of wiggle room. Hill estimates that GM could afford to spend $500 to $600 per car for each percentage point of market share it gains. "If they did that it would be even-steven," he said. "It would be neither accretive nor dilutive to the company's overall earnings." GM's market share surged to 29.6% in September from 27.3% in August, and Hill estimates the company's market share probably surged to 32.5% in October. Ford, meanwhile, was seen with flat or small increases in share.

GM has said it will launch its year-end closeout incentive program after Nov. 15, and there is little doubt that the company is aggressively pursuing its competitors' business. The automaker announced its initial plan to extend incentives through November just minutes after Ford had said in its third-quarter earnings call that they were unsustainable, according to Hill.

A lot depends on whether consumers can keep buying cars at this frenzied pace. One analyst thinks the slowdown in sales caused by the financing boom is right around the corner. "Even with incentives, the early opportunistic buyers have probably already taken advantage of the situation, and the macro situation is going to take over from here," said Gregory Kagay, ABN Amro analyst.

But consumers still love deals, and demographics might help, according to one economist. If the incentives remain on, sales won't rise but they'll continue at these levels, said Mitchell Held, economist at Salomon Smith Barney. "There's a record number of kids entering college these days," he said. "It's the baby boomers' kids that all seem to be 18 today." Give or take a few thousand vehicles, if companies continue offering 0% financing, sales volume should continue at this level through first quarter of next year at least, the economist says.

It may be hard to get rid of the deals anyway.

"The consumer is conditioned to buy with incentives, so they're still going to have to be aggressive," said Domenic Martilotti, analyst at Bear Stearns. "They may simply be more selective than across the board," he added. Chrysler said Thursday that it will offer extended warranties to buyers in November and December, in an effort to ease attention away from the loan deals.

Chrysler has said it plans to become profitable by 2002, but in the current environment, both it and Ford may have to wait until at least 2003, says Kagay. Chrysler began losing money late last year and continued to lose money in the third quarter. Ford posted a loss in the third quarter of $692 million and warned it could show a loss in the fourth quarter. For Ford, it may depend in part on what its restructuring plan will entail. The details of that plan have not been released.

GM, on the other hand, is still profitable on an operating basis and probably won't fall into the red anytime soon, analysts said, so for now anyway, the discounts probably won't end.