Sticking It To Japan With Sticker ShockDavid Woodruff
John Immel, a Dodge dealer in Fairbanks, Alaska, loves shoppers' reaction these days when they compare his cars with Japanese models. Tire-kickers, he says, often squint at the fine print on price stickers and exclaim: "Gee, you're $2,000 cheaper [than similar Japanese versions]." Big Three auto makers love it, too. As their price advantage sinks in with consumers, Detroit's market share has jumped nearly two points, to 74.6%, since January, on top of a 1.5-point gain last year.
Now, as the industry gussies up new models for the start of the 1994 model year on Oct. 1, Detroit is battling to keep its comeback against Japan zooming ahead. The strategy: to raise list prices only moderately while giving buyers a break by offering deals on popular option packages, slashing dealer margins, and pushing low-cost lease deals. Detroit is also rattling sabers about another dumping suit, claiming Japanese manufacturers haven't raised prices enough to match the soaring value of the yen.
Japanese carmakers are under enormous pressure to raise prices. Worldwide sales have slumped, while the yen has risen 17% vs. the dollar this year--hammering earnings. On Aug. 24, for instance, Honda Motor Co. reported that its pretax profits for the quarter ended June 30 skidded 55%, to $148.5 million, on sales that fell 17.3%, to $8.6 billion.
To avoid price hikes, the Japanese are furiously cutting costs. On Aug. 24, Mazda Motor of America Inc. laid off 175 people, including Executive Vice-President Clark J. Vitulli and four other top execs. Marketing Vice-President Jay Amestoy calls the cuts "an effort to maintain competitive pricing."
INSULATED. How much higher will stickers climb? Final 1994 prices won't be out for a few weeks. But Dean Witter Discover & Co. analyst Ronald A. Glantz expects Detroit to boost prices 6% on average, partly because of standard equipment such as passenger air bags. Japan's prices may rise 8% or more.
But Japan could try to hold the line on models made in the U.S. Japanese midsizes--the Nissan Altima, Toyota Camry, Honda Accord, and Mitsubishi Galant--are U.S.-built, which helps insulate them from exchange rate pressures. Analysts expect Honda's all-new 1994 Accord, from Marysville, Ohio, to be priced only slightly above the 1993 model, which ranges from $14,130 to $22,100. Likewise, Toyota Motor Co. will probably try to keep in check the price of its Camry, built in Georgetown, Ky. Japanese makers "are going to be sure that everything they build here sells like hot cakes," says Christopher W. Cedergren, of researcher AutoPacific Group Inc.
Detroit, meanwhile, is doing everything it can to stick it to Japan. For starters, it has a few nifty new models coming out, including a redesigned Mustang from Ford Motor Co. due at yearend. But Detroit's main weapon is the concept of "value pricing." In place of the usual dizzying array of options, the Big Three are pushing attractively priced models outfitted with popular features such as air conditioning and automatic transmission. The idea: to eliminate haggling with dealers and pare back rebates--a technique that has helped make General Motors Corp.'s Saturn Corp. subsidiary successful.
Ford has used the technique to boost sales of its Thunderbird model 100% so far this year. And on Aug. 24, GM unveiled special package deals on seven popularly equipped 1994 Oldsmobiles. The Big Three are applying the approach heavily in California, where Japan owns half the car market. There, GM has announced deals on 24 Chevrolet, Pontiac, Buick, Cadillac, and GMC models. A Pontiac Grand Am that lists for $15,509 this year, for instance, will go for $13,995 in 1994.
The Big Three are also using attractive lease deals to pull in customers. In late August, Chrysler Corp. unveiled a new leasing program with partner GE Capital Corp. that Theodor R. Cunningham, Chrysler's vice-president for sales, says will double its leasing business, to as much as 9% of sales in 1994. Ford already leases 26% of its cars; GM 14%.
LEASERS KEEPERS. Ford, meanwhile, is test-marketing a 12-year lease that, if it catches on, could dramatically boost customer loyalty. In early August, four Ford and Lincoln-Mercury dealers in Las Vegas began promising consumers a new car every two years for a fixed monthly payment if they agreed to sign a 12-year contract. At the end of the period, customers would get to keep their last vehicle, at no extra charge.
Some Japanese rivals will have trouble emulating Detroit's new pricing strategy. A few models, such as Nissan Motor Co.'s Altima, built in Smyrna, Tenn., are getting a big sales boost from value pricing similar to Detroit's, but the high yen will make price-cutting hard for other companies. Randall R. McCathren of Bank Lease Consultants Inc., based in San Leandro, Calif., predicts that financially strong companies such as Toyota and Mitsubishi will try to match Detroit in leasing, but he thinks hard-pressed Japanese makers such as Mazda will have a tough time raising the cash for Detroit-style lease programs. Now if the Big Three can just resist raising their prices too much, they can keep the pressure on.