Automakers are split on whether to fight the downturn in unit sales by offering more incentives on the models during 2009.
Some are slashing prices to help dealers clear their inventories while others are offering financing as low as 0 percent or including high-end features at no extra cost.
They are doing this to protect sales in a European market that is forecast to fall 20 percent to 10.7 million units in 2009, according to a report from investment bankers Goldman Sachs.
But others are holding back because using deep discounts and other incentives to sell new cars lowers the value of those models in the second-hand market.
Peter Cooke, of University of Buckingham in the UK, said long-term incentive campaigns also damage a brands image. The professor of automotive management said consumers get used to the discounts and expect them to continue.
Fleet sales are particularly sensitive to declines in residual values because companies have more cars to eventually re-sell and would suffer greater losses if the cars they bought had been heavily discounted.
Despite the potential backlash from using incentives, General Motors Europe President Carl-Peter Forster told Automotive News Europe last November that incentives are needed in the current downturn.
You have to give incentives to people who are not inclined to buy a car right now. It is more important now because of the economic situation.
But he was concerned about the effect the promotions will have on the business.
Everyone is doing this, but where do you stop? said Forster. Hopefully we all try not to kill each other even more.
In Spain, where the market suffered its worst ever sales drop in 2008, GM Europes Opel brand has cut prices by 34 percent on some models.
The idea is to help clear dealer inventories in a country where sales fell by 28.1 percent in 2008 according to ACEA, the European automakers association.
Brent Dewar, GM Europes head of sales, marketing and aftersales, said the focus of GMs sales campaign was on individual offers in each country.
In Spain the market is really tough, so we are focusing on affordability, Dewar said earlier this month.
In Germany, Opel is offering options and financing that give the customer a 2,925 price advantage. The automaker is linking the deal with a campaign to mark the 110th anniversary of Opel.
Dewar said: The focus is not on incentives, we want to be competitive but also responsible.
Lower down payment
He said GM would also help customers by asking for a lower down payment and charging lower interest rates.
At Renault, continuation of the companys incentive schemes in 2009 will depend on both market conditions and competitors behavior, said the automakers head of sales, Patrick Blain.
The real question is whether the other carmakers are going to continue using these absolutely brutal methods to drive down their own inventories, Blain said.
He said it will be up to us to react with intelligence, while preserving cash flow, which is the primary objective.
Peugeot brand boss Jean-Philippe Collin said the French carmaker will continue using sales incentives and discounts launched during the last months of 2008.
Premium manufacturers are also using incentives to manage stock levels at their dealers.
Jaguar Land Rover CEO David Smith said JLR quickly reduced production when demand started to decline late last year, but even then were having to run incentives in all markets. Its expensive.
Others are trying to resist the urge to offer incentives.
Toyota said it was not part of its strategy to develop aggressive discount campaigns to preserve sales and market share.
Discount campaigns will always have an impact on profits, a spokesman said. Toyota aims to develop its business in a profitable and sustainable way, with a long-term perspective.
Lawrence J. Speer, Tony Lewin and Bettina Mayer contributed