GM flexes muscles; Ford, DCX squeal

General Motors' decision to extend its 0 percent financing sent a message: For the first time in decades, it has momentum.

Emboldened by weakened competition and strong truck sales, GM is defining prices in the United States. The largest automaker is loading on incentives because it sees an opportunity to stop - and possibly reverse - its decades-long market share slide.

With that goal in sight, GM is willing to disregard criticism from rival automakers and Wall Street analysts. Tellingly, the 0 percent extension came two days after Standard & Poor's downgraded GM's debt rating.

Analyst John Casesa of Merrill Lynch said in a report Friday, Oct. 19, that GM will sacrifice margins to take market share from Ford Motor Co. and the Chrysler group, helping to offset share gains by foreign competitors such as Toyota.

"This program is enabling GM to take advantage of its weakened domestic rivals, especially a disoriented Ford," Casesa said.

U.S. share rises

In discussing third-quarter results with financial analysts, Vice Chairman John Devine cited an increase in GM's U.S. market share - 27.7 percent for the quarter, up from 27.4 percent in third-quarter 2000.

"That's the first time we've been able to say that for a while, and that's a very important development for us," Devine said.

Though conceding that the "Keep America Rolling" financing program is expensive and has drawn Wall Street criticism, Devine said it was needed to restart auto sales in the wake of Sept. 11 terrorist attacks. Now, he said, GM is pressing its advantage.

"We also believe that it's important for us to build on our product momentum," he said. "It's been a while since we at GM have been able to talk about that."

Though prompted by the attacks, the 0 percent program follows other GM incentives. GM has put heavy incentives on its large sport-utilities and pickups, run regional rebates as high as $2,500 on Cavaliers and boosted summer sales with an early lease-termination deal.

There's a secondary benefit to GM. Its incentives inflict financial pain on Ford and the Chrysler group, which must decide whether to follow GM's lead and extend 0 percent programs, despite their straitened finances.

"On the one hand, it's a way to keep America rolling," said Scott Merlis, managing director at Drescher Kleinwort Wasserstein in New York. "On the other hand, it's a way to stick it to their competition."

'Unhealthy for industry'

Discussing quarterly results last week, Ford CFO Martin Inglis expressed reluctance to extend 0 percent financing.

"I continue to think that this level of spending is unhealthy for the industry," Inglis said.

Last month, Ford and Chrysler group followed GM's initial announcement of 0 percent financing, although Chrysler hesitated several days. By Friday, Oct. 19, neither company had disclosed whether it would again follow suit.

Automakers lose about $2,200 in interest on a three-year, 0 percent loan of $20,000 compared with a standard 6.5 percent loan.

Other observers expressed misgivings over GM's move. Standard & Poor's lowered the debt ratings of GM and Ford on Oct. 15, dropping the companies two steps from A to BBB+. Scott Sprinzen, managing director of Standard & Poor's in New York, blamed declining profitability and intense competition.

After GM's 0 percent extension on Wed. Oct. 17, Sprinzen said it will be hard for GM to cut incentives.

"This is the type of move we had in mind when we talked about intensification of price competition," Sprinzen said.

"While the program might have started out as a way to jump-start the sales after Sept. 11, it's going to be very hard to get rid of."

'Product momentum'

But Merlis said he can't fault GM for pressing its advantage in the short term.

"The bottom line is GM is showing the best product momentum and competitiveness that it's shown in the last 25 years," he said.

Paul Ballew, GM general director of global market and industry analysis, said total U.S. share for the first three quarters was down one-tenth of a percent to 27.8 percent. GM expects to end the year in that range, he said.

You can reach Dave Guilford at dguilford@crain.com

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