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“Detroit Still Can’t Kick Its Habit of Ever-Rising Auto Incentives.” Investor’s Business Daily. 16 August 2004

Mon Aug 16, 7:00 PM ET

Donna Howell

Cash rebates and cheap loan offers have never been so hefty. And auto analysts expect them to keep rising — despite Federal Reserve (news – web sites) rate hikes and signs that incentives may be losing their punch.

Detroit rolled out incentives in earnest to boost sales after 9-11. In July domestic automakers offered more than $4,000 per vehicle.

Rising interest rates could curtail low-APR car financing deals long-term, analysts say. But American carmakers need heavy incentives for the foreseeable future. Sales are faltering as SUV demand falls and foreign makes gain more ground.

“At the retail level we’ve actually seen about a 6%-7% sales decline year to date, in the case of GM and Ford,” despite high incentives, said Lehman Bros. analyst Darren Kimball.

The average discounts on General Motors, Ford and Chrysler vehicles hit $4,011 per unit in July, says auto site Edmunds.com. That’s up $192 from June. It includes cash-back deals, artificially low financing rates, leasing incentives and other enticements.

Detroit’s Discount Fever

Domestic carmakers spend more on incentives than foreign rivals. In July, European automakers’ U.S. incentives hit $2,562. Japanese makes reached $1,024, and Korean brands were slightly down at $1,833, Edmunds.com says.

Of U.S. makers, GM had the highest average incentive, $4,467 per vehicle. Ford had the steepest monthly hike, up $358 to $3,686 per vehicle. Chrysler discounted by $3,384, down $185 from June.

Kimball predicts U.S. carmakers will roll out even higher incentives and cut output. GM recently cut output of its poor-selling Saturn Ion.

And Detroit will be sanguine about small Fed moves, like the Aug. 10 quarter-point rate hike.

Automakers might want to tout their 0% loan offers even more, he says. Rate hikes make cheap financing even more attractive to consumers, says Paul Ballew, GM’s executive director of market and industry analysis.

Fed Hikes No Big Deal

Initially the appeal would be largely psychological. A quarter-percent rate rise boosts an average monthly payment only $2 a month, says Jesse Toprak, Edmunds.com’s director of pricing and market analysis.

“If it goes up a whole percent or more, automakers may rethink their low-APR strategies,” he said. “We may see financing for 48 months or shorter, or 0.9% rates (vs. 0% financing).”

GM raised incentives in early August, before the Fed’s hike. And Chrysler is expected to add incentives to new models later this year, such as the redesigned Jeep Grand Cherokee.

Incentives are rising at a slower pace due to the stronger economy, says Tom Libby, senior director of industry analysis for Power Information Network, part of consultancy J.D. Power & Associates.

“But the situation is still challenging for us,” said GM’s Ballew.

Another reason Detroit’s love affair with incentives may be peaking is that more isn’t necessarily better.

Of domestic makes, Ford upped its incentives the most in July, said Edmunds.com. Yet its market share fell over a percentage point to a record-low 16.8%.

“Increasing levels of discounts don’t necessarily result in hoped-for sales increases,” said George Pippas, Ford’s manager of sales analysis.

So in some cases Ford will curb incentives, even if it means ceding market share.

That’s the dilemma Big Three automakers must grapple with, Kimball says. “If they raise incentives further, will they see the kind of response they’d like to see from the consumer? Do they double down or emphasize actions on the supply side — cutting production?”

U.S. makers also face increasing pressure from foreign rivals on efficiency. Toyota (NYSE:TM – News) gained a little over $360 million from cost cuts in the June quarter and plans more.

Toyota already boasts an after-tax profit margin of 6.4%. Honda’s (NYSE:HMC – News) is 5.5%. But Ford’s is 3%. GM’s is 2.7% and DaimlerChrysler’s just 1.5%. Also, the top foreign makers enjoy better relationships with suppliers, surveys show. U.S. manufacturers are trying to compete better on several fronts, but still lag.

Big Three automakers’ fates depend on two factors, says Mike Wall, analyst at auto research firm CSM. “It’s product, and hopefully getting a really robust economic recovery,” he said.

U.S. carmakers look to new and redesigned models to drive sales free from profit-killing incentives. Chrysler was able to minimize incentives on its stylish new luxury car. The 300 sedan accounted for 27% of Chrysler brand July sales.

“Chrysler is going great guns with their new 300 series vehicles. Ford is doing great with its F150 (pickup) and they’re coming out with their 500 series car in the next couple of months. Everything I’ve heard says that’s a good auto,” said John Henke, president of Planning Perspectives, a Birmingham, Mich., manufacturing consultancy. “GM doesn’t have much in its pipeline, I’m told. That’s going to make it difficult for them to do well.”

Analyst Toprak says U.S. automakers might spend more money on designing cars and trucks that people are eager to buy rather than deeply discounting lackluster models.

“We might see more investing dollars,” he said. “So they can come out with more attractive products so vehicles can sell.”

Tastes can change. GM and Ford are especially dependent on large trucks and SUVs. While they have been a hit with consumers, high oil prices could crash the party.

“Their profit centers are these larger vehicles,” Kimball said.

SUVs sat on dealer lots longer in July even though their incentives rose at twice the industry average. Large SUVs sold for $9,463, or 22%, below their suggested sticker prices. Libby credits high gas prices, but also a renewed emphasis on cars.

“From everything we’ve seen in auto shows and feedback from manufacturers, cars will be more prominently displayed and advertised,” said Edmunds.com’s Toprak.

Toprak says U.S. makers are getting braver about going after niche markets with more stylish vehicles. That will mean making money with much more limited production runs.

Meantime, Japanese makers are making bigger inroads with trucks and SUVs. Toyota’s light truck sales rose over 9% from a year ago. It sold plenty of compact Tacoma pickups. But its best gains were on the Sienna van and the Tundra full-size truck.