Smoke And Mirrors In Detroit

Why Big Three price hikes only look modest

In Detroit, it's the year of the stealth price increase. The Big Three auto makers proudly announced 1997 model prices in recent weeks, bragging that they subdued sticker shock by restricting increases to less than 2%. But what the companies didn't crow about were the hikes on many models that they quietly instituted in the preceding months. "You can't hoodwink people like this," grouses suburban Detroit auto dealer Martin "Hoot" McInerney.

Maybe not, but the Big Three clearly have decided it's time to take profits on their hot-selling trucks. Ford Motor Co., for example, double-dipped on price hikes for its popular F-150 pickup truck and Explorer sport-utility vehicle by raising stickers quietly on July 1 and then publicly announcing another boost on Aug. 8. General Motors Corp. stealthily raised prices on its sport-utility vehicles and small pickups back in April, then boosted them again on June 27. Chrysler Corp. triple-dipped on its star minivan, hiking its price in January, March, and July. It also slipped in an unannounced increase of $472 to $500 on its popular Jeep Wrangler on July 12--just days before announcing official fall hikes averaging 1.9%, or $422.

BACKLASH? Detroit could be in for a rude awakening when Japanese rivals announce prices in the coming weeks. The softening yen gives the Japanese leeway to lower prices by up to $800 per car, figures Morgan Stanley & Co. analyst Stephen J. Girsky. Just as bad for Detroit, notes independent auto consultant Christopher W. Cedergren, "this strategy may slap [Detroit] right back in the face by causing a slowdown in the whole light-truck market."

Ford's recent pricing decisions show just how crafty Detroit is getting. The company boosted Explorer prices by $200 on July 1 and then piled on additional hikes of $315 to $685 to the model's price in its official Aug. 8 pricing announcement. Ford says its 1997 model prices were up an average of only 1.2%, or $281--the lowest among the Big Three. But its computations don't include the July 1 price hikes on the Explorer and F-150, which account for a quarter of its U.S. sales.

GM also played hide-the-hikes. In announcing boosts of 1.7%, or $391 per vehicle, it omitted prices on a huge crop of overhauled models coming this fall. A GM spokesman says it is unfair to compare prices on redesigned models, which are packed with new features, with those of previous models. But dealers say many shoppers don't buy that logic.

For harder-to-move cars, rebates remain the rage. Ford raised the price of the most popular model in its redesigned Taurus line by $395 for 1997, or 2%. Still, Robert L. Rewey, Ford's group marketing vice-president, hints that it will keep rebates on the Taurus, which currently comes with a $1,000 cash-back deal. "Betting that we would go to zero on incentives in the '97 model year is not a good bet," he says. Chrysler, too, is slapping rebates of up to $1,500 on some 1997 models that aren't out yet. "Why should we lose the sales momentum?" asks Chrysler President Robert A. Lutz.

The bottom line, however, is going up a lot more than Detroit wants to admit. The question: Will that put a damper on the new model year before it even starts?

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