Automakers hope to raise prices as US auto sales recover, but competition could foil plans

As auto sales rebound, price increases are likely

DETROIT — When Rebbie Lewis McGowen decided to replace her 2000 Dodge Stratus sedan with a new loaded-out Jeep Grand Cherokee, she was amazed that her favorite dealer agreed to a price that was about the same as she paid for a similar Jeep nine years earlier.

“That’s why I jumped on it the first day I saw it,” said McGowen, 61, who got the silver sport utility vehicle from River Oaks Chrysler Jeep in Houston for about $34,000, $7,000 less than the sticker price.

Like many U.S. buyers, she took advantage of a depressed auto industry, one that in recent years has had too many factories churning out too many cars and trucks for too few buyers, forcing big discounts. Although sticker prices have risen, actual sales prices aren’t a whole lot different than they were nine years ago.

So far this year, average sale prices actually have dropped by about $800 to $25,586, according to J.D. Power and Associates.

But industry analysts don’t expect that trend to continue much longer. General Motors Co. and Chrysler Group LLC came out of bankruptcy protection with far fewer factories, and Ford Motor Co. for the past few years has been closing plants to align its output with demand.

Analysts say that with the industry’s massive restructuring, the big discounts that American consumers have gotten used to could go away as auto sales recover from the worst slump in more than a quarter-century.

“I just think it happened to be this point in time that I was able to make such a deal,” McGowen said. “Next year, when the 2010s come out, it’s not going to be the same situation.”

Growth in rebates, low-interest loans and other incentives may be starting to slow, reports the Edmunds.com automotive Web site. Across the industry, the average incentive per vehicle dropped from $2,869 in June to $2,735 in July.

But that could be an anomaly driven by increased demand from the government’s Cash for Clunkers program, which likely will expire in September. July’s figure is still $90 higher than the same month last year, according to Edmunds.

In addition to the restructuring, all of the Detroit Three are trying to develop better cars, ones that are so stylish, efficient, safe and reliable that people will pay more for them, similar to what Toyota Motor Co. and Honda have already accomplished in the U.S. market.

At Ford, the only one of the Detroit Three to evade bankruptcy court, getting more money per car is part of a strategy to return to profitability, Chief Financial Officer Lewis Booth said recently.

“We’ve all got to learn to flex the revenue muscle,” said Booth, who adds that Ford’s actual sale prices are up this year, even in a down market. “It’s driven by our new products, and that’s why were getting improved transaction prices. We’re getting a mixture of reduced incentives and higher value from the customer. We’re selling more higher-service cars, more options, and all of those are good for profits and revenue.”

So far, the strategy for Ford is starting to work, as it has on some hotter models for the other Detroit automakers. All say they want to take advantage of their global engineering operations to cut costs and roll out new models faster, because fresher models generally sell for better prices.

While industry analysts concede that automakers have reduced factory capacity, they say competition is only going to increase, and some question whether the discounts for consumers really will disappear.

Korean automaker Hyundai Motor Co., with the Hyundai and Kia brands, is gaining market share with new products and low prices, and it won’t be long until Indian and Chinese automakers enter the U.S. market with lower-cost cars. GM, for instance, has a deal to sell its nationwide Saturn dealership network to mega-dealer Roger Penske, who plans to bring in foreign-made cars to supplement what he can buy from GM.

Erich Merkle, president of the industry consulting firm autoconomy.com in Grand Rapids, Mich., sees the industry having some success in getting higher prices simply because it won’t be making too many vehicles for the market when demand returns during the next couple of years.

“But the competitive piece is still going to make any kind of real pricing power very elusive,” he said.

In the short term, Edmunds CEO Jeremy Anwyl sees prices rising in the fall, but then sales may drop and car companies will be forced to jack up incentives. Still, as sales recover in future years, the automakers will try to raise prices, he said.

“I think the chances of it sticking are probably less than even,” Anwyl said. “A lot of it is going to have to do with the economy at large.”

Increased government safety and fuel-economy requirements will drive up automakers’ costs as well, taking away some of the profit from increased prices, said Anwyl. Plus, other automakers, such as Toyota, Hyundai, BMW and Honda, have expanded U.S. factory capacity as the Detroit Three have pulled back, he said.

Regardless of whether the price increases stick, Merkle says consumers will get more for their money as automakers try to one-up each other on quality and refinement. As the Detroit Three’s cars get better, Honda and Toyota may have to respond by increasing their incentives or lowering prices, he said.

“For the first time, you have automakers like Honda and Toyota that really aren’t used to playing defense, they are going to have to start learning how,” he said. “Just when I think it can’t get any more competitive, it does.”