CHICAGO (Reuters) - The first shots have already been fired in what could be an escalating "price war" between major automakers in the U.S. market, according to Hyundai Motor Co.'s top U.S. executive.
"I think we can officially say that a price war broke out in the industry," John Krafcik, CEO of Hyundai Motor America, said on the sidelines of the Chicago auto show. "There is apparently a lot of pressure to deliver sales results."
Increased discounting on new car sales would be a boon to consumers but could chip away at the profitability that many investors had projected for automakers at the start of the second year of a still-developing recovery in U.S. auto sales.
Krafcik said General Motors Co. had started the most recent round of price-cutting and was quickly matched by Toyota Motor Corp. this month.
"We'll see if others decide to follow," said Krafcik. "It's certainly not in our plan right now."
Until the start of the year, automakers had resisted the temptation to increase spending on rebates and low-rate financing to lure car buyers.
Many analysts had counted on that more disciplined approach to pricing holding during this upswing, especially after Detroit-based automakers used the industry's recent crisis to renegotiate labor deals, shutter plants and slash costs.
Aggressive consumer discounts have contributed to volatile boom-bust cycles for the industry over the past decade and eroded the resale value of vehicles, particularly from Detroit manufacturers, who have had to compete on price.
A step backward
"I would call this a step backward for the industry," said Krafcik. "This is short-term thinking in a long-term process that hurts manufacturers and consumers."
GM posted a market-leading sales gain of 23 percent in January after stepping up its spending on what it said were "targeted" sales incentives.
Barclay's Capital analyst Brian Johnson said in a Feb. 2 note that the GM incentive spending could represent "a dangerous first salvo" in "a broader price war."
Johnson said consumers would benefit from the discounts but the moves would risk profit growth for automakers, especially given the pressure from rising commodity costs.
GM's incentive spending rose 16 percent to an average discount of $3,663 in January, while Toyota's spending jumped 24 percent to $1,962, according to Autodata Corp.
GM's February discounts include consumer rebates of up to $4,000 on the 2011 Buick Lucerne and up to $2,500 on the Chevrolet Malibu sedan.
A GM spokesman could not be reached for comment on Wednesday.
Toyota is running a range of promotions, including low-cost lease options and interest rates as low as 1.9 percent on vehicles like the Highlander SUV in February.
Bob Carter, Toyota brand sales chief in the United States, said last week that incentives had increased to about two-thirds of the industry average for the Japanese automaker.
But Carter said Toyota would keep its incentives focused on areas like subsidized lease rates and low-interest loans. Those types of incentives will not hurt resale values like large cash rebates, he said.
Hyundai had sales growth of almost 24 percent in 2010, the fastest growth in the U.S. market by any of the major auto manufacturers.
Hyundai has said it expects to sell about 590,000 vehicles in the U.S. market in 2011, an increase of almost 10 percent from 2010. That sales increase would be in line with the expected overall industry average.
Krafcik cited an estimate that put Hyundai's average incentive spending near $1,200 in January, among the lowest in the industry.