Industry and dealers scratch their heads over GM price hike

General Motors' decision to raise prices on its '86 cars caught a lot of auto-industry watchers by surprise and has some GM dealers grumbling. The world's largest automaker announced last week it is raising prices an average of 2.9 percent across its model lines, despite the fact that sales of American-made cars have been soft since last September's strong incentive campaigns ended.

Modest buyer incentives haven't been working well. GM's estimated inventory of unsold cars has swollen to 87 days, compared with the 60-day normal supply. And the Japanese are still selling all of the 2.3 million cars they can import into the United States -- even at prices poked higher by an increasingly strong yen.

Just what has GM got up its sleeve?

``What I think they're doing is paving the way for some really major marketing moves,'' says John Hammond, an auto-industry analyst with Data Resources Inc., a Lexington, Mass., consulting firm.

A GM incentive program this summer could be a ``full-blown affair'' that could run through the end of the model year in September, he says. That would make it the longest campaign in history -- compared with the typical one- to two-month programs.

Yet, despite prospects of a new incentive program, some analysts say, boosting prices is going to have one certain effect: It will make it tougher to sell cars.

``I'm somewhat uncomfortable with GM's price increase,'' says David Cole, director of automotive transportation studies at the University of Michigan.

``I'm just not convinced a price hike is justified in light of what's happening in the economy. There's a big difference between this year and the last few years. There's a lot more competition now, and it's definitely going to be a buyer's market.''

Professor Cole says he agrees with Mr. Hammond and others that GM probably is trying to change its price base in preparation for new incentives that could include car loan incentives in the 6 to 7 percent range or lower.

``It would be natural to see a rather bombshell-type program that lasts a long time,'' Cole says.

GM has not announced what models will be most affected by the price increase, but the expectation is that the biggest ones will be among smaller cars, not the bigger models.

``That means GM believes they can compete with Japan on a dollar-for-dollar basis,'' Hammond says.

Japan's self-imposed quota could also help GM sales during a promotion as car buyers discover they can't get a Japanese car right away because of the import limits. Their only option then would be to go to a US dealer, or go home without a car.

Analysts say the net effect of a ``bombshell'' GM incentive program on the buyer would be a lower price than is being paid today. The latest increase will only partly offset GM's costs of new incentives.

If GM went ahead with a big campaign, both Ford and Chrysler would be likely to follow with similar strong moves. But Cole says that as far as price increases go, this may be a watershed year in which boosts at Chrysler and Ford might not automatically follow on the heels of those by big No. 1.

Chrysler would have a real problem if it raised prices, says Hammond, who believes the company would lose more sales at a time of high inventory loads. Ford, on the other hand, doesn't have an inventory problem, but it may wish to keep prices down to cut a bigger chunk of the market. GM dealers view the price increases with varying degrees of dismay.

``I didn't anticipate it -- I don't think anyone did,'' says Ray Ferguson, sales manager at a Boston area Chevrolet dealership. ``Right now we're busy. A lot of places are slow. But we're doing well. With the selling season coming on, I think it's going to take some time [for the price increase] to affect us.''

But in light of weak sales in the Midwest, the sales manager at a Buick/Oldsmobile dealer in St. Louis complains that interest rate incentives have undercut legitimate deals, resulted in baiting by unscrupulous dealers, and caused slow sales when business should be booming.

``I'd like to get out of the rate-support business,'' he says. ``There's so much hokey stuff going on across the country with 6.6 and 4.9 percent rates which are really just buy-downs. You guess where [the cost of the extra low interest rate] is coming from -- it's not out of the kindness of a dealer's heart.''