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Auto Makers Face Tough Choice On Incentives Amid Slow Sales

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Old 07-04-2008, 11:53 PM
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Auto Makers Face Tough Choice On Incentives Amid Slow Sales

DETROIT -(Dow Jones)- U.S. auto makers saddled with growing stockpiles of unsold pickup trucks and sport-utility vehicles face a difficult choice in today's unforgiving auto market: Either pile on discounts to move slow-selling vehicles or let them languish on dealer lots.

Detroit's auto makers have tried hard in recent years to shed long-held practices of using expensive deals to lure consumers. The habit, in addition to slicing into profits, tarnishes brand images, erodes resale values of vehicles and conditions consumers to hold out for the next big sale rather than the newest or best model.

Despite the pitfalls, General Motors Corp. (GM) last month rolled out generous deals to its customers - six years of free financing on most cars and trucks - following four straight months of sales declines. The impact of the deal was evident in June sales results.

The auto maker's 18% sales slide was far less severe than declines at Ford Motor Co. (F), Chrysler LLC and even Toyota Motor Corp. (TM), which posted an uncharacteristic 21% decline.

"The sale sparked momentum by getting customers off the couch and back into the stores," Mark LaNeve, GM's sales chief, said in a conference call on Monday. "It worked."

GM felt the deal was so effective, it decided to extend the offer through July 7. But, in doing so, the auto maker is revisiting a pattern it vowed to break as part of its strategy to turn around its struggling North American operations.

GM and Ford, in particular, have won praise on Wall Street for showing more discipline in their discounting strategy. For much of the last two years the auto makers have resisted the temptation for sweeping inventive offers, even as they continued to lose ground to foreign-based rivals.

GM executives often tout internal data that say consumers are choosing the auto maker's vehicles less for the deals and more because the cars and trucks are attractive.

Ford is working to overhaul its entire approach to incentives, tailoring offers more specifically to each region of the country.

But the line is getting harder to hold.

U.S. auto sales hit their lowest point in more than a decade last month, as consumers slammed by soaring fuel prices and a collapsing housing market continued to put off big-ticket purchases like new vehicles. Even harder to sell are big pickup trucks and SUVs.

Even as Detroit auto makers levy deep production cuts at truck plants throughout North America, they continue to grapple with bloated inventories of their biggest and most expensive vehicles. Hanging onto unsold vehicles is expensive for the company and for dealers.

GM on average discounted its cars and trucks by $3,454 in June, up $563 from a year ago, according to auto information site Edmunds.com, which takes into account all incentive programs offer by auto makers. Ford's average discount was $2,745, down $386 from a year ago. Chrysler's incentives dropped $395 to $3,427. Toyota offered more generous deals, but didn't come close to the levels of the Detroit Three. The average Toyota discount was $1,186, up $198 from a year ago.

"The right answer is to find a solution somewhere in between" allowing inventory to languish and offering overly generous incentives, Jesse Toprak, chief industry analyst for Edmunds.com. "The last thing you want is to have your 2009 vehicles sitting right next to '08 models. That cannibalizes sales of both new and old models."

Ford, struggling with the same issues as GM, will likely roll out its next round of offers on July 7. The most generous deals are likely to be attached to slow-selling big trucks. Discounts will be harder to find for smaller, more fuel-efficient cars, which are getting snapped up by consumers looking to save on gasoline.

"The way you get your inventories in line with where they need to be is do it on the product side and not on the incentive side," George Pipas, Ford's sales analyst, said. "In this market, it's very hard to sell your way out of an inventory problem."
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