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Top Auto Executives Discuss Incentives At Annual Retreat In Michigan
Detroit Free Press
August 6, 2002
By Jeffrey McCracken
TRAVERSE CITY, Mich.--Incentives, whether in the form of rebates or the currently popular 0-percent financing offers, are necessary evils that aren't going away soon and in fact, continue to zoom to record or near-record levels, said a group of auto experts.
The growing use of larger and larger incentives means lower new car and truck prices for consumers but makes profitability a challenge for automakers and suppliers, said a panel at the Management Briefing Seminars, an annual retreat for the auto industry's top executives. The average vehicle sale included $1,932 worth of incentives in June.
Prices for new cars and trucks have dropped 3.1 percent since 1996, when adjusted for new content and inflation. A variety of factors, namely the ability of the North American auto industry to make far more cars and trucks than consumers will buy, has made massive price increases on new vehicles a thing of the past.
"It used to be new models could enjoy increased pricing. No more. Not with the competition out there,"said Karla Middlebrook, DaimlerChrysler Corp. director of vehicle pricing."Incentives are very high, and if you look at the trend of them over the last 20 years, they are at or near their peak."
All these incentives on new cars and trucks, said the panelists, don't have to be a negative for the companies. They can help an automaker get rid of an excess of older models and serve other purposes.
"Incentives are a tool in the toolbox that all of the auto companies use to keep showroom traffic coming and to keep the plants up and running. It's a necessary evil and the challenge is just to do it right,"said David Andrea, director of forecasting for the Center for Automotive Research, which sponsors these seminars with the University of Michigan.
Automakers such as General Motors Corp., which have healthy balance sheets and new vehicles people want, can use incentives to grab more share of the market or attract buyers to more expensive vehicles.
GM, behind its 0-percent financing offers, spent an average of $2,591 per vehicle in June, the most in the industry. But those incentives have allowed GM to lure buyers to higher-priced products like sport-utility vehicles. As a result, GM is on pace to exceed Wall Street profit expectations.
But incentives can be a heavy burden when you've got a company like Ford Motor Co., which is struggling to make money.
In June, Ford spent an average of $2,376 per vehicle in incentives, according to the Center for Auto Research. The automaker, unlike GM, doesn't have as many new or redesigned products for consumers and is falling behind GM in labor productivity. Ford is not expected to turn a profit this year.
"All that money going to incentives at Ford or any of them is money that could be going to research and development and to newer, better products,"said Lee Sage, vice president of the automotive practice at Trilogy, an automotive software provider."If a company gets too reliant on incentives and doesn't attract consumers with better products or features, they are mortgaging the future of their company."
Sage noted that at $1,932 per vehicle, if the industry sells more than 16.5 million new cars and trucks this year as projected, that's more than $30 billion in money for incentives.
A famous and recent example of incentives harming an automaker is what happened to the Chrysler Group in 2000 as it redesigned its aging minivan. The redesigned minivan was ready for showrooms faster than expected, so Chrysler was sitting on a bunch of older models and needed sky-high incentives to get rid of them. That in turn flooded the market with low-cost, old Chrysler minivans and ate into interest for the coming new ones.
Not coincidentally, Chrysler a few months later was in the midst of a painful restructuring that led to the elimination of more than 20,000 jobs.
Automakers say the way to mitigate or compensate for all the incentive spending is to come up with better new cars and trucks more quickly and share more parts between products.
"It's difficult to think incentives are ever going away, so we as a company have to find a way to manage them and make decisions to get better products out there so incentives aren't the only thing keeping unit sales so high,"Middlebrook said.
Pretty interesting
Detroit Free Press
August 6, 2002
By Jeffrey McCracken
TRAVERSE CITY, Mich.--Incentives, whether in the form of rebates or the currently popular 0-percent financing offers, are necessary evils that aren't going away soon and in fact, continue to zoom to record or near-record levels, said a group of auto experts.
The growing use of larger and larger incentives means lower new car and truck prices for consumers but makes profitability a challenge for automakers and suppliers, said a panel at the Management Briefing Seminars, an annual retreat for the auto industry's top executives. The average vehicle sale included $1,932 worth of incentives in June.
Prices for new cars and trucks have dropped 3.1 percent since 1996, when adjusted for new content and inflation. A variety of factors, namely the ability of the North American auto industry to make far more cars and trucks than consumers will buy, has made massive price increases on new vehicles a thing of the past.
"It used to be new models could enjoy increased pricing. No more. Not with the competition out there,"said Karla Middlebrook, DaimlerChrysler Corp. director of vehicle pricing."Incentives are very high, and if you look at the trend of them over the last 20 years, they are at or near their peak."
All these incentives on new cars and trucks, said the panelists, don't have to be a negative for the companies. They can help an automaker get rid of an excess of older models and serve other purposes.
"Incentives are a tool in the toolbox that all of the auto companies use to keep showroom traffic coming and to keep the plants up and running. It's a necessary evil and the challenge is just to do it right,"said David Andrea, director of forecasting for the Center for Automotive Research, which sponsors these seminars with the University of Michigan.
Automakers such as General Motors Corp., which have healthy balance sheets and new vehicles people want, can use incentives to grab more share of the market or attract buyers to more expensive vehicles.
GM, behind its 0-percent financing offers, spent an average of $2,591 per vehicle in June, the most in the industry. But those incentives have allowed GM to lure buyers to higher-priced products like sport-utility vehicles. As a result, GM is on pace to exceed Wall Street profit expectations.
But incentives can be a heavy burden when you've got a company like Ford Motor Co., which is struggling to make money.
In June, Ford spent an average of $2,376 per vehicle in incentives, according to the Center for Auto Research. The automaker, unlike GM, doesn't have as many new or redesigned products for consumers and is falling behind GM in labor productivity. Ford is not expected to turn a profit this year.
"All that money going to incentives at Ford or any of them is money that could be going to research and development and to newer, better products,"said Lee Sage, vice president of the automotive practice at Trilogy, an automotive software provider."If a company gets too reliant on incentives and doesn't attract consumers with better products or features, they are mortgaging the future of their company."
Sage noted that at $1,932 per vehicle, if the industry sells more than 16.5 million new cars and trucks this year as projected, that's more than $30 billion in money for incentives.
A famous and recent example of incentives harming an automaker is what happened to the Chrysler Group in 2000 as it redesigned its aging minivan. The redesigned minivan was ready for showrooms faster than expected, so Chrysler was sitting on a bunch of older models and needed sky-high incentives to get rid of them. That in turn flooded the market with low-cost, old Chrysler minivans and ate into interest for the coming new ones.
Not coincidentally, Chrysler a few months later was in the midst of a painful restructuring that led to the elimination of more than 20,000 jobs.
Automakers say the way to mitigate or compensate for all the incentive spending is to come up with better new cars and trucks more quickly and share more parts between products.
"It's difficult to think incentives are ever going away, so we as a company have to find a way to manage them and make decisions to get better products out there so incentives aren't the only thing keeping unit sales so high,"Middlebrook said.
Pretty interesting
