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U.S. auto sales slowing down

Automakers hope to minimize losses with incentives

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DETROIT — Like a sprinter running a 10-kilometer race, U.S. auto sales sped to a record start in the first half of 2000 but seem a little winded now.

Most industry analysts predict sales will slow over the next several months, although the year's total will still surpass last year's record of 16.9 million vehicles. But as sales slow, General Motors Corp., Ford Motor Co. and the Chrysler side of DaimlerChrysler AG will rely on a combination of new incentives — cash and cheap loans — to keep buyers coming to dealerships.

Analysts say automakers are looking for a modest decline.

"I think automakers are happy with a market that's going from white-hot to red-hot," said Diane Swonk, economist with Banc One in Chicago.

So far, industry analysts say there are few economic warning signs that vehicle sales are about to plunge. Americans' incomes are still rising, unemployment remains near record lows and consumer spending has backed off slightly but still remains strong. Swonk and other analysts said there's still little evidence of gas prices scaring consumers away from new car buying.

But some economic reports this past week raised concerns that the Federal Reserve could push interest rates higher again. Higher rates make loans more expensive, and automakers appear more willing to raise some bargain-basement finance rates, which do tend to slow sales.

In moves that counter rising rates, GM and Ford set new incentives earlier this month that increased cash rebates, following Chrysler's lead. GM now offers $2,500 rebates on several models, including some older SUVs. Ford's rebates are a little less, thanks to stronger car sales.

Analyst David Healy with Burnham Securities estimates that GM and Chrysler averaged about $2,250 in incentives on every vehicle sold in June, with Ford averaging $1,745.

Chrysler's incentive costs were one of the reasons behind a 12 percent drop in second-quarter earnings announced during the week. Higher incentives were also a drag on GM's second quarter earnings.

The higher incentives are necessary for a variety of reasons. With more than 200 models of cars and light trucks for sale in the United States, competition is fierce. The strong sellers from U.S. automakers are their newest vehicles — the Ford Focus compact, GM's trucks — or those that are strikingly different, such as the Chrysler PT Cruiser.

Another reason for incentives: imports grabbing a larger piece of the American market. Through June, GM, Ford and the Chrysler side of DaimlerChrysler had seen their market share shrink from 70 percent to 67 percent.

The biggest loss came from Chrysler, which suffered from a decline in sales of its SUVs — the Jeep Grand Cherokee and Dodge Durango. GM's overall market share declined to 28.6 percent, but the company slightly increased its share of the truck market.

"A lot of the world's overcapacity has been aimed at the U.S.," Chrysler president Jim Holden said Wednesday.

The biggest market gains have gone to Asian manufacturers, whose sales are up 30 percent. Toyota and Nissan have grabbed more customers with their trucks — Toyota with its Tundra, Nissan with the Xterra. And Korean automaker Hyundai has thrived at the lower end of the market.

"The battle for market share is pretty tremendous," Swonk said. "GM is out there pushing hard and that means continued incentives, but I don't see sweetening incentives from here."

Chrysler's experience also shows how getting incentives wrong can be a costly mistake. Earlier this year, the company raised the costs on leases for the Jeep Grand Cherokee, hoping to increase residual values. With 60 percent of Grand Cherokee sales coming from leases, the changes had an immediate impact. Sales of Grand Cherokees fell 13 percent in June and are off 4 percent for the year.

"Incentives are half art and half science, and we got the art wrong," Holden said.