The Double Edge of Incentives

Domestic auto makers have closed the gap when it comes to quality and reliability vs. the Japanese competition.

“But where they fall short is on value for the money,” says Claes Fornell, director of the National Quality Research Center at the University of Michigan.

In its recently released American Customer Satisfaction survey, the center found consumers consider domestic cars to have the same quality and reliability as Japanese imports.

But the study, based on a survey of 80,000 motorists, goes on to say, “The U.S. auto industry will have to fight to keep from losing customers to foreign car makers.”

So what's the problem?

Often domestic and Japanese vehicles are priced within a few dollars of each other. And when it comes to incentives and offering cash rebates, the domestics typically put thousands of dollars on the hood to attract buyers.

That, Fornell says, is the problem.

“The perception of consumers is that they get more value for the money among the Japanese brands,” he says. “It probably has to do with the use of discounts (incentives).

“Toyota (Motor Corp.) and the other Japanese auto makers offer less discounts less often than the domestics, which leaves the perception they give more value for the money. Yet Toyota and the other Japanese are doing well, thank you.”

Fornell says that the discounts offered by the domestics have tended to devalue their brands.

“And once you start discounting it's hard to get out of the habit, and consumers come to expect it,” he says. “It dilutes the brand.

“Discounts are a two-edge sword and have a negative effect. Low price contributes to a low opinion,” he adds.

Chrysler Group recently announced prices for its entry-level PT Cruiser would be reduced $4,000 for ‘05. So will that help or hurt the value perception?

“I don't know if it addresses or compounds the problem,” Fornell says. “My reading is that while it should help sales, consumers won't see it as a positive for the brand.”