Hyundai says price war under way in US car market

Reuters (Chicago) - 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 a Hyundai Motor Co (005380.KS) executive,

"I think we can officially say that a price war broke out in the industry," John Krafcik, president and chief executive 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 that General Motors Co (GM.N) had started the most recent round of price-cutting and was quickly matched by Toyota Motor Corp (7203.T) 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 their aggregate 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 the Detroit-based automakers used the industry's recent crisis to renegotiate labor deals and shutter plants.

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 the Detroit-based manufacturers who have had to compete on price.

Edmunds.com analyst Jessica Caldwell said current incentives aren't as large or widespread as in pre-recession times when dozens of models carried rebates of $3,000 or more.

"GM was very aggressive in January, but I wouldn't call it a price war," Caldwell said. "Toyota's incentives were not extremely different from what it had been doing. In February, other brands may be more aggressive as a reaction (to GM)."

INDUSTRY TAKING '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.

Rick Scheidt, vice president of GM's Chevrolet, argued that Chevrolet has become more strategic, offering few incentives on hot-selling models such as the Equinox and Cruze and higher ones on its Silverado pickup to match competitors.

"If you don't participate, you aren't going to be a big player," said Scheidt. "Things are much more targeted now. I don't think you can read that much into just one month."

A GM spokesman declined comment on Wednesday.

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 those discounts but the steps would risk profit growth for the 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 industry-tracking firm Autodata Corp.

GM's promotions for February include consumer rebates of up to $4,000 on the 2011 Buick Lucerne and up to $2,500 on the Chevrolet Malibu sedan.

Toyota is running a range of promotions including low-cost lease options and -- in some regions of the United States -- zero percent loans for up to 60 months on some models, including Camry.

"We have increased our incentives, but we certainly aren't leading the industry," said Bob Carter, Toyota brand sales chief in the United States.

Hyundai had sales growth of almost 24 percent in 2010, the largest 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.