Analysts Say Cut-Rate Loans Not Enough : GM Opts for the Quick Fix

For General Motors, it represents a quick fix.

The auto maker’s 2.9% discount financing program on remaining 1986 model cars--the lowest rate it has ever offered--generated considerable publicity even before GM officially announced it Thursday. And it will no doubt spark a flurry of customer traffic at GM dealer showrooms as consumers try to beat the price increases that will inevitably follow at the start of the 1987 model year in October.

Industry analysts agree that the dramatically reduced loan rate--the going rate for car loans at most banks these days is 9% or more--should increase sales, especially if Ford and Chrysler, as expected, follow with similar programs in the next few days. For GM, the program should help clear out its bulging inventories of unsold 1986 models just in time to make room for 1987 cars.

Yet analysts also agree that this quick fix does nothing to address GM’s fundamental problems. Those include a serious erosion of its market share, which fell to just 36% of all car sales (including imports) during the first 20 days of August, down from the 42% that GM had for most of the past year.

In fact, the new cut-rate financing may be nothing more than an attempt to cure the symptoms of GM’s real problems, rather than the causes, analysts warned.

“I really think this is an act of desperation by GM,” said Jack Kirnan, a sales analyst with Merrill Lynch Economics in New York. “They have clearly got serious problems with their market penetration, but it is a product problem, not something that can be solved by a short-term marketing ploy.

Styling Too Similar

“Their cars, especially their luxury cars, simply look too much alike,” Kirnan said. “A Buick looks like an Oldsmobile, which looks like a Cadillac, and consumers aren’t going to pay a lot of money for a car that isn’t different from other cars.”

Under GM’s new program, 2.9% loans will be offered on three-year loans, and 4.8% rates on the more typical four-year car loan, for all 1986 GM passenger cars and a wide range of light trucks. As an alternative to the discount financing, GM will also offer rebates ranging from $300 on its domestic and Japanese-built subcompacts to $1,500 on its new, slow-selling front-wheel-drive luxury cars.

While the incentive program is likely to be attractive to car buyers and expensive for GM, many analysts expect the auto maker to make up at least some of the costs by hiking prices on its 1987 models by 5% to 5.5%

The incentives, which replace less-dramatic discounts that have been offered since July 1, only apply to 1986 models already on dealer lots, and none will be available on 1987 models as they arrive in dealer showrooms over the next few weeks. In an effort to ensure that the incentives, which expire Oct. 8, don’t hurt sales of the 1987 models, GM said it is delaying its official new model introduction--the day it launches an advertising campaign for its 1987 cars--until Oct. 9.

When coupled with the fact that the new tax bill, if approved, will eliminate the deduction for the sales tax on the purchase of a new car next year, the GM incentives should persuade many consumers to shop for new cars this fall rather than next year. Analysts believe that could add as many as 200,000 additional units to the domestic industry’s sales totals for 1986, perhaps stealing those from early 1987.

79-Day Supply of Cars

Despite the fact that GM has had some incentives in place throughout much of 1986, its dealers still had a 79-day supply of unsold cars on their lots, while Ford dealers had just a 54-day supply and Chrysler dealers a 66-day supply. Meanwhile, GM’s sales are down 2.1%, and its market share has slipped to 41.3% so far in 1986, down from 42.6% last year and 44.5% in 1981.

“What these inventory imbalances at GM are telling us is that the market is changing, with more and more foreign producers entering, but the traditional producers like GM haven’t adjusted enough by cutting back on production,” noted Ted Sullivan, an analyst at Chase Econometrics.

COMPARING RATES ON A $10,000 CAR LOAN

Loan Monthly Total rate Term payment interest 2.9% 36 mos. $290.37 $453.32 9.0% 36 mos. $317.99 $1,447.64 4.8% 48 mos. $229.38 $1,010.24 9.0% 48 mos. $248.85 $1,944.80