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Auto Competition Heats Up

August 31, 1986

Stuck with a 79-day supply of unsold cars and with introduction of its 1987 models only weeks away, General Motors has slashed interest rates on its new-car loans to as low as 2.9%. That is seven points or more below market rates, and well below GM's own costs for borrowing money. Ford and Chrysler are in much better shape on their inventories than is the nation's No. 1 auto maker, but they also face the need to remain competitive. In response to GM's move, Chrysler has cut its loan rate to 2.4% and Ford to 2.9%.

All this is good news for consumers, who now have a window of opportunity to save as much as $1,500 either through reduced financing costs or direct cash rebates on 1986 cars. Those incentives ought to run down inventories fairly speedily, but in the process they could put a major dent in next year's auto sales. Adding to the cloud over 1987 sales are a couple of provisions in the new tax bill that Congress will soon vote on. After this year, sales taxes would no longer be deductible, while the deduction of non-mortgage interest charges would be phased out. In consequence, sales might surge this year but slump in the year ahead.

With more than 1 million unsold cars and trucks to dispose of, General Motors would clearly seem to have been overproducing, but auto-industry analysts say that this is no accident. GM, which once could count on a 60% share of the American market, can now claim only about a 42% share, and it is fighting to prevent further erosion. The battle for market share did not, to be sure, restrain GM from raising prices earlier this year. Now it has had to turn to subsidizing sales. The result could be a third-quarter operating loss of $100 million or more.

Holding on to market share is important for the future, since a buyer who is lost this year might stay lost for years. The competition from foreign autos that has cost GM market share seems certain to intensify as Japanese auto makers expand their production capacity in the United States and as import quotas disappear next spring. With the rise in the value of the yen, the Japanese have already shown that they are ready to accept lower profits to retain market share. Meanwhile, imports of lower-cost cars from South Korea and other countries almost certainly will grow. Distress sales are fine for moving excess cars. Over time, though, the competition for sales and market share is most of all determined by quality and price. The auto maker who loses sight of that is in trouble.

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