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Rebates return, to automakers' dismay

There are few things auto buyers like more than incentives, but for the industry they are the profit-eating menace that helped drive two of Detroit’s Big Three makers into bankruptcy.
Image: 2010 Toyota RAV4s
Toyota 2010 RAV4 sports utility vehicles sit in a long row at a Toyota dealership. Toyota's U.S. sales surged 41 percent in March as unprecedented incentives sent customers flocking back to showrooms.David Zalubowski / AP

There are few things auto buyers like more than incentives, but they are the profit-eating menace that helped drive two of Detroit’s Big Three makers into bankruptcy.

Across the industry, manufacturers promised to forswear these costly givebacks, using the recession as reason to slash production and bring it into line with realistic expectations for future demand. The move, analysts say, has been a major reason why Ford could trim givebacks and translate that into unexpectedly solid earnings and why General Motors started clawing back into the black during the final months of 2009.

But recent trends show just how difficult it is for makers to abandon incentives — which the legendary Lee Iacocca once famously likened to “dope.” And with the industry giant, Toyota, desperately hoping that hefty helpings of cash will overcome concerns about its ongoing safety scandals, industry insiders and analysts alike are fretting that a new round in the long-running rebate wars may be getting under way.

“Once you start incentivizing the market,” warns Joe Phillippi, chief auto analyst with AutoTrends Consulting, “it’s been proven, time and time again, that it becomes extremely difficult to get away from more givebacks.”

Rebates and other givebacks have been a routine part of life in the auto business for decades, Iacocca’s Chrysler turning them into a standard part of marketing back in the 1970s, when its ads told customers they could, “Buy a car, get a check.” But things surged out of control, recalls George Peterson, chief analyst with AutoPacific Inc., following 9/11, when GM tried to single-handedly kickstart a plunging economy with the most massive giveback campaign in industry history.

In recent years, it has been routine for Detroit makers to offer incentives that have run to $5,000, even $10,000 on slower-selling models. Import makers typically have been more restrained, on the whole, although weaker players such as Mitsubishi have played along.

That long-struggling Japanese brand nearly went broke on an ill-conceived "NINJA" campaign that allowed young buyers with No income, No Jobs or Assets to buy a car and delay paying back their loans for up to a year. Instead, many waited until the first payment was due before handing back the keys.

“Using the recession as a guide, the industry really pulled away from incentives for much of the last year,” Peterson says, adding that the Detroit Big Three, in particular, closed more than a dozen assembly plants, so there was less need to prop up sales to keep underutilized factories going.

“Our plan is to bring capacity in line with demand, which means we can sharply cut back on all those incentives,” Ford’s President of the Americas Mark Fields stressed during a 2009 interview.

Or so went the plan until last month. That’s when Toyota decided it had no other option but to toss cash on the hood, in industry parlance, to counter the damage from its ongoing problem with so-called sudden acceleration.

By comparison to what its Detroit rivals have offered in recent years, the Toyota numbers were relatively modest, running anywhere from $500 to as much as $3,000 on the 2010 Avalon sedan. A number of the maker’s products, including the Tundra pickup and Corolla and Camry sedans, also qualified for zero-interest loans. Overall, noted the car-shopping Web site, Toyota incentives totaled a record $2,256 a vehicle.

“Business has been very good,” says Dennis Pecho, general manager of Continental Toyota, in Chicago.

Toyota’s U.S. sales for March were nearly twice what the automaker sold in February and up by more than a third over March 2009.

With the safety crisis showing no signs of going away, Don Esmond, Toyota’s top U.S. sales executive, says he told his dealers, “We will remain competitive.” That means that while the maker has revised the giveaways for April, its incentive program is continuing — and likely will for the foreseeable future, analysts believe.

That, in turn, is forcing Toyota’s competitors to fight back. Overall industry incentives for March surged roughly 4 percent to $2,742, according to Edmunds. And analysts Phillippi and Peterson have no doubts the numbers will go higher.

Even brands normally loathe to advertise on price are pushing incentive offers, notably Honda, whose “Really Big Thing Sales Event” requires zero down, zero deposit and no first month’s payment

Detroit, as always, leads the charge, however. GM is putting as much as $10,000 on the hood of some of its old Saab products, and nearly as much for Hummer. Excluding the incentives on the four brands it plans to close or sell, it’s still offering up to $4,500 on some low-demand trucks, like the Chevy Silverado pickup.

On the positive side, notes soon-to-retire Vice Chairman Bob Lutz, incentives are minimal on some of the automaker's newest and strongest selling products, such as the Chevrolet Equinox.

Chrysler isn’t much behind GM, with incentives of up to $4,000 on a number of Jeep products. The exception is Ford. which generally is pushing givebacks more in line with Toyota, from $500 to $3,000.

CEO Alan Mulally stressed, late last month, that he has no plan “to give away products and destroy profits.”

Whether the strong-willed former Boeing executive can maintain that position remains to be seen, says Phillippi. “Sometimes, it just takes losing a couple tenths of a point of market share to turn up the pressure,” he noted.

The general industry consensus is that the rebate wars won’t cool down unless and until Toyota backs off. And despite its current problems, the Japanese maker has more than enough cash to keep the battle going for some time.

The American auto market has been showing a general, if modest, upward trend, which oddly enough complicates the matter. That’s led a number of makers, notably including GM, to add third shifts at some plants and generally boost production.

The last thing the company will want to do is cut back again, says Phillippi, which will create even more pressure to feed buyers’ addiction to incentives. The maker, “won’t hesitate to put money into the market,” he believes, particularly in its run-up to its public offering which will help pay off the billions in bailout money invested in GM last year to keep the company afloat.

For his part, Lutz says, "I'm not worried" about a new incentive war, although he does admit that Toyota is in the diver's seat as it "tries to contain a serious reputational problem." He conceded in a recent interview that if the Japanese maker continues to ramp up its givebacks, the rest of the industry collectively "can't sit idly by and watch that happen."