Did General Motors Company Just Start a Price War?

GM promised price discipline, but it just boosted incentives. Will other automakers follow?

Feb 10, 2014 at 7:30PM

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The all-new 2014 Chevy Silverado is a very good truck, say reviewers. But sales have been sluggish, and now GM is boosting discounts. Photo credit: General Motors Co.

On the one hand, it sounds grim: New-vehicle "inventories", or supplies of unsold vehicles, have risen to the highest levels seen since the recent recession. Meanwhile, the rate of growth in U.S. auto sales has slowed dramatically in recent months.

On the other hand, it's no big deal, say some automakers. Fierce winter weather kept shoppers away from dealerships in December and January, they say, and delayed some fleet deliveries. Ford (NYSE:F) said last week that it's confident that those sales will be made up as the weather improves, a sentiment that was echoed at other automakers.

On the other other hand, General Motors (NYSE:GM) just boosted its incentives. And that could lead other automakers to follow -- sparking a price war.

GM's disciplined approach has led to discounts. Now what?
New GM CEO Mary Barra, echoing a refrain repeatedly heard from her predecessor, Dan Akerson, has emphasized that GM intends to remain disciplined around pricing. 

GM won't spend freely on incentives in search of market share anymore, Barra and her lieutenants say. GM is focused on improving its profit margins in North America. Especially when it comes to GM's all-new pickups, the days of huge incentives are gone, we've heard.

That's good. That's what GM shareholders want to hear. 

But GM's sales were down 12% in January, and it had a 114-day supply of vehicles as of the beginning of February. (Sixty days' supply is generally considered optimal. It's common for that number to be higher in winter, but over 100 days' worth is worrisome at any time of year.) 

What will GM do? That became clear last Friday, when GM kicked off a Presidents Day promotion. For the next few weeks, GM will offer cash-back rebates of $500-$2,000 on most Chevy, Buick, and GMC models, along with some attractive lease deals. 

Some of the biggest discounts will be on GM's all-new pickups, the 2014 Chevy Silverado and GMC Sierra. The trucks received strong reviews, but sales have been disappointing recently.

News of the promotion came just a day after CEO Chuck Stevens said that GM would "maintain our disciplined approach to balancing supply and demand."

Apparently, that "disciplined approach" has decided that it's time for a big sale. So is it time to worry about GM's profit margins? 

Could a larger price war break out soon?
There might be more to worry about than General Motors.

Analysts have pointed to several signs that the U.S. auto market may be slowing. Despite the average age of vehicles on U.S. roads -- still more than 10 years -- there are reasons to believe that the rush of people who need a new vehicle, the people who have driven the rise in U.S. sales that we've seen since the recession, is largely exhausted.

Morgan Stanley auto analyst Adam Jonas told Automotive News that he thinks the "incremental buyers," those who drive sales increases, are moving away from buyers who need a new vehicle to those who merely want one. 

That means that factors like the availability of credit -- and new-vehicle pricing -- are likely to become a lot more important to auto sales going forward than they have been recently.

GM at least seems to be acknowledging that shift with its Presidents Day discount program. That might help GM's sales totals, but it might also lead automakers like Ford to boost their own incentives.

It could also lead Japanese companies like Toyota (NYSE:TM) to cut prices. Toyota reported record profits last week, thanks in large part to exchange-rate shifts that have made dollars worth more in yen terms. While Nissan (NASDAQOTH:NSANY) has used that exchange-rate advantage to cut prices and gain U.S. market share, Toyota has so far resisted the temptation.

If that changes, we could see a full-blown price war break out. That would be great for car shoppers, but not so good for automakers' profits. Stay tuned.

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John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends General Motors. It recommends and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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