General Motors Corp. yesterday extended a program that allows customers to buy vehicles at discounted employee prices, prompting Ford Motor Co. and Chrysler to follow with similar incentives of their own.
The escalating price war among the Big Three U.S. automakers underscores the battle to retain market share and beat back intense competition from foreign manufacturers. The moves yesterday follow a series of incentives GM and other automakers have offered buyers, including low- or no-interest-rate loans, cash back refunds and extended warranties.
GM's offer, which was due to expire yesterday, proved so successful the company will continue it until Aug. 1. The company launched the program in June, after a dismal first quarter, in an effort to stoke sales and clear out 2005 inventory before launching its 2006 models. Sales in the month surged 41 percent from a year earlier, to the highest monthly level since September 1986.
"The strength of the program and dealer response led to us considering moving this on for another month," said Christopher Preuss, a GM spokesman. "Certainly the program has been successful beyond our expectation."
GM should not expect the sales bounce to be as strong in the second month, warned Jesse Toprak, senior analyst with Edmunds.com. "Since others are matching the program this month, the effectiveness will be less," he said. "The good side is you sell more cars, clear out excess inventory. . . . The flip side is they are essentially selling the deal and not the car, and that's always been the problem for domestics, especially for the last few years."
GM embarked on a similar strategy shortly after the Sept. 11, 2001, terrorist attacks, fending off a potential drop in sales by offering deep discounts and interest-free financing. The public soon grew to expect such incentives, and automakers had to keep offering deeper discounts even as sales began to fade.
GM began backing away from the discount strategy early this year. The new round marks a dramatic return to a strategy many experts have said buys short-term sales at the expense of profitability.
GM's market share in the United States grew 6.7 percent in June, to 32.1 percent, the highest level since December 2002, according to Edmunds.com. The employee discount, which does not apply to Corvettes, Pontiac GTOs or medium-duty trucks, knocks an average of 4 percent off the invoice price. A Buick LeSabre normally listed at $29,000, for example, would sell for $22,738 with the discount. The program increased GM's incentive spending by an average $136 to $3,865 per vehicle sold in June.
"With GM essentially considering that '05 is a lost cause, it's a matter of getting inventory down and generating some momentum to the point where they are getting into position for '06," said Kevin Tynan, senior auto analyst with Argus Research. "So if they can bring inventory down low enough through the end of year, the first quarter of '06 will be the first in eight or nine quarters where you see increased productivity."
Ford and DaimlerChrysler AG's Chrysler Group took their cue from GM's sales boost. "If you look at the month of June, the customer spoke pretty loudly they like a great deal," said Ford spokesman David Reuter.
The Ford program offers a similar employee discount to all customers but does not apply to Mustang and GT cars, the hybrid gasoline-electric Escape sport-utility vehicle, or Ford's Volvo, Jaguar, Land Rover and Aston Martin brands.
The 2005 Explorer 4X4 will have a discounted employee price of $29,577 compared with a regular sticker price of $33,860, Reuter said. With an additional cash-back rebate of $4,000, the final price would be $25,577.
Chrysler said it would announce details of its program today. "Certainly [GM] got a lot of traffic from that program they offered," said Kevin McCormick, a Chrysler spokesman. "It was something we kept our eye on over the course of the month to see what impact it had."
GM's sales jump followed the company's $1.1 billion first-quarter loss and a downgrade of its bonds to junk status by two major credit rating agencies. The company has been in talks with the United Auto Workers union to discuss decreasing employee health care programs to cut costs.
Last month, Mark LaNeve, GM's vice president of sales, service and marketing, told several reporters that the company was considering extending the program. He said it was created to get customers back into GM showrooms. "We wanted to get the focus back on the product. That was the genesis," he said.
GM shares rose 12 cents, to $34.77 yesterday, while Ford shares rose 9 cents, to $10.80. Shares of DaimlerChrysler AG dropped 38 cents, to $40.10.