Content provided in partnership with

Automotive Industry

The Industry's 'Drug' Dilemma - Automakers try getting rid of incentives - Brief Article

Automotive Industries, Sept, 2000 by Ron Harbour

Can automakers kick the incentive habit? DaimlerChrysler tried recently -- and paid for it when Jeep sales plummeted.

In the automotive industry, new models come and old models go, but incentives seem to last forever.

Incentives were originally intended as temporary price cuts for customers. "Buy a car, get a check," is how the great pitchman Lee lococca first popularized the incentive on Chrysler TV ads in the 1980s. At the time, Iacocca needed all the help he could get in blowing out his company's slow-selling models. Not to be outspiffed, General Motors and Ford quickly jumped on the incentive bandwagon, matching Chrysler and then upping the ante. The war was on.

Most Popular Articles in Autos: Service Slants; 2007 utility vehicle buyer's guide: Side-By-Sides are popular; here's who ...; Transmission considerations: beyond the manual gearbox; Buell Motorcycle engineering, innovation, & dedication: in an industry ...; 100 + 10: America's oldest automotive magazine celebrates its 110th year ...; More »

Since then, incentives have become institutionalized in America's auto business They've taken on a disturbing permanence. And while a vehicle's popularity may determine the amount of the incentive, it's clear the public is looking for rebates in almost every model -- car or truck -- on the lot.

DaimlerChrysler became the latest automaker to attempt to break the public of incentiveladen deals. But after seeing the results, it might be a while before an automaker will be bold enough to try a similar strategy.

Earlier this year, Chrysler dropped selected incentive programs for some of its most desirable vehicles, including the Jeep Grand Cherokee (which is only in the middle of its current product cycle). But incentives are the industry's most alluring drug. Like an addict, the public is used to the cash off. And like an addict, it's hard to wean them from it. In the subsequent months, sales for Jeep models were off 15 percent and minivan sales were reportedly down 29 percent from the previous year.

Naturally, Ford and GM did not sit idly by while Chrysler made its customers go "cold turkey." GM stuck its rebate needle in deeper, boosting the money on several models' hoods to $2,500. Ford offered cash-back deals that averaged a few hundred dollars less.

European and Asian automakers also jumped into the incentive fray. However, while these foreign brands continued to increase market share in the first half of the year, the incentive amounts they offered were considerably less than those being touted by the former U.S. Big Three, thus providing a significant advantage in vehicle profits.

Although the overall North American market for vehicles is up in 2000, it appears to be propped up artificially by the incentives. Through the first six months, incentives in total averaged almost $1,700 per vehicle. GM was heaviest at $2,119, Daimler Chrysler $1,982, and Ford $1,588. These "deals" are in truth temporary price cuts. Unfortunately, they appear to be more permanent than temporary these days. Conversely, Asian and German brands averaged only $1,000 to $1,200 per vehicle in incentives.

Competition in the American market has risen considerably since Chairman Lee was hustling Kcars. Today, 43 percent of all cars sold in the U.S., and 20 percent of light trucks, are foreign brands. Toyota, Honda and Nissan all have shown double-digit increases in sales volume in 2000, and Japanese brands continue to gain market share in segments where they previously never participated. New plant capacity is largely being added by Honda and Toyota -- and it's mostly in the more profitable trucks, vans and SUVs.

Meanwhile, the entire industry continues to crank out product at record or near-record levels, even with a slowing of sales predicted for the second half of the year. With plant productivity and capacity utilization at all-time highs, the pressure on manufacturers to move their 2000 models is intense. If antomakers again try to reduce or eliminate incentives on 2001 vehicles, in hopes that customers will pay a premium for the newest models, they may find themselves with higher than normal inventories and lower than expected sales --just like Chrysler did.

If that scenario occurs, what will they do to spur sales of 2001 models? Why, they'll offer rebates, of course. This is a habit that shows no signs of being broken.

RON HARBOUR is president of Harbour and Assoc., manufacturing consultants in Thoy, Mich.

Automotive Industry

The Industry's 'Drug' Dilemma - Automakers try getting rid of incentives - Brief Article

Automotive Industries, Sept, 2000 by Ron Harbour

Find Research Guides for:

Find Featured Titles for: Business

Most Popular Articles in Autos

Most Popular Publications in Autos