DETROIT - By announcing combined production cuts of nearly 760,000 units in the first quarter, a 20.6 percent rollback from the first quarter of 2000, the Big 3 have embarked on a high-stakes game of chicken aimed at reducing the soaring cost of sales.
The goal: Reduce inventories of unsold cars and trucks - which on Jan. 1 stood at a nine-year high of 76 days for that date - as a means of slashing incentives that are near record levels.
DaimlerChrysler had a 73-day supply as of Jan. 1; Ford Motor Co. was at 86 days; and General Motors had a 100-day supply.
'Part of the incentive pressure is coming from this excess inventory sitting on dealer lots,' Dieter Zetsche, the new CEO of the Chrysler group, said at the Detroit auto show last week.
The worst-case scenario is that in 2001, even with incentives, U.S. brands will have a shrinking share of a shrinking market. At least in 2000 they had a shrinking share of a growing market.
Most forecasts for 2001 expect light-vehicle sales to fall to the 16 million to 16.4 million range, down from 17.4 million in 2000. A few pessimists see sales tumbling as low as 15.5 million units.
A shrinking market will magnify all mistakes. But in the long run, though, building fewer cars and trucks could be a first step toward reversing market share losses for the Big 3.
The key is whether they can abandon the failed strategy of using ever-larger incentives to push less desirable cars and trucks on the dealer and the consumer.
Will the Big 3, their dealers and their shareholders endure the short-term pain for the long-term gain? The game of chicken is to see whether anyone breaks down and turns the production/incentives spigot back on.
It will be tempting, especially since the Japanese brands are cranking up North American production to take even more share, especially in light trucks.
Zetsche said the U.S. manufacturers seem willing to try.
'We are happy to see the manufacturers, from the signs we see in the market, seem to be all together in cutting production instead of this crazy `push' system,' Zetsche said in an interview at the Detroit show Tuesday, Jan. 9.
DaimlerChrysler dropped incentives on 2000 models in its latest incentive program, which was announced Jan. 12, but the 2000s probably were sold out. The company left its other incentives on 2001 models in place, but didn't raise them. GM increased many of its incentives earlier this month. Its present deals expire April 2. Some Ford incentives expire Tuesday, Jan. 16.
In an interview at the Detroit show, GM Chairman Jack Smith said GM will not pursue volume for its own sake at the expense of profit.
'The key is that we are not driven by share. We are driven by profitability,' he said.
Ford spokesman George Pipas said Ford cut production even though dealer orders were strong.
'Before we reached the point of dealer push-back, before our dealers started saying, `No,' we cut production. We had all the dealer orders we wanted, but it was obvious to us that demand is slowing, and we did not want to be in a position March 31 where we had too many cars and trucks,' said Pipas.
So far, dealers for the Big 3 brands seem happy to go along - even though, as Lincoln Mercury dealer Jack Straub put it, 'The one thing everybody is afraid of is, if the customer wants something, and you don't have it.'
Nevertheless, reducing inventory was a necessary step, said Straub, who owns Jack Straub Lincoln-Mercury in Keyport, N.J.
'I like to sell cars as much as the next guy,' said Ed Levy, the owner of Golling Pontiac-GMC in Lake Orion, Mich., and co-chairman of the Pontiac-GMC dealer council. 'But I don't expect to sell my cars at a loss, and I don't expect the factory to, either.'
Levy said he had his highest floorplan expense in 2000, but it was his second-best sales year.
'So I can't complain. It's not going to be the kind of year in 2001 we've had the last few years, but it lasted a lot longer than we thought it would.'
Tom Barenboim, the owner of Clark Chrysler-Plymouth in Methuen, Mass., said last week that he had about 78 days worth of inventory. He was not worried about the factories cutting production.
'One of the biggest costs we have is inventory. Is it manageable? Yes. Do I like it? No,' he said.
'We're an impulse purchase. We sell what's on the shelves. But I can live with a little less inventory and a little less cost, because I'm expecting a bit of a hiccup in the first quarter.'
Big 3 shareholders and their Wall Street advisers could be a tough audience for production cuts, since cutting production hits the bottom line hard. Laid-off UAW members still get most of their pay, so there is little offsetting reduction in cost.
Analyst: More production
John Casesa, auto industry analyst for Merrill Lynch & Co., last week applauded the production cuts from the point of view of reducing excess inventory. He said more cuts might be necessary as sales slow.
Zetsche said overproduction last year made incentives necessary, which in turn caused the Chrysler group's recent operating loss.
'People keep asking me how there could be such a dramatically fast deterioration from one quarter to another,' Zetsche said.
'But in the first half (of 2000) we were shipping 130,000 more units to dealers than our dealers could sell to our customers. That is the difference.'