news-record.com

NEWS

No deal: Buyers will see fewer discounts for cars

Tuesday, August 31, 2010
(Updated Wednesday, September 1 - 9:28 am)

DETROIT (AP) — For years, Americans shopping for cars were treated to all sorts of deals and incentives, especially at the end of summer. Think Cash for Clunkers, which paid up to $4,500, or promotions that offered employee discounts to everyone.

Those days are over.

Deals are getting more scarce because automakers, newly lean and profitable, are holding the line on those profit-eating promotions. In July, they offered $1,000 less in incentives per car than a year earlier, according to Edmunds.com.

And with no one expecting the government to offer a repeat of the Clunkers program, get ready for fewer discounts on your next car.

"This may be as good as it gets, and get used to it," says Jeff Schuster, the executive director of forecasting for J.D. Power and Associates.

As a result, U.S. auto sales are at a standstill, with potential buyers waiting for more deals but automakers resisting. The industry expects this to be the worst August in 18 years, with sales barely over 1 million cars and trucks. Sales are expected to fall 3 percent from July, according to car-pricing website Truecar.com.

August usually sees strong sales as automakers offer deals to clear out the lots for new models. In August 2007, before the recession, automakers sold nearly 1.5 million new cars and trucks. Last August, when sales were at a 30-year low, the government came to the rescue. Cash for Clunkers, which paid buyers up to $4,500 per vehicle, boosted sales by about a third to 1.2 million.

But this year, the government is on the sidelines, and so are many buyers.

The standoff between buyers and car makers could continue through the rest of the year unless companies sweeten deals or there's some sort of government intervention, says Jesse Toprak, TrueCar's vice president of industry trends and analysis.

"We really need some sort of catalyst to take us up to a higher level," he says. Car sales are still far below normal levels because, with unemployment still high and home values sharply lower, consumers just don't feel confident enough to buy.

Others say a healthier economy — not incentives — is the only real driver for higher sales.

"Just lowering prices is not going to solve the problem," says George Pipas, Ford's top U.S. sales analyst. "The key is an improved consumer outlook."

Automakers have been vowing to cut back on incentives for years. But this time, they mean it.

In the last few years, Detroit automakers — and, to a lesser extent, their foreign rivals — have closed plants, cut tens of thousands of workers and aligned production with demand. Because they're producing fewer vehicles, they don't need to offer discounts to get rid of excess cars and trucks.

Since 2004, automakers have cut their North American production capacity by 18 plants and 2 million vehicles, Citi Investment Research auto analyst Itay Michaeli says. At the end of July, automakers had 52 days' supply of vehicles to sell, down from 69 days' in July 2008, according to J.D. Power and Associates. Automakers need a certain amount of cushion to assure that there are enough cars and trucks available, but anything above a 60-day supply is generally considered too high.

Without those capacity cuts, the current depressed market would have been a disaster for Detroit automakers, since they would be producing far too many vehicles. But General Motors Co. and Ford Motor Co. have been profitable this year and stand to make even more money when the market recovers.

Analysts believe that 14 million vehicles is a natural level for annual U.S. sales, based on population, the rate people scrap used cars and other factors. J.D. Power expects sales this year to be around 11.6 million, up from 10.4 million last year. Before the recession and bankruptcies, auto sales hit about 17 million, but that was partly because they were juiced by overproduction and generous incentives.

Some analysts think automakers should speed the recovery with an eye-popping — but not profit-busting — deal.

Michaeli says the biggest factor holding back sales is consumers' fear of layoffs, so he thinks automakers should offer to buy back cars if people lose their jobs.

Hyundai won customers last year by launching a bold program that did just that. The South Korean automaker's market share is up 38 percent since it began "Hyundai Assurance" in January 2009. That's proof such programs can work, Michaeli says.

