By Jeff Vedders
Sales Incentives and the Automotive Industry
You’ve seen the signs everywhere, 0% financing for 36 months on all 2003 vehicles. Are you paying attention? Bought that new car yet? It sure seemed like a great deal when first announced, but are incentives really working?
According to an article in Rubber & Plastics News, analysts are predicting a third consecutive year of declining sales, expecting sales of 16.4 million units in 2003. It should be noted, however that if these predictions hold true, it will be the fifth best year in U.S. history. While this doesn’t sound too bad, these same analysts point out that their predictions are based on continued high sales incentives and continued cost cutting, not to mention a short, successful war with Iraq. Even if the sales projections hold true, profits are hard to come by for automakers and suppliers.
General Motors began the incentive push we are seeing today with their “Keep America Rolling” campaign introduced after September 11th. Ford and DaimlerChrysler were quick to follow. This helped to increase demand for US light vehicles. The “Big Three” are the primary companies offering these incentives. According to the PricewaterhouseCoopers North American Suppliers Report, foreign-owned automakers are focused solely on trimming costs from the manufacturing process rather than relying on incentive programs.
Profitless Prosperity and Other Dangers for the Big Three
As seen above, large numbers of American cars are being sold. However, the cost-cutting necessary to remain competitive coupled with the recent sales incentives are shrinking margins significantly. The North American Suppliers Report mentions that cash normally used for research and product development is being passed on to the consumer. Needless to say, this could be damaging for the Big Three in the future as foreign-based automakers make inroads into the North American market. Also, U.S. auto sales fell in October and November leading many analysts to conclude that consumers are becoming immune to incentives.
While sales incentives are moving more cars, ultimately these incentives are a short-term solution. If these incentives continue, there could be long-term problems for the Big Three automakers.
One final thought: CNW Marketing/Research estimated the following incentives being offered by automakers in August. General Motors offered $3,392 per vehicle; Ford, $3,478; and DaimlerChrysler, $3,116. Japanese automakers offered an average of $2,096.
Sources:
º Rebates are strong poison, Joe Kohn, Automotive News, v 77, p 6, September 02, 2002.
º More of the same: Forecasters expect third consecutive decline in U.S. auto sales, Jim Henry, Rubber & Plastics News, v 24, n 6, p 4, December 23, 2002.
º North American Supplier Report, PricewaterhouseCoopers AUTOFACTS, published by Auto Business Ltd.