Chrysler's Latest Turnaround Is Undone By Rebate Madness - WSJ

[Klaus]

Chrysler's Latest Turnaround Is Undone By Rebate Madness

Can the auto industry's price war get any crazier? It sure can.

The big news in the car business last week was the stunning and abrupt end of the latest Chrysler turnaround story -- done in, it appears, by out-of-control rebates.

Chrysler's surprise forecast that it will lose about $1.16 billion (€1 billion) in the second quarter because of higher-than-forecast marketing costs put a price tag on what Chrysler's former head of sales and marketing, Jim Schroer, calls Detroit's "incentives doom loop."

Mr. Schroer, who resigned abruptly on May 31, just days before Chrysler's red-ink bombshell, was well known in Detroit for his strong views on how important it is to build a strong image for automotive brands, the better to avoid selling on nothing but a deal and a smile.

Mr. Schroer pushed hard to land a multi-million-dollar deal with singer Celine Dion, so she could help give Chrysler brand vehicles a tonier image. And he hired Aerosmith, the long-lived Boston rock band, to pump up the Dodge Division's earthy "Grab Life by the Horns" message.

Mr. Schroer also tried to rein in the amount of money Chrysler offered on rebates without losing market share. The company revived the "7/70" protection plan -- the seven-year, 70,000-miles engine-and-transmission warranty idea that former Chrysler Chairman Lee Iacocca used to reassure wary consumers back in the 1980s. The thinking this time was that shoppers still worried about Chrysler's quality would accept the warranty in lieu of a bigger price cut. Instead, they demanded both.

In the end, Mr. Schroer concedes his efforts to take the high road -- selling brand image, value and improved quality -- got swamped as rivals, particularly Japanese companies, launched new sport utility vehicles and minivans "at the speed of light" against Chrysler's aging minivans and Jeep Grand Cherokee.

At the same time, General Motors piled on bigger and bigger rebates to move its growing stocks of trucks and SUVs. Ford, meanwhile, honed a complex strategy of offering targeted deals which vary by region and model, and dangling big cash awards to dealers who hit sales quotas. All this takes trainloads of cash and technical expertise that Chrysler can't match. GM and Ford have seen what happens when they try to pull the plug on the deals: Sales plunge, as they did at Chrysler last January.

When manufacturers are intent on undermining their pricing and profits to defend market share and generate cash flow short-term, few customers will stand in their way. And this is where the "doom loop" comes in. GM, Ford and Chrysler have now trained the people who shop their brands to expect that 1) sticker prices will be inflated and 2) big rebates inevitably will be offered to offset the sticker shock. As a result, 3) used Detroit brand vehicles typically fetch lower values at trade in time -- which, in turn, 4) increases the pressure to drop the prices even more up-front.

Mr. Schroer argues that successful marketing in the car business rests on "Three R's, Reliability, Resale and Residuals," with the last referring to the estimates of a vehicle's value at the end of a lease. The higher the scores in those three measures, the more likely it is that a car will sell on its merits at something like full price. Detroit is stomping on all three of these values.

"We have deals today that make the ones [offered] post-9/11 look like amateur hour," he says.

Few vehicles are selling at full price these days, of course. In Detroit, executives argue that they're not the only ones discounting their wares -- the imports are doing it too.

The Asian and European brands are offering bigger price cuts than a year ago. The average discount on Asian brand vehicles rose 46% in May to $1,197 a car, according to Autodata Corp. information used in a report by Merrill Lynch auto analyst John Casesa. European auto makers -- despite the strong euro -- raised average discounts by 61.6% to $1,847, according to the Autodata figures.

But those numbers pale compared with Autodata's estimates for GM, Ford and Chrysler. The Big Three are now trumpeting rebates as big as $4,500 a car on some models, and there's more in the form of cash awards to dealers who hit sales quotas, lease specials, deals for members of the Armed Forces, deals for suppliers, and so on.

There's no end in sight. On Thursday, the Big Three put out their weekly production reports. Sure enough, with a hefty 85 days' supply of unsold pickups, minivans and SUVs on hand, GM said it planned to work overtime at five light-truck-assembly plants next week. To pick one example, as of May 31, Autodata reckons GM has 101 days' supply of Cadillac Escalades on hand, at current sales rates. A year ago, Cadillac dealers had 64 days' worth of Escalades on hand, a more normal level. Bulletin to folks who hanker after a Hummer H2: Check your local dealer now. GM has 67 days' supply of America's Baddest SUV on hand, compared with 33 days' worth in January. For a specialty vehicle, 67 days' stock is a lot, and suggests the days when dealers could extract big premiums for the H2 will soon be over. These are trucks a lot of people actually want; the GM models people don't care about are the ones with the $4,000 rebates.

Remember, this is June. Hood-thumping wheeler-dealering isn't supposed to start until close to the end of the model year in August or September. So if rebates are above $3,000 a vehicle now, imagine what things will be like in September.

Which is exactly what smart consumers will do: Imagine what things will be like in September.

