Competition, GM Style

The big price increases on imported Japanese cars that have accompanied the yen’s rise in value against the dollar present U.S. auto makers with a golden opportunity. As the chairman of General Motors Corp. remarked a few weeks ago, it is still a valid law of economics that higher prices mean lower sales. What he was saying is that consumer resistance to more expensive imports could be expected over time to boost sales for an American car industry that currently finds itself in a bit of a slump. A bright prospect, indeed--or so at least it seemed until GM, which dominates the American market, baffled auto industry analysts, outraged its dealers and alienated would-be car buyers by announcing that come mid-April it will raise its car prices by 2.9%.

The price increase will be the second for GM this model year, following an increase last fall that averaged 4% to 6% for most of its cars. The timing of the GM action is mystifying. As of the middle of March, General Motors had on hand an 87-day supply of unsold cars--a considerable bulge over the industry’s normal level of 60 days. The time-proven way to get rid of a surplus of anything is to cut prices to make a product more attractive. GM, for inexplicable reasons, thinks that it has a better way. Faced with more unsold cars than it knows what to do with, it raises prices--in this case by an average of $350 a unit.

Some industry analysts think that the price increase will be accompanied by yet another cheaper-financing program, giving GM the chance to make up on price what it loses on finance charges. But this sleight-of-hand hardly assures an increase in car sales. The American auto industry has had five years of protection against imports, paid for by consumers through billions in higher car costs, and finally has the opportunity to take advantage of a price edge over Japanese cars and reclaim a lost share of the market. And how does the leader of the industry respond? By raising prices. It doesn’t make sense.