Chrysler's Big Deal Is Your Better Deal

Car prices fall, and carmakers merge, because of oversupply.

Last week's merger of Daimler-Benz and Chrysler Corp. signals a happy trend for consumers.

Car prices are coming down.

Even at an average $20,000 plus, cars are the cheapest, in pre-inflation dollars, in 20 years, according to government figures.

Why? Two reasons: supply and demand.

That's where DaimlerChrysler comes in. Too many carmakers are rolling out too much supply. And while Chrysler and Mercedes-Benz, Daimler's automotive wing, aren't swimming in idle factories, the companies are making sure they won't be, says Susan Jacobs of Susan Jacobs & Associates in Rutherford, N.J.

Both companies wanted greater growth opportunities without building more plants, Ms. Jacobs says.

Lower prices have also followed softening demand in the United States, the world's largest market for new cars.

Many Americans bought new cars in the past few prosperous years, Jacobs explains, and cars now last longer.

Americans also generally replace smaller cars with bigger ones - often to accommodate growing families. But many baby boomers - past the family years and headed for retirement - no longer need bigger cars.

Reducing overcapacity "is the only reason Daimler-Benz would do this" merger, says Art Spinella of CNW Marketing Research in Bandon, Ore.

The bottom line: "Customers are king, and there will be increasing pressure to cut prices," said Alain Batty, Ford's president of international operations, at a press conference in New York.

What customers want is more features for less money.

And today they have the clout to demand it.

So sticker prices are coming down.

And even while the industry sells only 50 million of the 70 million cars it can build worldwide, automakers race to build more factories where labor costs are low: Brazil, Argentina, South Korea, Malaysia, and Thailand.

Factories now under construction can bring 20 million more cars to market by 2008, according to Mr. Batty.

No one wants to miss the next big trend, says Stephen Girsky, automotive analyst at Morgan Stanley, and the consequence, for now, is a break for consumers.

Sticker prices have dropped on 71 different US car models in the past two model years and remained flat on 77 others. And that doesn't include rebates and discounts off those sticker prices. Such price cuts are at record highs, averaging $1,500 per car, according to Automotive News.

With consumers demanding more luxuries and government regulators requiring expensive safety equipment, this price competition slams the brakes on automaker profits.

Many economy cars sell at break-even prices or at a loss, according to car company executives. Light trucks, such as the popular sport-utility vehicles, make up the difference. Profits often near $10,000 per vehicle.

So look for more big mergers in the auto industry, says David Cole at the University of Michigan. The DaimlerChrysler merger may spur automakers with weak product lines, low profits, and large debt, such as Nissan, Mitsubishi, Hyundai, and Volvo, to accelerate discussions that may already be under way, he says.

At Thursday's press conference, Daimler chairman Juergen Schrempp predicted only eight or nine large automakers would survive the next 10 years, out of 18 today.

Such mergers could reduce supply and shore up profits, but not any time soon, says Ms. Jacobs. Demographics, management tradition, and long-term supplier contracts should continue to push car prices down late into the next decade.

To Our Readers

A previously announced story on station wagons will run May 18, not today, to make room for coverage of the Daimler-Chrysler pact.

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