The U.S. auto industry is trapped in a death spiral due to its dependence on retail incentives, warns Peter Schwarzenbauer, president and CEO of Porsche Cars North America Inc.

Auto makers must honor the basic business model of supply and demand to ensure long-term growth and profitability, he says.

“Our biggest concern, besides the general economic situation, is always – from our point of view – this stupid incentive war,” he tells Ward’s in an exclusive interview. “This is destroying the car market in general.

“Everybody who is using heavy incentives (is) destroying the future of the industry – if it continues,” he says. “Unless we see major changes here, philosophical changes, this will be damaging for all of us.”

Schwarzenbauer makes his remarks as Porsche suffers an August sales decline of 12.5%, compared with year-ago. His position is reflected in Porsche’s no-incentives policy.

The auto maker has spurned the sales technique steadfastly. The one controversial exception was in 2002, when U.S. Porsche Car Club members were offered a $1,000 discount on ’02 Boxsters.

The measure, intended to clear out inventory in preparation for the ’03-model rollout, will not happen again, Schwarzenbauer vows.

“We are much closer now with the dealer body,” he says. “So if we would see that dealer stock is getting too high…from now to January-February next year, we would react on the production side right now.”

Porsche has detailed monthly communications with its 212 U.S. dealers to develop a clear picture of the market. Armed with this information, the auto maker can quickly increase or decrease the flow of product.

Depending on the consumer climate, this exchange can enable tight control of profit-draining inventory costs or help dealers exploit strong demand.

Says Schwarzenbauer: “You have to get better in forecasting and managing demand and supply.”

For most auto makers, that is easier said than done, says David Cole, chairman of the Center for Automotive Research. “(Porsche is) very low-volume, and its customers are very targeted,” he observes.

Schwarzenbauer acknowledges this advantage, but makes no apologies.

“For the big car companies, there is no quick solution,” he says. “Looking at it from the outside, where is this strategy to get away from (incentives) long term? This is what is concerning us.

“We are working very, very closely with the dealers on continuous effort to fine-tune our demand and supply,” he adds. “We think this is the key to be successful in this market, unless you want to go into the incentive war.”

Per vehicle, auto makers serving the U.S. market actually spent 15% less on incentives in August than the previous month – $2,390 to $2,810 – according to Edmunds.com. That total ais nearly 9% less than August 2005’s average of $2,611.

Because Edmunds.com tracks all incentives, from customer cash to lease programs to dealer rebates, Porsche shows up on the radar. It spent $538 per vehicle, second lowest after the Scion brand’s $74. Jaguar Cars was the worst offender, with an average per-vehicle incentive of $8,447.

Schwarzenbauer sees no early end to the trend. “This is a long-term issue, which will not go away in the next year,” he says.

Despite the pervasiveness of customer incentives and last month’s sales decline, Porsche remains on track for a record year. Through August, the auto maker recorded 24,200 deliveries, a 12% hike over the 21,665 vehicles it sold during the first eight months of 2005.

emayne@wardsauto.com