Toprak thinks the government should guarantee car loans, charging buyers a small premium to cover the cost of any defaults. But so far, there's been no discussion of such a plan, or of a repeat of the $2.88 billion Cash for Clunkers program. Under that program, dealers offered customers government-funded rebates of $3,500 to $4,500 to trade in older models for new ones that got better gas mileage.

Deals are still out there on some models, and incentive spending for Asian automakers crept up this year after Toyota Motor Corp.'s safety recalls. But generally, automakers are not boosting incentives. In August 2008, GM offered an average of $4,053 per vehicle in incentives; this August, it's expected to spend $300 less than that, according to TrueCar.

That leaves many buyers in limbo. Lori Pietryga of Ann Arbor, Mich., has a 2007 Honda CR-V with 10 months left on a four-year lease. She's considering buying a new CR-V, but only if the price is right.

Pietryga, 51, a medical equipment saleswoman, pays $450 per month. If she can get a dealer to buy out her lease and give her a CR-V for the same payment or less, she might sign the papers. But with only 40,000 miles on her current CR-V, she's able to wait if the dealers don't cooperate.

"If it's not a deal, I don't need to do it," she says. Pietryga plans to play dealers against each other to try to get a better deal.

Schuster says eventually cars will wear out and people will have to buy, regardless of the incentives. But in the meantime, he says, "it takes a while to get off the drug."

Accompanying Photos

File photo (Associated Press)

Comments

This article has been closed to new comments. Comments are generally closed after 14 days. However, comments may be closed earlier at the discretion of the News & Record.

Inappropriate content? Please report abuse.

genorad99

August 31, 2010 - 10:16 am EDT

I went to a Toyota dealer and test drove a RAV-4 model. Wanted to trade in two cars. Salesman turned me over to their financial guru and he wrote down the bottom sticker price of his car (not counting tax) and then below that the trade in value of my 2 cars. I looked at his figures and laughed. Got up and left. Went by my credit union and got the NADA trade in values for my 2 cars which was 50% higher than his offer. I wouldn't pay his sticker price to begin with much less trade in my 2 cars for his offer. I'll continue to drive my older cars and pay less property tax (another rip off by the state and your local government) until they die before I will consent to being ripped off by a car dealer. The pricing information for new and used cars is available through the Internet, your local banks and credit unions. The new cars are way overpriced as far as value to begin with. So no new cars in my immediate future means no money for the car dealers. And the property tax values on vehicles should be set as the average selling price of those vehicles. Not some highly inflated book value as is currently the case. The state has the sale values as a matter of record since they are receiving the sales tax revenue. Anyone want to bet that the selling or trade in values are a lot less than the property tax book values? That issue could be solved by forcing the local tax offices to pay you the assigned tax value for your vehicle. That would also take care of the trade in ripoff that dealers perform.

dmm219

August 31, 2010 - 10:45 am EDT

The financial ignorance is astounding:

"newly lean and profitable"

US car companies are neither "lean", nor "profitable". But since no one (especially the press) can do math in this country or understands basic finance, the BS continues.

1. "profit" during one quarter, when a company achieves that profit solely from layoffs and cost cutting, the face of LOWER REVENUE does NOT make a company profitable. In fact, it makes said company extremely risky and unstable.

2. "lean" does not equal less workers. Lean DOES equal efficiency. Most companies who try to "lean" by firing people end up becoming less efficient in the future.

The Bailout of GM was not a success in any way. Look at what happened to Chrysler, who was bailed out in the 80's with "spectacular" success...where are they now? Bailing companies out only ensures their demise. GM will be exactly where Chrysler is in 10-20 years.

Rootboy Slim

August 31, 2010 - 9:34 pm EDT

Good idea, government guaranteeing auto loans. It works so well for home loans.

eMail Updates

Advertisement | Advertise with Us

Featured Ads

Search

Advertisement | Advertise with Us
Advertisement | Advertise with Us
Advertisement | Advertise with Us

News & Record Network Sites

User Tools

  • Social Networking
  • RSS
  • Share
  • Sign in to MyNR

Search