updated 7/6/2005 6:15:41 PM ET 2005-07-06T22:15:41

DaimlerChrysler AG’s Chrysler Group became the last of the Big Three carmakers to slap employee discounts on its vehicles Wednesday, raising the stakes in a price war with a very uncertain outcome.

Under the program, which runs through Aug. 1, Chrysler is offering some Chrysler, Dodge and Jeep vehicles at the employee rate plus up to $3,500 cash back. Chrysler is following the lead of General Motors Corp., which began offering an employee discount to customers June 1, and Ford Motor Co., which announced an employee pricing plan Tuesday.

Chrysler also said Wednesday its former chairman and chief executive, Lee Iacocca, who led the carmaker’s turnaround in the 1980s, is expected to appear in advertisements for the new promotion. Chrysler’s program excludes the Chrysler 300, the Dodge Magnum, Sprinter and Viper and the Jeep Liberty Diesel. All 2006 models and SRT models also are excluded.

GM’s sales jumped 41 percent in June thanks to the discount, which allowed customers to buy vehicles for an average of $400 to $500 less than they spent in May. Ford and Chrysler followed after lackluster sales in June.

Quarterly sales results, which will be released in mid-July, will show how much the discount program has cost GM. But Jesse Toprak, an analyst with the automotive research firm Edmunds.com, said early signs indicate the program was cost-effective.

In general, Toprak said, GM paid for the discount by taking away cash rebates and other incentives. GM said more customers were willing to buy rather than lease, which held costs down, and customers also bought more expensive vehicles than they might have because of the perceived savings.

According to Autodata Corp., though, GM spent an average of $4,458 per vehicle on incentives in June, up $449 from May.

Toprak said Ford and Chrysler could have the same success with minimal cost if they follow GM’s strategy. Ford already has taken away some cash incentives to help pay for the program, he said.

Still, Toprak said, the Big Three have reason to worry. Consumers might not continue to flock to dealerships as the summer goes on, especially when 2006 vehicles arrive in showrooms without big discounts attached.

GM’s program “has further conditioned consumers to expect a big discount when they walk into a GM dealer,” he said.

Merrill Lynch analyst John Casesa agreed with that assessment in a note to investors.

“We are concerned that this everyday low price strategy has only set the domestic industry’s starting price point a notch lower and in the long run will further erode brand-equity and residual values,” Casesa said.

A discouraging sign for the Big Three is that the employee-pricing promotion did little to affect June sales of Asian brands, which continued to climb.

Toyota Motor Corp. spokesman Xavier Dominicis confirmed Wednesday the company has no plans to match the Big Three’s discount program. Toyota sales were up 10 percent in June.

“Our outlook is a long-term outlook, and we’re seeking sustainable growth,” Dominicis said. “Toyota buyers tend not to be the deal-of-the-day buyers. There’s a lot of loyalty when you look at our buyers.”

Chris Ceraso, an analyst with Credit Suisse First Boston, said the discount programs also could sour relations with dealers. In a research note, Ceraso said the amount GM spent suggests dealers sacrificed thousands of dollars in profit margins in June to help the automaker.

Jim Sanfilippo of Bloomfield Hills-based Automotive Marketing Consultants Inc. said he believes the employee-discount programs could ultimately help U.S. automakers in the 2006 model year and beyond.

U.S. automakers have been trying to get away from incentives and price vehicles more realistically, and this program helps them do that by setting clear prices and letting manufacturers see what consumers are willing to pay, he said.

“Maybe GM erred on the side of generous (in June), but somewhere in there is the sweet spot, where they can make $1 a car or whatever the market will bear,” Sanfilippo said. “It’s easier to figure that out with pricing than with rebates.”

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