[Klaus]

Chrysler's Latest Turnaround Is Undone By Rebate Madness

Can the auto industry's price war get any crazier? It sure can.

The big news in the car business last week was the stunning and abrupt end of the latest Chrysler turnaround story -- done in, it appears, by out-of-control rebates.

Chrysler's surprise forecast that it will lose about $1.16 billion (€1 billion) in the second quarter because of higher-than-forecast marketing costs put a price tag on what Chrysler's former head of sales and marketing, Jim Schroer, calls Detroit's "incentives doom loop."

Mr. Schroer, who resigned abruptly on May 31, just days before Chrysler's red-ink bombshell, was well known in Detroit for his strong views on how important it is to build a strong image for automotive brands, the better to avoid selling on nothing but a deal and a smile.

Mr. Schroer pushed hard to land a multi-million-dollar deal with singer Celine Dion, so she could help give Chrysler brand vehicles a tonier image. And he hired Aerosmith, the long-lived Boston rock band, to pump up the Dodge Division's earthy "Grab Life by the Horns" message.

Mr. Schroer also tried to rein in the amount of money Chrysler offered on rebates without losing market share. The company revived the "7/70" protection plan -- the seven-year, 70,000-miles engine-and-transmission warranty idea that former Chrysler Chairman Lee Iacocca used to reassure wary consumers back in the 1980s. The thinking this time was that shoppers still worried about Chrysler's quality would accept the warranty in lieu of a bigger price cut. Instead, they demanded both.

In the end, Mr. Schroer concedes his efforts to take the high road -- selling brand image, value and improved quality -- got swamped as rivals, particularly Japanese companies, launched new sport utility vehicles and minivans "at the speed of light" against Chrysler's aging minivans and Jeep Grand Cherokee.

At the same time, General Motors piled on bigger and bigger rebates to move its growing stocks of trucks and SUVs. Ford, meanwhile, honed a complex strategy of offering targeted deals which vary by region and model, and dangling big cash awards to dealers who hit sales quotas. All this takes trainloads of cash and technical expertise that Chrysler can't match. GM and Ford have seen what happens when they try to pull the plug on the deals: Sales plunge, as they did at Chrysler last January.

When manufacturers are intent on undermining their pricing and profits to defend market share and generate cash flow short-term, few customers will stand in their way. And this is where the "doom loop" comes in. GM, Ford and Chrysler have now trained the people who shop their brands to expect that 1) sticker prices will be inflated and 2) big rebates inevitably will be offered to offset the sticker shock. As a result, 3) used Detroit brand vehicles typically fetch lower values at trade in time -- which, in turn, 4) increases the pressure to drop the prices even more up-front.

Mr. Schroer argues that successful marketing in the car business rests on "Three R's, Reliability, Resale and Residuals," with the last referring to the estimates of a vehicle's value at the end of a lease. The higher the scores in those three measures, the more likely it is that a car will sell on its merits at something like full price. Detroit is stomping on all three of these values.

"We have deals today that make the ones [offered] post-9/11 look like amateur hour," he says.

Few vehicles are selling at full price these days, of course. In Detroit, executives argue that they're not the only ones discounting their wares -- the imports are doing it too.

The Asian and European brands are offering bigger price cuts than a year ago. The average discount on Asian brand vehicles rose 46% in May to $1,197 a car, according to Autodata Corp. information used in a report by Merrill Lynch auto analyst John Casesa. European auto makers -- despite the strong euro -- raised average discounts by 61.6% to $1,847, according to the Autodata figures.

But those numbers pale compared with Autodata's estimates for GM, Ford and Chrysler. The Big Three are now trumpeting rebates as big as $4,500 a car on some models, and there's more in the form of cash awards to dealers who hit sales quotas, lease specials, deals for members of the Armed Forces, deals for suppliers, and so on.

There's no end in sight. On Thursday, the Big Three put out their weekly production reports. Sure enough, with a hefty 85 days' supply of unsold pickups, minivans and SUVs on hand, GM said it planned to work overtime at five light-truck-assembly plants next week. To pick one example, as of May 31, Autodata reckons GM has 101 days' supply of Cadillac Escalades on hand, at current sales rates. A year ago, Cadillac dealers had 64 days' worth of Escalades on hand, a more normal level. Bulletin to folks who hanker after a Hummer H2: Check your local dealer now. GM has 67 days' supply of America's Baddest SUV on hand, compared with 33 days' worth in January. For a specialty vehicle, 67 days' stock is a lot, and suggests the days when dealers could extract big premiums for the H2 will soon be over. These are trucks a lot of people actually want; the GM models people don't care about are the ones with the $4,000 rebates.

Remember, this is June. Hood-thumping wheeler-dealering isn't supposed to start until close to the end of the model year in August or September. So if rebates are above $3,000 a vehicle now, imagine what things will be like in September.

Which is exactly what smart consumers will do: Imagine what things will be like in September.

[Albie]

GM has 67 days' supply of America's Baddest SUV on hand, compared with 33 days' worth in January.

WOw thats alot. DO you think they will discount them yet?