Price Hikes: Motown May Be Shooting Itself In The Tire Again

The reaction hit even before the action. Hours ahead of Toyota Motor Sales USA Inc.'s announcement on Feb. 14 that it would raise sticker prices on Toyota cars and trucks an average 3.2%, General Motors' Saturn Corp. unit said its own base price would jump between 0.8% and 2.4%, and more for certain popular options. Saturn's increases will kick in on Mar. 1, Toyota's on Mar. 13.

The move by Saturn was all too predictable. With other Japanese carmakers exploring price increases, each U.S. auto maker is likely to follow suit. But an across-the-board increase in new-car stickers would be the wrong response. This is Detroit's chance to win back young buyers.

We've seen this show before. In the early 1980s, when "voluntary" export quotas pushed prices of Japanese cars higher, Detroit's carmakers raised prices, too. When a rising yen forced the Japanese to push up prices rapidly in the late 1980s, GM, Ford, and Chrysler again raised their prices, rather than snatch market share from Toyota, Nissan, and Honda.

This time around, says David N. McCammon, Ford Motor Co.'s vice-president for finance, Ford has no current plans to raise its base prices. But Ford and GM have been testing the waters by trimming rebates and other incentives on select 1992 models. On Feb. 5, Ford cut its rebates on the Mustang and the Mercury Grand Marquis. GM dropped its $500 rebate on the Chevy Beretta. Only Chrysler Corp. has held rebates about the same.

SCARCE PROFITS. Initially, Saturn attributed its increase to higher costs. Baloney. The January producer price index for finished goods, excluding volatile food and energy, was up 2.5% over the past year. But the price of materials and components for manufacturing actually fell, by 2.3%.

When pressed, Saturn execs admit that the hikes aren't all that related to raw costs. Says Donald W. Hudler, vice-president for Saturn's sales, service, and marketing: "As good as we are, we don't need a $1,500 to $1,800 price edge on the Japanese, which is where we would be" without the hike.

Maybe not. Then again, the differential wasn't quite that large. A Saturn SL1 compact with automatic and air conditioning now is priced $1,270 below a comparable Honda Civic DX. But throw in the Civic's standard driver-side airbag, which Saturn offers as a $625 option, plus hidden dealer incentives that a determined haggler may be able to convince a Honda dealer to kick in, and Saturn's edge narrows to under $150.

There's nothing wrong with taking advantage of a rival's higher prices, of course. After all, profits have been as scarce in Detroit recently as running boards on Corvettes. Last year, the Big Three lost some $8 billion. With car sales at last showing signs of rebounding, it's natural for the companies to trim incentives and even raise prices a bit.

`TRY AMERICAN.' However, hiking prices on entry-level cars, such as Saturn's SL1, is the wrong way to go. Detroit lost a generation of first-time car buyers in the 1970s when shoppers who chose Japanese cars got nifty, fuel-efficient models--and those who chose Detroit wheels too often got lemons. Now, in such models as the SL1 and Ford's Escort, Detroit finally has entry-level cars with quality and features comparable to Japan's. Yet, the Big Three's market share in this segment remains quite low (chart).

In coming weeks, Detroit should selectively raise prices, as the market allows, on bigger cars and trucks but not on entry-level models. Such a strategy would piggyback smartly with the nation's new "Buy American" mood. Says Ford's McCammon: "We would favor 'Try American.' We would like potential buyers to try ours, try theirs, and compare." Holding the line on small-car prices would make that comparison even more compelling.

Before it's here, it's on the Bloomberg Terminal.