GM to Raise Car Prices 2.9%; Move Surprises Analysts
General Motors, in a move that surprised industry analysts, said Thursday that it is raising new car prices by 2.9%.
The increase comes despite slumping domestic car sales, swollen inventories and falling consumer prices generally. Many industry observers had expected U.S. car makers to hold the line on prices or even cut them to improve their competitive position against Japanese models, which have gone up sharply in price because of the soaring value of the yen.
GM said it was taking the step to reflect “higher labor and other manufacturing costs as well as the impact of major capital spending and other programs.” The company has been spending billions in recent years to redesign its cars.
The price increase, which takes effect April 14, amounts to 2.9% on the “average equipped” 1986 model, the company said.
GM declined to give prices for individual models or to say how the average figure was computed. The increase will average more than $300 a car, industry analysts estimated.
Spokesmen at Ford and Chrysler would not comment on the GM move. Both firms also declined to discuss their future pricing strategies.
The GM announcement came as a shock to auto industry analysts, who anticipated a period of generous sales incentives by domestic auto makers to lure potential buyers of Japanese cars into their showrooms.
Prices for new cars from Japan’s top four car makers have risen by an average of $1,028 since Oct. 1 because of the falling value of the dollar in relation to the Japanese yen, according to the trade newspaper Automotive News. In the same period, the prices of American-made cars have risen an average of $400.
In recent months, Japanese car sales have shown some weakness. However, the drop in domestic car sales has been much steeper. Sales of domestically produced new cars slid 17.2% in the most recent 10-day reporting period.
Industry analyst Maryann Keller of the New York investment firm of Vilas Fischer Associates said she was “flabbergasted” by GM’s move.
“I find the act suicidal. The domestic auto industry has not been able to sell an auto without a promotion or incentive since the late summer of 1985, and right now their sales are really in the doldrums. . . . So why raise prices? It’s absurd.” Keller noted that she and other observers saw the next few months as a period to test U.S. car buyers’ appetite for Japanese cars as their prices increase dramatically. She said GM has decided, in effect, to cancel the experiment.
“This plays right into the hands of the Japanese,” she said. “If there were ever an opportunity to experiment and test the depth of buyer loyalty to the Japanese, this would be the time to offer the American public a bargain. . . . If there was any debate about whether the Japanese would get away with raising prices in the spring of 1986, this ends it.
“This is a rather remarkable event. It suggests that the U.S. auto industry is out of touch with the American public,” Keller said.
GM announced Wednesday that its current interest rate incentive--offering 9.9% financing on most models--would expire April 12. The price increase announced Thursday takes effect two days after the program ends.
Bob Heinz, sales manager for Warren Biggs Chevrolet in Los Angeles, said he thinks GM’s price hike is “rather foolish.”
“It doesn’t make sense to cut off the interest rates (program) and raise prices at the same time.” He predicted that the moves would hurt sales.
Just last week, GM Chairman Roger Smith had said that “they haven’t repealed the law” that higher prices mean lower sales.
One analyst suggested that GM is raising prices to widen its profit margins, which have been squeezed by GM’s production costs, the industry’s highest. David Healy, of the Wall Street investment firm Drexel Burnham Lambert, also said that the move may be a prelude to a new incentive program.
Times researcher Stephanie Droll in Detroit contributed to this story.
