| Treading Water |
6 October 2003
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Detroit's Incentives aren't Helping
Detroit's car makers responded to the weak American economy of the last two years by offering car buyers incentives that seemed crazy, such as 0% financing. The chickens are coming home to roost now in the way of job cuts. Ford may cut as many as 12,000 jobs worldwide (3,000 in America last week), DaimlerChrysler is after a few thousand of its own (via early retirement), while General Motors has just announced more incentives on 2004 models while talk of 8,000 jobs lost is in the news. The vicious cycle continues.
The problem is marketshare. America's Big Three (or is it 2.5 since the Daimler purchase of Chrysler?) have been losing out to Japanese, European and Korean car makers despite their incentives. And US capacity simply exceeds demand. Until that goes away, through plant closings most likely, the car buyer is figuratively and literally in the driver's seat, and the Asian and European car companies are opening factories in the US almost as fast as the Americans close their own.
Recovering marketshare requires Detroit to do something it isn't very good at doing -- innovating on a grand scale rather than incremental improvements. The SUV has become their great money maker, and despite all the arguments against these beasts, demand seems to be rather inelastic. Yet, gasoline at $2+ per gallon makes the SUV a more difficult sale. Fuel efficiency has been forced on US carmakers by legislation; it should have been done from self-interest. Credit remains a problem for many would-be car buyers because US bankruptcies have soared -- easier terms for sub-prime borrowers would also help.
After all is said and done, though, Detroit is reducing margins to defend marketshare, which only really works in the short-term. It could be a case of too little too late, which means that profitability over the long-term is impossible. Yet if their competitors are opening plants in the US while they are closing them, what does that say about management rather than the market?
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