EYES ON THE ROAD
By JOSEPH B. WHITE     
    
Auto Makers Wean Themselves From Costly Sales Incentives
Getting Better at Balancing Supply and Demand -- But Will They Stick to It?




Maybe you don't feel it just yet, but it's that magical time of year when kids of all ages dare to dream.
The leaders of big car companies have visions dancing in their heads, too, but not of sugar plums.
They're dreaming of higher prices.

Sales are sluggish and consumers are worried about the impact of high energy prices on their bank accounts or their
businesses. But strangely enough, the auto industry sees this as a good time to try to end a multi-year slide in real prices,
adjusted for inflation and new equipment.

What Detroit – and rivals in Tokyo and Frankfurt – wants to do is convince consumers that the sticker price is the price,
or at least, closer to a fair price than in the recent past.

Surprisingly, the auto companies appear to be having some success – at least in the short run.

After years of declines, new vehicle prices have been flattening out since last December.

Eight of the nine biggest car makers in the U.S. market managed to push up their average transaction prices for vehicles
during the third quarter from the same period a year ago. GM increased average retail transaction prices by 5.5% to lead
the group. On average, transaction prices for the nine manufacturers rose 2.6% during the third quarter from a year earlier.

Both General Motors Corp. and Ford reported losses last week in their North American auto businesses.

But the losses would have been far worse if the two companies hadn't succeeded in pushing up prices, largely by reining
in discounts. At Ford, higher prices narrowed the third-quarter loss in North America by $1 billion, or about $360 more per
vehicle. World-wide, Ford netted $1.3 billion in higher prices for its vehicles compared to a year ago.

For most of this decade, Detroit's auto makers did a poor job of balancing production with actual consumer demand.
The reasons are many, starting with the fact that car makers book revenue when a vehicle is sold to a dealer
 -- and ordinarily that "sale" is booked whenever a vehicle is built. Never mind that a car could be "sold" and then sit for
weeks in a parking lot before a real customer showed up.

Throw on top of that the old United Auto Workers union contract that compelled the Detroit Three to pay U.S. factory workers
whether they built cars or not, and then season with a penchant for rosy scenario sales projections and inwardly focused
market-share targets and you get the toxic combination of perverse incentives that resulted in endless rounds of distressed
merchandise discounting. Selling new cars as if they were leftovers at a cheap electronics store helped to tarnish the images
of Detroit brands, and perpetuate weak resale values that drove customers to brands such as Honda or Lexus or BMW.
 
By contrast, the strongest of the European and Japanese auto makers rely less on panicky deals, because they are more
disciplined about keeping inventories down.

Toyota Motor Corp., for example, has had a rough patch with sales the past few months, resorting to very Detroit-like deals
to shift its big Tundra pickup. Even so, Toyota's total inventory of unsold vehicles in the U.S. is just a 46-day supply as of Oct. 31,
compared to 79 days, 80 days, and 84 days for GM, Ford and Chrysler LLC respectively.

Among the big European names, BMW is running the tightest ship, with just 24 days' supply as of Halloween.
Mercedes-Benz is at 42 days, and Audi at 61 days.

Detroit's giants are catching on to this supply and demand thing. The process is lumpy and imperfect.
There's a reason why industry executives talk about discounts using the language of addiction, as in, "we have to get off incentives."
As with booze or cigarettes, it sometimes takes a crisis to convince the addict that change will be less painful than muddling
through on the sauce.

In Detroit's case, the crisis came with financial losses that, among the Three, total more than $20 billion since 2005.
Of course, there's also the continuing downward spiral in market share. But equally bad is the dwindling share of mind
Detroit brands have among influential and affluent consumers.

When your vehicles are synonymous with rent-a-car, you're in a bad place.

Now that a new UAW contract makes it less costly to idle unneeded assembly lines, the Detroit companies are curbing
production, and whittling down the volume of vehicles they sell at big discounts to rental car fleets.

There are signs that the discipline, and some improved designs, are paying off.

GM's Cadillac division has just 24 days' supply of its new CTS model, a direct competitor of the BMW 3-Series.
GM has just 27 days' worth of its Buick Enclave crossovers to sell – and GM is offering almost nothing in the way of
discounts as a result. GM is cutting a shift of production at the plant that builds the Enclave and two similar vehicles
sold through the GMC and Saturn brands, to avoid a potential glut if the market slows.

Ford doesn't have anything quite as hot as the Enclave on its lots. But the company is managing to stabilize and even
raise prices for its mid-sized Fusion. A 2008 Fusion sold for about US$19,282 in October, compared to $19,125 in
September. For the 2007 model year, Fusion prices bounced around in a range between $18,125 and $18,746.

Ford is limiting bulk sales to fleets, which sacrifices market share in favor of bolstering resale values for new cars
sold to consumers.

What all this means for consumers is that the game of cat and mouse between manufacturers and shoppers could
get more challenging – if what you want is a big rebate or a no-interest loan. December is traditionally a good month
for deals on luxury models and leftovers from last year, and it's likely that custom will continue.

The wild card is how much the soaring value of the euro against the dollar will dampen the holiday spirit at the
German brands. Even if you hate Lexus, you should thank them for keeping your BMW more affordable.

Longer term, the ability of the mass market car makers, both American and Japanese, to forswear crazy deals
will depend on whether the effort to hold prices starts to cost too much in terms of sales volume.

Unfortunately for the manufacturers and their shareholders, the underlying causes of weak automotive pricing
– a glut of car-making capacity world-wide and the status of the U.S. as the open market of choice – haven't changed.
It's hard enough to walk the straight and narrow path. It's even harder when the whole world is against you.