The Coming US Car Price War

There is a car price war about to take place in the US. It will be driven by the large number of new models which have begun to be released, the high price of gas, the amount of time Americans hold their cars and efforts of large companies like VW to press for more market share.

The American market is not unique. KMPG released a report that said the global auto market would become more competitive. Large auto companies continue to build manufacturing facilities in China. The report says many car firm executives believe capacity will be overbuilt there. Bloomberg recently wrote that PSA Peugeot Citroen, Renault SA and Fiat SpA will be pressured by VW as it works to increase it market share in Europe. The German corporation says it expects to overtake Toyota (NYSE: TM) soon as the world’s largest auto company by units sold. The distinction belonged to GM up until three years ago.

The quality advantage that European and Asia cars have over US manufactures continues to shrink which will highlight price as the differential that attracts many consumers. A new Consumer Reports annual analysis of brand quality placed Honda Motor (NYSE: HMC) at the top of the list. Ford (NYSE: F) was not far behind and it bested Mercedes, Hyundai, and VW.

The car companies expect to sell 12.6 million cars and light vehicles in the US this year. The price of oil and gas will affect these results. Another challenge car companies must face is that Americans hold new cars for 63.9 months up 4.5 months from a year ago, The New York Times reports. Ironically, improving car quality gives owners the opportunity to keep their vehicles in operation for years with little need for repair.

Large global car companies which have very modest market share in the US will push to move into the N0. 2 auto market in the world. First among these is VW. It cannot reach its global sales goal with the 1% to 2% of the American market it has now. VW has a very modest number of models and its quality scores are mediocre.

The competition for unit sales is about to get much more cutthroat. The companies which control the American market–GM, Ford, and Toyota– will have to defend themselves against Hyundai, VW, and Chrysler. None of these firms with smaller presences can post large increases in sales on quality alone. The quality field has become too level.

There has not been a stiff competition based on incentives in the American car market for some time. Weaker auto firms have offered thousands of dollars off sticker price to clear inventory over the last two years. Heated competition based almost solely on price is part of the auto industry’s history that went away after the destruction of GM and Chrysler.

Gas prices could cut 2011 sales in the US closer to 12 million vehicles, a drop from over 16 million four years ago. Market share become more precious when the pie does not get larger.

Douglas A. McIntyre