A Tiny Bit of Sunshine for Detroit

Slashed production is finally getting supply more aligned with demandand prices are rising

Detroit's bad numbers just keep on coming. The Big Three's domestic vehicle sales, market share, and employment rolls have all been declining steadily for years—and now a looming recession threatens to dampen the financial performance of U.S. automakers even further.

But one vital statistic is improving, and it could represent a bit of hope: Car prices are rising. After accounting for rebates and other deals, the average vehicle sold for a record $29,230 in December, according to Web price tracker Edmonds.com. That's up from $28,923 in December, 2006. On average, 2007 prices have been about $1,000 per car higher than in 2005.

That may not sound like an enormous amount, but General Motors (GM), Ford (F), and Chrysler collectively sell more than 8 million vehicles a year. So every additional $100 per vehicle translates into more than $800 million in extra revenue. The price increase may also be an indication that the companies, which have been slashing production, are finally getting the supply of cars closer in line with demand—an important step toward long-term viability.

"STARTING TO PAY OFF"

Since 2005 the Big Three have closed plants capable of producing 2.2 million vehicles annually. An additional 1.8 million vehicles' worth of cuts have already been announced. Cranking out fewer cars means dealers aren't choking on inventory, so there's less pressure to cut deals with consumers. In December, Ford Motor boosted list prices by an average of $150 for nearly every vehicle in its lineup. GM imposed similar hikes for many of its models in December as well. "This is the intended consequence of cutting their excess production," says Jesse Toprak, director of pricing and market analysis at Edmunds.com. "It's starting to pay off."

Consumers also have been embracing more expensive products. GM, for example, has a hit with its new Cadillac CTS sedan. Not only are sales up so far this year, the car's average sale price of $37,000 is $8,000 more than that of the old CTS, which went out of production last year. The company's Buick Enclave sport-utility vehicle has a sticker price of $37,000—a full $14,000 more than the Rendezvous, which it replaced.

While Detroit is still enticing consumers with costly rebates, the carmakers are starting to show more restraint. Ford's incentives have dropped by about $100 over the past year. GM and Chrysler pushed their average rebate up to about $3,500 a car in January, but both companies are spending less than they did in the past three years, when their average incentive went as high as $4,500 a vehicle.

The Big Three also are cutting back sales to rental agencies, long the dumping ground for unwanted, heavily discounted models. Automakers are not only selling fewer rental cars, they also aren't committing to buying them all back. So rental agencies are buying cars loaded with more extras, which are easier to resell. Dollar/Thrifty Automotive Group, for example, said in its third-quarter earnings statement that its costs for cars rose 25% last year. That has pushed rental rates to an average of $55 a day, up $10 a day from 2005, according to Abrams Consulting Group.

While the price increases are a small piece of welcome news for American car manufacturers, they could evaporate if Asian carmakers start hiking U.S. vehicle production. But with a recession coming, there is no indication that they plan to do so.

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