Hyundai says price war under way in US car market

The first shots have already been fired in what could be an escalating "price war" between major automakers in the US market, according to a Hyundai Motor Co 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 US 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 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 labour 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.

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% in January after stepping up its spending on what it said were "targeted" sales incentives.

Barclay's Capital analyst Brian Johnson said in a February 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% to an average discount of USD 3,663 in January, while Toyota's spending jumped 24% to USD 1,962, according to industry-tracking firm Autodata Corp.

GM's promotions for February include consumer rebates of up to USD 4,000 on the 2011 Buick Lucerne and up to USD 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% 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% in 2010, the fastest growth in the US market by any of the major auto manufacturers.

Hyundai has said it expects to sell about 590,000 vehicles in the US market in 2011, an increase of almost 10% 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 USD 1,200 in January, among the lowest in the industry.