Summer is here and the Big Three U.S. automakers are revving up a new round of inducements to lure customers into car showrooms and clear out their inventories. But don’t expect another summer of generous incentives.
Faced with a declining market share, General Motors, Ford and Chrysler have ginned up sales for the past five years with a series of discount programs that culminated in GM’s “employee” price deal last summer, which offered consumers the same price traditionally given to company employees and their family members.
The incentive program worked, but sales plummeted as soon as the discounts expired in October. Although the discounts have proved popular with car buyers, they are a double-edged sword for automotive companies, sacrificing profit margin for the sake of sales volume. Critics also say sharp discounting cheapens brand image and hurts resale values.
“This year’s discounting doesn’t have the same fire-sale connotations that we saw last summer — it’s more subdued,” said Jack Nerad, automotive analyst at Kelley Blue Book, a vehicle information resource. He said this year’s incentives are aimed more at the traditional seasonal goal of clearing out vehicles from the previous model year.
So far, only Chrysler has rolled out a far-reaching incentive plan. The U.S. unit of DaimlerChrysler said Friday it plans to offer employee discounts to everyone on most 2006 models, beginning Saturday and lasting through July. In addition, Chrysler’s incentives give buyers the choice of zero percent financing for 36 months, or rebates that vary by model.
Slumping market share for Big 3
The Big Three U.S. automakers need to do something to move more cars off dealers’ lots. Their combined U.S. market share fell to 56 percent in the first quarter of this year, down from 58 percent the year before. At the same time, Japanese rivals Toyota and Honda had a combined share of 22 percent, up from 21 percent the year before.
Last year’s strong June will mean a sharp decline in market share this year, notes Jesse Toprak, executive director of pricing and market analysis for Edmunds.com, an automotive information site. Toprak expects the combined share for Chrysler, Ford and GM in the month just ending will be 55.5 percent, down from 63.1 percent in June 2005.
“Last summer, the domestics enjoyed great success because of the employee discount program,” said Toprak. “They haven’t yet found the silver bullet for 2006, but they sure could use it.”
Hardest hit will be GM, said Toprak. He predicts its sales will drop nearly 32 percent compared with June 2005. Even so, GM has vowed not to return to the discounting strategy it used last summer.
Mark LaNeve, GM’s vice president of vehicle sales for North America, said this week that the company has no intention of reviving last year’s employee pricing plan and instead will offer zero-percent financing for up to six years on many of its remaining 2006 models. Ford also plans to offer no-interest loans and $1,000 gasoline cards to buyers.
The employee-pricing plan, which amounts to a 5 percent discount, would probably not work as well as it did last year and in any case is not popular with GM dealers, LaNeve said. Employee pricing also would go against GM’s goal of trying to wean itself off incentives and increase its average sales price.
‘The right strategy’
“We don’t want to go to market that way,” said LaNeve, adding that GM is trying to improve its brand image so it can sell great products rather than great incentives. “We’re confident we’ve got the right strategy, and we’re going to continue down this path.”
Indeed, one reason for the less generous incentives this year is the success of certain 2007 model GM trucks, including the Chevy Tahoe, Chevy Suburban, GMC Yukon and Cadillac Escalade, all of which have been selling well without the aid of incentives, according to Tom Appel, editor of Consumer Guide Automotive.
“These are some real bright spots for GM,” said Appel. “The 2007 models of these trucks have really grabbed the imagination of the public, and they really have improved over 2006 and are slightly more fuel efficient, which is a big plus. But on the other hand there are big incentives on their 2006 predecessors, which are still unsold on dealers’ lots.”
Most of this year’s incentives will be targeted at selling SUVs and other gas-guzzlers that have seen sales suffer as pump prices have headed above $3 a gallon. GM, for example, is offering interest-free loans of varying durations on 2006 Cadillac, Saab and Hummer models and some newer 2007 SUVs.
In the minivan category, a rebate war is brewing — especially between Ford and Chrysler — with rebates of up to $4,000 offered for some models.
“Sales numbers show that the minivan market is shrinking, and companies are fighting for a smaller and smaller piece of it,” Appel said. “I think the same thing is happening here as happened to the traditional truck and SUV market, where we are also seeing high incentives. People are moving to crossover vehicles like the Toyota Highlander instead.”
Crossover vehicles — which blend the ride and style of a passenger vehicle with the practicality of a SUV — are the fastest-growing segment of the U.S. vehicle market.
Chrysler’s summer incentive plan resurrects employee-pricing deals, and some industry analysts said its U.S. rivals may be forced to follow suit, albeit reluctantly, if the sales pitch proves popular with car consumers.
But while employee-pricing plans are appealing, they do not always offer the best deals for buyers, said Toprak of Edmunds.com.
“Most people don’t like negotiating the purchase price of car, and the fact that there’s one price gives people a sense of confidence and security that their neighbor or co-worker didn’t get a better deal,” Toprak said. “But when you look at the actual savings to consumers, it’s not actually always better than other incentive options.”
Still good deals out there
Although fewer deals will be on offer this summer, consumers still should be able to find an attractive incentive.
“The hardest decision people will likely make this summer is whether to go for zero-percent financing, or a cash rebate,” Toprak said. “It requires you to do the numbers and figure out what’s better for you. Generally speaking, the longer you keep a vehicle, the better the low financing programs are for you. But if you keep the vehicle for a short time, typically less than three years, you may be better off going for the cash rebate.”
Incentives or no incentives, buyers still need to do their homework, determining a budget, their needs and preferences, how long they intend to keep it and how they might finance it.
Looking beyond rebates
And buyers probably should consider the potential resale value, according to Robert Gentile, director of auto products at Consumer Reports. He points to a new Consumer Reports study that looks beyond rebates to examine the long-term costs of owning a vehicle.
The analysis looked at the 10 biggest incentives on the market and calculated ownership costs over a five-year period. Then the magazine did the same calculations on similar vehicles with no incentives, but better fuel efficiency and resale potential. The study found that only eight out of 10 of the incentives offered a better value than simply buying a more fuel efficient model.
“I think the moral of the story is, don’t let the large incentive be the only factor that goes into choosing the right car model for you,” Gentile said.
“It may sound obvious, but often when you see $4,000 or $5,000 incentives, it makes it very tempting to buy,” he said. “You need to decide if the big rebate is really worth it. We found that you could have bought a Honda Pilot instead of Ford Explorer, even though you paid more up front. [The Honda] is so fuel efficient you would have made out better in terms of fuel cost and depreciation.”