DETROIT Buoyed by unexpectedly strong sales in 1988, U.S.automakers are hinting broadly that they will raise prices andeliminate incentives for the 1989 model year, but analysts say themove may easily backfire.
"They can't have it both ways," said Edward Sullivan of WhartonEconometrics Forecasting Associates Group. "They can get away withraising prices, but customers are too wedded to the idea that therewill be some kind of incentives around."
Sullivan and other analysts concede that the industryperformance has been so strong this year that the Big Three autocompanies can afford a sales decline for several 10-day sellingperiods before they would need to panic.
Last week, Chrysler Corp. announced it was tell ing dealers to expect price increases of an average 3 percent orabout $400 on 1989 cars and increases of up to 9 percent or over$1,000 on its hot-selling Jeep, truck and minivan models.
Ford Motor Co. officials are expected this week to announce asimilar increase, and General Motors Corp. is seen by analysts aseventually joining in.
At the same time, Chrysler and Ford officials have said theywant to scale back extensively on incentive programs that have beenoffered continually since the end of 1987. At Chrysler, the need toeliminate incentives is particularly great because its vehicles areamong the lowest-priced in the industry compared with competingmodels.
By offering incentives on top of these moderate prices, Chrysleris badly squeezing its profit margins, as the company admitted lastweek in annoucing that profits for the second quarter declined 25percent.
Automakers traditionally try to open each model year in Octoberwith price increases and without incentives. Last year, however,they quickly learned that the strategy was a mistake. Sales, whichthanks to incentives had soared in August, 1987 to an annual rate of8.6 million cars, slumped to a 5.4 million rate in October.
They crawled up to a 6 million selling rate in November beforeautomakers finally gave in and put incentives back on in December tostay. The continual rebates have kept 1988 sales at a rate of 7.7million cars, compared with the most optimistic expectations for theyear of 7.1 million autos.
At the same time, the Big Three automakers have lived up to aninformal pledge to dealers at the beginning of the year that theywould not raise car prices. The pledge, however, came at a time whenthe price of raw materials such as steel has gone up, and thecompanies have found themselves in a position of selling more carsbut seeing their profit diminished by incentives and materialsincreases.
Thus, said a Ford official who asked not to be identified, thecompanies are understandably eager to raise prices and stop payingrebates of several hundred dollars per car.
Sullivan said price increases this fall are most likely on largeand luxury cars, as well as trucks and vans. Increases will beminimal on subcompact, compact and sporty cars because buyers inthese segments are most sensitive to price and likely to shop around,he said.
Although price hikes likely would stick, Ford analyst L. RaymondWindecker said the automakers have learned from their experience lastyear with removing rebates.
"If there is some hesitancy through November, you'll seeeverybody go back to full-bore marketing programs," said the Fordanalyst.
How far would sales have to plummet before a return ofincentives is triggered? Analysts agree that a decline in the annualrate from the current 7.7 million to about 6.3 million in October orNovember - a 20 percent drop - would trigger a return of incentives.
In addition to uncertainty about the strength of the market,automakers are faced with rising consumer loan interest rates. Whileautomakers in recent years have offered car loans at miniscule rates,the typical new car loan currently carries an average rate of 11.7percent. The WEFA Group estimates this will rise to 14 percent bythe end of 1989.
Another factor causing concern for the U.S. automakers at thispoint is the strategy of their Japanese competitors. The importshave proved in the past two years that they are willing to absorb theincrease in the yen's value by raising prices only moderately.
At the same time, dealers of Japanese cars have been just asaggressive as their U.S. counterparts in offering incentives andmaking deals off the sticker price. Sullivan said WEFA expectsJapanese automakers to raise prices of cars sold in the United Statesby about 6 percent for 1989, despite predictions that the yen maystrengthen by another 20-30 percent.
"It won't come all in one hit, either," said Sullivan, whothinks Japanese automakers will raise prices by about 2 percent at atime through the model year.
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