The auto industry must significantly reduce or entirely eliminate the practice of offering generous incentives to consumers, according to Fiat and Chrysler Group LLC CEO Sergio Marchionne.
According to an estimate of automaker incentive offerings released by Autodata Corporation, Chrysler currently offers the highest incentives in the industry. In September, those incentives averaged $4,908, up 18% compared with September 2008 levels. The numbers compiled by Autodata Corporation are based on estimates, since automakers do not make their actual incentive spending figures public.
Marchionne said, “We need to go back to making products that people want at a price that is defensible in a competitive framework.”
Marchionne is not the first to propose an overhaul of Chrysler’s generous incentive programs. In 1998, Chrysler partnered with German automaker Daimler-Benz AG. Then-Chrysler Group CEO, Dieter Zetsche, likened incentives to drugs and warned of the dangers they pose by placing automakers in a reactive position, forcing them into bidding wars with rival automakers in the marketplace. Zetsche’s efforts, along with those of subsequent management, failed to wean Chrysler away from the practice.
Marchionne pointed to Chrysler’s low inventories as a way for the automaker to reduce incentives and increase the company’s profitability.
This past summer Chrysler Group LLC shut down all its factory operations for 41 days while the company was in bankruptcy restructuring, leaving the automaker short of inventory when the federal government launched Cash for Clunkers. While many of its competitors ramped up production in anticipation of the federal incentive program, Chrysler was forced to play catch up. Dealerships sold out of midsize sedans and crossover utility models, and many dealers blame the lack of inventory for missed sales.
Marchionne has called the Cash for Clunkers program, “a disturbance that, at least form Chrysler’s standpoint, was unexpected.”
At the beginning of the 2009, Chrysler’s U.S. market share was estimated to be 11% but slipped during the intervening nine-month period to 9.2%.
Marchionne sees Chrysler’s current incentive program as a knee-jerk reaction to the recent slip in market share and slumping sales. “It’s painful,” he says, “It looks ugly. People sit back and say ‘What are you going to do to try and incentivize the demand?’”
Instead of ramping up its incentives, Marchionne feels that Chrysler’s lean inventories will allow the automaker to sell its 2010 models at or near the sticker prices even if that means further reductions in the automaker’s U.S. market share. In the end, he feels that the result will be increased profitability.
Although there have been no reductions in Chrysler’s incentives to date, many analysts predict that they the automaker could very well implement Marchionne’s strategy within the next couple of months.