Published June 28, 2005
DETROIT – General Motors Corp.'s (GM) "Employee Discount for Everyone (search)" consumer incentives program has given the struggling auto giant a bit of relief in June, boosting its U.S. sales as much as 30 percent, analysts say.
Moving the metal at bargain-basement prices is unlikely to bolster GM's profits, however. And that probably explains why no major automaker has matched the General's latest offensive in Detroit's long-running price war.
Profit margins in the highly competitive industry are already getting squeezed across the board and no one readily cuts prices further, even on end-of-model-year inventory.
Pitched as the deal of a lifetime, the GM program was described by David Healy, an analyst with Burnham Securities, as something that only came "out of dire necessity." And big incentives to clear out dealers' lots and build showroom traffic aren't the answer to all that ails GM or Detroit.
"Although Detroit has for all practical purposes closed the U.S.-Asian quality gap, the perception that American companies still produce garbage, as they actually did during much of the 1970s and 1980s, is proving most difficult to eradicate," Healy said in a research note.
"The poor quality of many of these old models has bred a new generation of car buyers who would never consider entering a domestic-brand showroom."
GM has used profit-eroding incentives to prop up sales ever since it launched interest-free loans to lure buyers into showrooms after the attacks of Sept. 11, 2001.
The current program could give GM a market share of about 30 percent, a remarkable increase from 25.8 percent last month, according to Merrill Lynch analyst John Casesa. But whatever fleeting success it has, analysts predict more long-term share erosion for Detroit's leading automakers as they compete against new vehicles from Asian rivals across the entire market.
Apart from seeing their market position hammered by the likes of Toyota Motor Corp. (search) , GM and Ford Motor Co. (F), which last week slashed its 2005 earnings outlook for the second time this year, are both struggling with high fixed costs.
They have also been sent into a tailspin this year by a dramatic slowdown in sales of mid- and large-size sport utility vehicles, once reliable profit engines that have sputtered in the face of high U.S. gasoline prices.
"The domestic car manufacturers will have to reconcile themselves to the fact that American consumers seem less enamored of big SUVs than at any time in memory," said Jack Nerad, analyst for Kelley Blue Book, an industry tracking firm.
GM's incentives are helping to drive showroom traffic for all the automakers, despite fears about slowing income growth and the impact of rising fuel prices on many consumers, Wall Street analysts say.
They say U.S. vehicle sales for June could approach a seasonally adjusted annual rate of 17.6 million, far above the 15.4 million rate last year and 16.6 million in May.
Ford may break a 12-month-long U.S. sales losing streak in June, and it may see sales rise as much as 5 percent, analysts said.
DaimlerChrysler AG's (DCX) U.S.-based Chrysler Group, riding on the continued strength of its Chrysler 300 sedan and minivans, is expected to post higher sales again in June.