By Tom Brown
DETROIT (Reuters) - Chrysler's decision on Wednesday to jump into the fray of hard-sell discounting signals the start of a full-scale price war by Detroit's Big Three automakers.
The strategy may work over the short term, as it did for General Motors Corp. last month when it moved the metal at an impressive clip and cleared up GM's inventory problems.
But in a sign, perhaps, of the desperate times in Detroit, Chrysler said late on Wednesday that it was bringing back Lee Iacocca, its
81-year-old former chief executive and onetime TV pitchman, to star in ads pushing its cut-rate deals on new cars and trucks.And Wall Street analysts said the once mighty U.S. automakers can not price-cut their way to prosperity.
GM has been selling anybody a 2005 model car or truck at the same low prices GM employees pay since June 1.
The world's largest automaker and its Detroit-based rivals face stepped up competition from Asian car makers, as well as lessened demand for gas-guzzling mid- and full-size pickups and sport utility vehicles.
GM extended the employee discount program through Aug. 1 on Tuesday, prompting Ford Motor Co. to say it was matching the program that delivered blockbuster sales for GM in June.
The Chrysler arm of DaimlerChrysler launched its employee-price program on Wednesday and, like its larger rivals, said it would shave thousands of dollars off the sticker prices of most 2005 models.
The generous discount programs at all three automakers exclude some of their hottest-selling models, such as the Ford Mustang, Chevrolet Corvette and the Chrysler 300 sedan.
And it remains to be seen how the car makers will seek to differentiate themselves, since their programs look almost identical, with one price for all and no need for customers to haggle.
Company sources said higher advertising spending is a given across the board and marketing efforts could dwarf those of earlier campaigns. Chrysler alone said its U.S. media ad spending would total about $75 million this month, up about 30 percent over previous end-of-model year promotions.
The big problem for GM -- apart from its ad spend rate after it lost $1.1 billion in the first quarter -- is that it no longer stands alone as the U.S. auto industry's answer to Wal-Mart Stores Inc. as the undisputed discounter of choice.
"The impact on GM is likely to be negative," analyst Robert Barry of Goldman Sachs said in a research note. "Part of the (GM) programs appeal was uniqueness. Now employee pricing will become that much more commonplace."
A GM spokesman played down the harm that could come from Ford and Chrysler matching its incentives strategy, saying "they risk appearing a day late and a dollar short."
Ford and Chrysler can clearly steal some of the General's thunder, though, by getting more aggressive in the marketplace.
LONG-TERM PAIN
GM has disputed independent estimates about the cost of its consumer incentives program.
Autodata Corp. of Woodcliff Lake, New Jersey, said GM's June incentives increased about 11 percent over the previous month to an industry-leading average of $4,458 per vehicle, however, and selling cars by hacking thousands of dollars off invoice prices is not without costs.
All of the domestic automakers could suffer more long-term pain than gain from the escalation of Detroit's incentives war. Meanwhile, their more nimble Japanese rivals continue to focus more on selling products, putting a premium on sheet metal, rather than pitching the latest deal.
"While we certainly understand GM's need to maintain volume, we are concerned that this everyday low price strategy has only set the domestic industry's starting price point a notch lower, and in the long run, will further erode brand- equity and residual values," Merrill Lynch analyst John Casesa said in a note to clients.
He pointed out that Toyota Motor Corp.'s June U.S. incentives declined $45 from May to an average of $1,090, while its sales were up 10 percent. Nissan Motor Co. Ltd. also lowered its incentives, while its June sales rose 14 percent.