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Detroit’s Challenge: Weaning Buyers From Years of Deals

May 2004, by Terry Flesia, features editor

To get through the shaky economy of the last two years, carmakers loaded on the perks, ranging from zero percent financing to hefty cash rebates—and consumers got hooked on them. Now the automakers face a huge challenge: weaning consumers from all those discounts.All the “deals” have seriously eroded the automakers’ profits, particularly the domestics. Looking at the per-vehicle profit picture, in 1999 General Motors realized $1,224 profit per vehicle sold in North America. In 2002 that same profit declined to $701 per vehicle sold. The situation is even worse for Chrysler. In 1999 its per vehicle profit was $1,497. That profit slid to $226 in 2002. Of the “Big Three,” Ford suffered the most. Ford’s profit in North America turned into $114 per vehicle sold in 2002, a huge slide from Ford’s reported $1,735 per vehicle profit in 1999.Making life even more difficult for the domestic automakers is that despite the fact that the Japanese automakers’ cash rebates average about a quarter of the domestics, their North American profit per vehicle improved during the same period. Honda’s profit increased to $1,581 in 2002, up from $1,484 in 1999. Toyota surged from a $974 profit in 1999 to $1,214 in 2002.Weaning customers from the discounts won’t be easy for the domestics. In 2003, rebates for some models rose to their highest levels in years. The average cash rebate from Chevrolet was $3,231 in 2003, nearly double 2001’s $1,654 average giveaway, according to Power Information Network. Ford’s average rebate in 2003 was $2,752, more than double its 2001 average of $1,334. Lincoln’s 2003 cash rebate averaged $4,086, up from $2,449 in 2001, and Chrysler went from $1,835 in 2001 to $2832 last year.Although automakers raised sticker prices to offset some of the rebate costs, most have had to sacrifice profit margins. The Big Three are trying to break away from the heavy discounts. Executives at GM, Ford and Chrysler say an improving economy should allow them to ease off incentives, though they don’t expect to abolish them altogether. “I suspect that we’ll be having incentives in some form for the rest of our lives,” said Richard Wagoner, GM’s chief executive. On the flipside, many dealers say that rebates were the only way buyers could finance a new car.The automakers are trying other strategies to wean buyers off heavy cash discounts. Chrysler is trying to follow the lead of Japanese automakers, adding new features to its vehicles and then setting sticker prices closer to what buyers actually might pay. Ford is trying to scale back its deals by monitoring which packages of options sell best in each region of the country. Ford uses that analysis to target regional promotions that motivate buyers--but cost less than national across-the-board giveaways. GM has just extended for all of 2004 a 24-hour test-drive program.Automakers are up against a powerful force of consumer behavior. As many clothing, toy and electronics retailers found out during the Christmas shopping season, a lot of American consumers are prepared to sit on their wallets if they don’t see big discounts.Given the post-9/11 buying mentality of the American consumer today, it’s going to be a tough sell for the domestics. [email protected]
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