Incentives share blame for stalled sales of autos

Buyers: Analysts say a hot housing market also stole 300,000 potential auto buyers.

September 18, 2004|By Rick Popely and Jim Mateja | Rick Popely and Jim Mateja,CHICAGO TRIBUNE

Automakers have predicted for nearly three years that a slew of new models and an improving economy would boost sales and reduce the need for profit-draining incentives.

The economy has bounced back and new models are rolling into dealerships as promised, but sales remain lackluster.

Where are the buyers?

Analysts say they're staying away for several reasons: Great deals led consumers to buy a new car earlier than they would have in 2001 and 2002; those rebates and zero-percent financing are now routinely expected; and people have decided that housing is a better place to put their money.

Detroit-based Comerica Bank reported last month that new vehicles are at their most affordable level in 25 years, requiring 20.6 weeks of median family income. But auto sales fell 12 percent in August, and even Toyota Motor Sales USA, largely immune to the industry's struggles the past three years, saw a 10 percent decline. After the weakest August in five years, industry sales are flat with those through August last year at 11.4 million.

Moreover, General Motors Corp. and Ford Motor Co. are saddled with bigger inventory of 2004 models than desired and will build fewer vehicles in the fourth quarter than a year ago.

Analysts expect the production cuts to reduce fourth-quarter earnings for the two largest automakers because they count vehicles as sold when they are shipped to dealers.

With that as the backdrop for the 2005 model year, neither automakers nor analysts see the industry posting a blockbuster year like the record 17.4 million cars and light trucks it sold in 2000. Nor do they expect incentives to decline significantly, let alone disappear.

Ford sales analyst George Pipas thinks automakers are getting paid back for luring buyers into the market early with zero-percent loans and big rebates.

"There's very little pent-up demand because of all the sales we reaped in 2001 and 2002 during an economic recession," Pipas said. "Normally during a recession it's not unusual for demand to fall 20 to 25 percent, but we kept demand artificially high with incentives and prices artificially low. We tapped into volume that by rights we shouldn't have seen."

Sales have slid 4 percent since 2000, to 16.7 million last year. That's still high by historic standards. Pipas predicts that sales will hover around 16.6 million this year and again in 2005.

Lost to housing market

Art Spinella, president of CNW Marketing Research, says the housing market stole 300,000 potential auto buyers this year as consumers bought homes or took home-equity loans for remodeling projects to beat rising interest rates.

Historically, 37 percent to 38 percent of consumers who tell CNW they intend to buy a new car purchase one. This year only 25 percent of "intenders" have bought new vehicles. But among consumers who intended to buy a house, 56 percent closed the deal, up from the usual 43 percent.

"The feeling is that the car companies are going to be giving discounts forever, so you might as well buy the new house or get that home-equity loan for an addition sooner than later," Spinella said.

Typically among the most optimistic forecasters, Spinella predicted 17.1 million units in December but has pulled back to 16.8 million. He says the industry will be lucky to top that in 2005.

While automakers dismiss notions that higher gas prices have discouraged vehicle purchases, Jim Hall, vice president of industry analysis for forecasting firm Auto Pacific Inc., says sales in 2005 could hinge on fuel prices.

"Every industry that uses fuel has to charge a little more when prices go up, and the higher prices come out of everyone's income," Hall said. "When consumers have less money to spend, that's what slows down the market."

And then there's the diminished potency of manufacturers' incentives, which CNW says averaged $4,041 per vehicle in August.

Jeff Schuster, North American forecasting director for J.D. Power and Associates, says the industry has trained consumers to expect higher incentives, but they are about flat with a year ago and did little to help August sales.

"$100 more per vehicle is not enough to give you a sales boost," he said. "It's not enough to get a person who doesn't really need a new vehicle to cross the line."

Big on incentives

GM, consistently the most aggressive with incentives, has rebates up to $5,000 on 2004 vehicles and as much as $3,500 on several 2005 models. GM's sales are down 2 percent this year, but Paul Ballew, the automaker's market analyst, insists that incentives still work.

"The way to make vehicles affordable and give consumers more vehicle for the dollar is to use incentives such as rebates or financing or add equipment, and we expect that to continue," Ballew said.

Domestic automakers hope that new and redesigned models such as the Ford Five Hundred, Freestyle and Mustang, the Chevrolet Cobalt and Jeep Grand Cherokee will draw customers without $4,000 rebates or interest-free loans.

But Spinella says such models not only have to be new, they also have to be distinctive and exciting, like the Chrysler 300, a large sedan that has been selling briskly without major discounts (buyers get $1,000 if they finance through Chrysler).

"A new model has to be fresh and really push the envelope to have impact," he said. "And then it only lasts about a year before you have to do something with incentives."

The Chicago Tribune is a Tribune Publishing newspaper.

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