March 31 (Bloomberg) -- Chevrolet dealer Gordon Stewart knows what it takes to sell a truck: cash discounts. Yet General Motors Co. won’t increase incentives to match its U.S. rivals.
“Our truck business has been hammered,” said Stewart, who has four Chevy stores in Michigan, Florida and Georgia. “It’s hard to sell a pickup right now with our competitive approach. We don’t equal Ford’s incentives and we don’t even come close to Dodge’s.”
This month, Chrysler offered an average incentive of $5,598 per truck on the Ram 1500, 35 percent more than the Ford F-150 and 46 percent more than Silverado, according to data dealers provide to researcher J.D. Power and Associates obtained by Bloomberg News. GM is holding off on incentives to preserve profit margins on its redesigned pickups.
This newfound discipline after years of matching foes’ offers or leading the way in discounting may give investors reassurance that the Detroit-based automaker has learned important lessons of its 2009 bankruptcy. GM’s gross margins in the first quarter may increase more than 20 percent while Ford’s may fall by almost 18 percent, according to analyst estimates compiled by Bloomberg.
The restraint isn’t without disadvantages for GM, which is also grappling with a 2.59 million car recall that threatens the company’s safety reputation. In the tussle for lucrative and loyal truck buyers, Chrysler Group LLC’s Ram boosted sales by 24 percent this year through February, while Ford’s F-series is up just 1.1 percent and the Chevy Silverado has fallen 15 percent.
“This has always been a cash-on-the-hood kind of product segment,” said Larry Dominique, president of ALG Inc., a Santa Barbara, California-based company that sets vehicle resale values. “This is a huge segment. There’s lots of plants running, there’s a lot of metal being produced and automakers want to push it out.”
Strong sales of Ram pickups, including last year’s 21 percent gain, have kept Chrysler’s streak of monthly sales gains going to 47 months. The run will almost certainly continue through March: The Auburn Hills, Michigan-based automaker will probably report a 10 percent increase in March sales, the average of eight analyst estimates in a survey by Bloomberg.
Industrywide sales may rise 2.1 percent to 1.48 million light vehicles, the average of 10 analyst projections. The annualized rate, adjusted for seasonal factors, may rise to 15.8 million, the average of 14 estimates, from 15.3 million a year earlier.
GM, Ford and Toyota Motor Corp. are projected to have smaller gains than Chrysler’s, while Honda Motor Co. may report a decline. Nissan Motor Co. sales may be unchanged, the average of seven estimates. GM results may be little affected by the small-car recall because the models with defective ignition switches are no longer on the market. Separately, the company has announced a recall of its 2014 Silverado and GMC Sierra pickups with 6-speed transmissions for a potentially leaky oil cooler line.
There is no vehicle type more important to the Detroit Three than pickups. They generate $8,000 to $10,000 in gross profits per vehicle and still produce most of their automotive income, according Morgan Stanley. Far from being the rugged roustabouts of old, today’s trucks can have as much leather and high-tech gear as a luxury car, with prices to match.
“It’s not uncommon for a pickup truck owner to spend almost his annual income on his truck,” said Dominique, who shepherded Nissan’s Titan pickup a decade ago when he ran the Japanese automaker’s product development. “There are guys out there making $65,000 who are buying $65,000 trucks.”
Those overextended buyers are very susceptible to the lure of a good deal, Dominique said. And with the generous profits trucks haul in, auto companies have room to negotiate. In March, Ford ran a promotion it calls “Stampede of Savings” in the big truck markets of Dallas; Houston; Memphis, Tennessee, and Kansas City, Missouri. GM is running the “Chevy Open House Event,” where buyers are offered the same discounts granted to auto suppliers.
In recent months, though, Chrysler has offered half-ton truck buyers the biggest pile of cash. Ram incentives have risen 31 percent since December, when Chrysler offered $4,274 on its truck, according to the Power data. During that same period, Ford’s incentives rose 1.3 percent, while Silverado’s discounts declined 2.1 percent, according to the Power data.
That trend has Youngstown, Ohio, Ram dealer Chuck Eddy elated, especially since he’s always found it challenging selling Chrysler products just down the road from GM’s big Lordstown, Ohio, car factory.
“We’re just kicking Chevy’s butt right now, and we’re doing it in a GM town,” Eddy said. “We always had the truck that chased everybody else, now they’re chasing us.”
GM is not descending deeply into discounts on the redesigned Silverado and GMC Sierra it began selling last year. It’s trying to protect profits per vehicle and prove it has learned from the mistakes that drove the company into bankruptcy in 2009, said Jim Cain, a company spokesman.
