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March 24, 2010 Big 3 pressured as Toyota ups rebates | | The Detroit News

Big 3 pressured as Toyota ups rebates

Japanese carmaker increases incentives 44% in 2 months

Toyota Motor Corp.'s recall woes would seem to be good news for American automakers, but the incentives that it's offering to help overcome a spate of bad publicity could spell trouble for its domestic competitors.

In recent weeks, Toyota has ratcheted up incentives on its cars and trucks. It's an unusual move for a company that has long been able to set its prices with little regard for the rest of the industry. And analysts fear that could trigger a pricing war.

"It's a cause for concern for everybody. They have a tremendous balance sheet -- the best in the industry -- and they really do have the ability to sway the market with their pricing," said Michael Robinet, vice president of global vehicle forecasts at CSM Worldwide.

"It's going to create an unhealthy environment."

Toyota's incentives have nearly doubled since the beginning of the year, while the industry average has increased by just 3 percent, according to proprietary data from J.D. Power and Associates obtained by The Detroit News. Toyota was offering an average of $1,542 in rebates and other incentives on each vehicle it sold in January, compared to $2,651 for all automakers in the United States. But by the end of the first week of March, Toyota's average had soared to $2,722, while the industry average had inched up to $2,730.

Other automakers -- most notably General Motors Co. -- have been quick to follow suit, creating a new race to the bottom that threatens recent gains by its cross-town rival, Ford Motor Co.

Last year, the Dearborn automaker posted $5.5 billion in net pricing gains. That was a major contributor to the automaker's $2.7 billion profit. And most of those gains came in the U.S.

"It's kind of redoing the wrongs that had been corrected by companies like Ford," Robinet said. "Ford has been doing a fantastic job of sticking to its knitting, but Toyota has a different strategy than Ford does now. They can't ignore it -- and some of the other Japanese (automakers) will not be able to ignore it either."

That has not been lost on Wall Street.

"Ford's string of car pricing increases appears under pressure," said analyst Brian Johnson of Barclays Capital. "At this point, even if the incentives only run through early April, Ford is likely to show a roughly $200 million pricing headwind in its (first-quarter) earnings."

Ford acknowledged that it has been forced to respond to Toyota's moves.

"The Toyota issue illustrates the kind of challenges we will confront in 2010," said George Pipas, head of sales analysis and forecasting at the Dearborn automaker.

Toyota is harder to ignore than GM or Chrysler, and he said Ford is responding to its increased incentives "tactically." Rather than increasing its own incentives across the board, Ford is countering Toyota by offering zero-percent financing for 60 months on its Focus and Fusion.

"These two cars face off against Toyota's two highest-volume vehicles, the Corolla and Camry," Pipas said. "They are the most likely to be cross-shopped. You don't want to give your customers a reason to leave."

Chrysler watching Toyota

The one thing Ford has going for it is a steady stream of new cars and trucks. Analysts say Chrysler Group LLC is not so lucky. The Auburn Hills company has only one new product for the 2010 model year: the Ram Heavy Duty pickup.

Chrysler's enormous incentives, the biggest in the industry, are the only reason that people are still buying Chryslers, according to Robinet. The attractive deals now being offered by Toyota, he said, are bound to lure away many of those prospective customers.

"It's not going to be good for a company like Chrysler that is trying to build volume," he said.

Chrysler executives, who spoke to The Detroit News on the condition of anonymity, said they were watching Toyota's moves.

"What Toyota has done has certainly stirred the marketplace up," they said. "But we're not overly worried about that. We don't get a high degree of cross-shopping."

Conquest data from J.D. Power bears that out. It shows that most of the people buying Toyotas today already are Toyota customers. Before it began recalling vehicles for problems with unintended acceleration, many of Toyota's customers were trading in other automaker's products.

Chrysler said it will begin introducing new products later this year, and will work to lower its incentives regardless of what other carmakers do on pricing.

"We're selling the product, not the deal. That's what we're doing now. We will not waiver and we will not panic," one executive said, adding that the company is trying to better match production with the actual demand for its vehicles.

But the executive also said Chrysler cannot ignore the rest of the market.

"The commitment that we've made with our dealers is that we will remain competitive," he said.

Consumers win

GM was one of the first automakers to respond to Toyota's increased incentives by sweetening its own deals. Like Ford, GM has newer products -- some of which are doing well in the marketplace. But like Chrysler, it has been losing market share since it filed for bankruptcy last year and is struggling to build volumes.

"Every automaker out there is aggressively pursuing customers," said GM spokesman Tom Henderson. "We're going to be competitive."

But he said GM also is working to manage its inventories so it does not build more cars and trucks than its dealers need.

If there is a winner in this incentive war, it is consumers.

"It's a great marketplace for car buyers," said analyst James Bell of Kelley Blue Book. "It's also bringing new vehicles to light, because Toyota owners are starting to look at other brands."

Robinet does not expect Toyota to let up on incentives anytime soon. But if there is one thing all three Detroit carmakers can agree on, it is this: Incentives are only a temporary solution that can create even more problems in the long run.
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