Automakers' Gas Gimmicks May Backfire

[Choleric]

Cut-price fuel might not be best way to draw in struggling drivers




By Roland Jones
MSNBC.com

Time was when automakers would slap a wad of cash on a car’s hood to shift it off a dealer’s lot. These days, with gasoline prices climbing to new record highs almost daily, they’re slapping down a can of gas instead.

With the summer driving season just around the corner, Chrysler recently launched its “Let’s Refuel America” program — an offer that caps the price of gasoline at $2.99 a gallon for three years for people who buy or lease new vehicles from the maker of Dodge and Jeep vehicles.

The automaker, which was acquired last year by private equity firm Cerberus Capital Management for $7.4 billion, said this week that the gas deal has has resonated with consumers and raised traffic on the Chrysler Web site by 25 percent since it began May 7, and so it has extended the promotion through July 7.

“Boy, have we gotten a great response,” Chrysler’s Vice Chairman and President Jim Press said on a conference call with reporters. “This has really resonated with the needs and the worries and concerns that customers have.”

But free-gas deals rarely work out well for automakers, experts say, and Chrysler risks coming off as insensitive for encouraging Americans to drive more at a time when soaring fuel costs are making most aware of the nation’s overuse of energy. And in some cases car buyers might be better off taking advantage of a rebate or low-interest finance deal.

Cheap gas deals are not new. Japanese automaker Suzuki has made a similar offer to Chrysler’s in the United States, offering free gas for the summer through June 30. And in recent years, a number of automakers — including General Motors, Ford, Mitsubishi and Volkswagen — have offered cut-price gas deals to lure shoppers to their vehicles. The thinking is that gas-price sensitive Americans will find an offer of cheaper fuel something that’s tough to resist.

Gas deals are usually offered in times when sales look shaky, as they do this year. U.S. auto sales are expected to be weak in 2008, dropping to their lowest levels since 1995 because of rising gas prices, a harsh economic climate and a dearth of appealing new models on offer.

But the deals are little more than a gimmick — they’re not often successful for automakers, and they’re not always in the best interests of car buyers, notes Philip Reed, senior consumer advice editor at automotive research Web site Edmunds.com.

“People tend to get panicky when it comes to high gas prices, and that can mean a snap decision — but that could cost them,” he said.

“If someone is wondering whether to take a deal such as the $2.99 gas deal Chrysler’s offering they should look at the math first, because they might be better off going for a zero-percent financing deal,” he continued. “The interest on a car loan can be $50 a month, and that buys a lot of gas, and a rebate of between $2,000 and $4,000 is not uncommon these days, and it could take a while to make back that amount with the savings you’ll get from cheaper gas.”

Chrysler’s deal caps gas at $2.99 per gallon for new car buyers with Chrysler paying the rest. It covers most of the automakers models and is based on 12,000 miles of driving per year and the vehicle’s government fuel economy rating.

The highest take rate has been on the company’s smaller, more fuel-efficient vehicles, Press said. Chrysler would not say how much it expects the offers to cost the company, but did say it has purchased hedging instruments to guard against the price of gas going up even further.

While Chrysler’s free-gas promotion only stipulates that shoppers lease or buy a qualifying Chrysler, Dodge or Jeep vehicle, Suzuki’s promotion requires entrants to take advantage of its zero-percent financing offer as well. The aim is likely to build brand awareness for its cars, notes Aaron Bragman, an analyst with the consulting firm Global Insight.

“It’s interesting that Suzuki is jumping on the bandwagon here,” he said. “I think this is more about brand awareness than sales because they do have small cars out there, but the small-car marketplace is very crowded, and with more people starting to buy smaller cars because of high gas prices, Suzuki’s sales are not exactly on fire. So this looks like a marketing effort to get them on people’s shopping list.”

Given widespread concern about problems stemming from overuse of energy resources, automakers that run gas promotions could see their efforts backfire, Reed said.

“Essentially, Chrysler is saying don’t look at what’s going on in the real world with gas prices hitting new records. They are saying, ‘We will protect you from high gas prices,’ but people are realizing that the problem of high fuel prices is complex and that we need to do something about our dependence on foreign sources of oil, and lessen our dependence on fossil fuels,” he said.

“The cheap gas deal is saying something else — it’s telling us not to worry, we can drive as much as you want, and so it’s as if Chrysler isn’t addressing the current fuel-economy trend,” Reed continued. “People realize that lowering the price of gas won’t fix things. This is a deeper problem that’s going to take years to fix, and people are already taking steps by driving less and looking to conserve fuel.”

Chrysler’s sales may be goosed this summer by its promise of $2.99 gas, but its promotion smacks of desperation, said Global Insight’s Bragman.

“This is the sort of thing you do when you don’t have a lot of product that can sell on its own merit,” he said. “In reality, Chrysler mostly sells trucks and SUVs and it still doesn’t have a strong line of smaller vehicles to sell — that’s what’s in vogue with consumers right now.”

The latest data show that as gas prices have marched higher across the nation this year car buyers have turned to cars and crossover vehicles, while SUVs and pickup trucks have fallen from favor.

And although Chrysler has made some deals to bring smaller cars to the North American market, the availability of those cars to consumers is still a few years away, Bragman notes. These deals include a partnership with China’s Chery and another, inked more recently, with Nissan to build a small car in Japan and sell it in the United States by 2009, he said.

“Chrysler does have some smaller cars, such as the Dodge Caliber and the Jeep Patriot, and it has base four-cylinder versions of the Sebring and Avenger, but these cars by themselves are not especially competitive in their segments in terms of quality and design,” he said.

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