“We would deeply disappoint so many people from Wall Street to our dealers on Main Street if we were to match the kind of things that Dodge is doing,” Cain said. “We’ve made commitments to be disciplined and that’s not anything we’re interested in walking away from.”
Cain said GM recognizes it is losing some sales to Ram among price-sensitive shoppers, though “not in volumes that have us staying up at night.”
The company has put profits and margins ahead of sales volumes since at least 2012, when Dan Akerson, then the company’s chief executive, said those targets were more important than being bigger than Toyota, which unseated GM that year as the world’s largest automaker. He was succeeded in January by Mary Barra.
Over the past year, GM shares have risen 25 percent, while Ford gained more than 17 percent and Toyota added 20 percent.
A report by analyst Brian Johnson at Barclays last month said GM’s share of the U.S. large pickup market fell to 33.9 percent in January, from 39.6 percent in 2011. The Ram, during that period, picked up more than 3 points of share to 19.3 percent in January. Ford’s share grew to 39.5 percent in January from 37.3 percent three years ago, Johnson wrote.
GM’s introduction of its new pickups “has been arguably the least successful large pickup launch over the last 15 years in terms of share and pricing,” Johnson wrote in the Feb. 26 report on GM entitled: “Facing a large pickup full-court press.”
The largest U.S. automaker is loath to cut prices out of concern it will hurt resale values and average prices, Cain said. Each have risen since the introduction of the new Silverado, which features a quieter cockpit and smoother, more fuel-efficient engines. It was named North American Truck of the Year by journalists at this year’s Detroit auto show, a prize the Ram won the year before.
The Silverado sold for an average of $37,794 last month, which was above Ram’s $37,060 average price and below Ford’s $39,015 average, according to J.D. Power data obtained by Bloomberg News.
“It is a brand new truck and we’re achieving our objectives on almost every section of the scorecard,” Cain said. “The challenge for us is how do we deal with the lower end of the market, where we haven’t been performing well, without sacrificing all the other gains that we’ve made?”
To Chevy dealer Stewart the solution is simple: Focus on having the highest sales not the highest prices on the market.
“If you’re selling a Cadillac and you’ve got limited supply and more demand than supply, then you can brag about your transaction price,” Stewart said. “Who in marketing brags about a high transaction price on a high-volume product?”
Chrysler declined an interview request to discuss its incentive strategy and issued a statement from its U.S. sales chief, Reid Bigland.
“To comment on these monthly ups and downs or to make excuses for them is not the game we are in,” Bigland said in the e-mailed statement. “Average transaction prices and incentives often change every month, but our focus on building the best trucks remains constant.”
Ohio Ram dealer Eddy said Chrysler could even back off on the big deals, because the Ram now sells on its merits.
“We don’t have to incentivize the truck as much,” Eddy said. “I’d like to slow it down because we don’t have to do it right now to sell this truck.”
Analysts and critics have praised the Ram for its big rig styling, power and fuel efficiency. Consumer Reports magazine last month named the Ram 1500 the best overall pickup in its Top Picks list of cars and trucks. It was the first time in 16 years any Chrysler model made the Top Picks list of the Yonkers, New York-based magazine.
More Than Discounts
“You can’t just explain the Ram’s growth with incentives,” said Jeff Schuster, an analyst with researcher LMC Automotive in Troy, Michigan. “Clearly, pricing plays a role, but the Ram does offer some features and content that buyers are interested in. And the styling separates it from the other two.”
Ford later this year will introduce a new F-150 with a lightweight aluminum body that may boost fuel economy to almost 30 miles per gallon on the highway, people familiar with the planning have said. Ford has pushed fuel-efficiency in this fragile economy as a way to gain market share with a truck design last updated in 2008. Three years ago, Ford began outfitting its trucks with turbo-charged, V-6 engines it calls EcoBoost, which improves fuel economy by as much as 20 percent.
“EcoBoost has really helped the F-150, I don’t think we can underestimate that,” said Erich Merkle, Ford’s sales analyst. “About 57 percent of our overall sales now are V-6 engines.”
Ford boosted incentives on F-series when GM debuted its new trucks last year and the second-largest U.S. automaker has kept the pressure on with a goal of capturing 40 percent of the large pickup market, Johnson of Barclays wrote.
Chevy dealer Stewart is pressuring the suits at GM in Detroit to match the deals Ford and Ram are offering or they’ll keep losing buyers to the competition.
“We can sell trucks like popcorn when they price them right,” Stewart said. “Things go just as bad when they price them too high and that’s where we are right now.”
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