- The Washington Times - Friday, December 8, 2000

Don and Cindi Scoggins had planned to just walk the Chrysler-Jeep lot the other day in Texas, casually looking at new minivans.
But they didn't get far. Their plans changed when they discovered that they could get a $3,000 rebate on a new minivan. It was one of at least 40 rebates of $2,000 or more that DaimlerChrysler, General Motors and Ford were offering on a wide range of vehicles.
And more are likely to come, analysts and industry observers say. As sales slow, new vehicles are stacking up at assembly plants and on dealership lots.
On Friday, the Big Three automakers each reported a decline in November sales, and Ford and DaimlerChrysler took steps to trim production to control swelling inventories. At the same time, automakers are pumping their consumer incentives to historic highs.
In October, the incentives averaged $1,342 for every new vehicle sold — up from $1,307 a year ago, according to Autodata Corp. of New Jersey, which tracks incentives. And those are just cash incentives. Many manufacturers are offering low-interest and even no-interest financing that can save buyers $5,000 or more.
"We had been talking about getting something new, but we had not been serious about it," said Mr. Scoggins, 40, sales manager at Blue Bell Creameries in Lancaster. "I think the incentive was what pushed me over."
Mrs. Scoggins had 108,000 miles on her 1997 Plymouth Grand Voyager from her job as a property supervisor at Westdale Asset Management in Dallas. She traded it for a 2000 Chrysler Town & Country LXI.
The bottom line for the Scoggins: With the $3,000 cash-back incentive from DaimlerChrysler and a $3,000 markdown by the dealer, they were able to get the $30,000 vehicle for about $24,000, Mr. Scoggins said.
"We drove a 2001, but it didn't have any incentives on it," he said. "It just made more sense to go with the 2000."
Although incentives and special financing can cut deeply into automakers' profits, they now loom so large in car sales that some dealers think they may be here to stay.
"Customers already automatically expect them," said Leo Griggs, managing partner of Park Cities Chrysler-Jeep-Volkswagen in Dallas. "Product is pretty close now among the Big Three, so consumers move quickly to who has the best incentives. I really don't think they will ever go away."
That might seem a bold observation for a Chrysler Group dealer.
After the division lost more than $500 million last quarter, parent DaimlerChrysler fired Chrysler Group's president, James P. Holden, and replaced him with a well-regarded German manager from Daimler-Benz, Dieter Zetsche.
In one of his first meetings with dealers, Mr. Zetsche said he won't abandon incentives immediately but wants to reduce the company's dependence on them.
However, Mr. Griggs and other DaimlerChrysler dealers said they doubt whether the company can even slow the growth of incentives in the short term.
"We're an incentive-driven market," Mr. Griggs said. "We're bringing customers in with zero down, cash back, low-interest financing. If you want to stay competitive, there's no antidote for it."
Consumer incentives on new cars have been around for more than 20 years, pushed to prominence by former Chrysler President Lee Iacocca in the late 1970s.
For years, they were used mostly to attract buyers to older, slow-selling vehicles. Now, they are routinely applied to a diverse group of cars and trucks — some new, some older.
"The auto industry is a high fixed-cost business," said George Hoffer, an economics professor at Virginia Commonwealth University in Richmond who follows the auto industry.
"Labor is a fixed cost because if you shut a plant down, their labor contracts still require them to pay their workers 95 percent" of base wages, Mr. Hoffer said. "While incentives seem relatively high, they aren't when you think about the cost of not selling your vehicles and having to shut down factories when they start piling up."
Incentives are also largely an American sales device.
Companies such as Toyota, Honda and BMW are seldom forced to offer incentives on their vehicles — probably because they do a better job of building products that consumers really want, Mr. Hoffer said.
In a recent listing of incentives in Automotive News, GM had 22 cash incentives of $2,000 or more on various vehicles, DaimlerChrysler had 11 and and Ford had seven. There were no incentives listed for Toyota, Honda or European makes.
"I'm sure the Big Three think of the Honda Odyssey as a competitor," Mr. Hoffer said, referring to the popular minivan. "When an American make puts an incentive on its minivan, its Big Three competitors have to match it.
"But Honda and Toyota never make any attempt to match them. There's no incentive now on the Odyssey. That tells me they are in a different market."
Thanks largely to cost reductions and higher productivity, most of the domestic automakers have been able to remain profitable over the last five years while still putting large consumer incentives on many of their vehicles.
"Look at Ford Motor Co. in 1999," said a spokesman for the Ford Dealer Council. "They made $7 billion, they sold more cars and trucks than ever and spent more on incentives than ever. If you're in accounting, you can make the case that it worked just fine for Ford."
The question is, though, will the system continue to work fine this year?
Automakers fund virtually all the incentives. Moreover, they are spending more at a time when many other costs — such as interest — are higher than a year ago.
In addition, all the automakers have closed plants temporarily in the last month or so to reduce inventory — while maintaining their consumer incentives.
The automakers won't discuss their incentive expenses or how they might affect profits, but industry analysts aren't expecting earnings to set any records this year.
"The incentive trend all year long has been upward — steadily rising," said Bill Seltenheim, vice president of Autodata Corp. "It's a trend we expect to continue."
Many dealers hope it does. Incentives not only draw customers to showrooms, they often make it possible for buyers to purchase a bigger or more luxurious vehicle than they would otherwise be able to afford.
Ford, for example, is offering 0.9 percent financing on 2000 models of its huge Excursion sport utility vehicle, which sells for about $40,000. On a 60-month loan, that would drop the payment to $682 from $830 at the market 9 percent rate, Mr. Reynolds said.
"That's an $8,880 difference over the life of the loan," he said. "That's the real deal."
Ultimately, dealers and industry observers say, automakers may need to close some factories to break their dependence on incentives. In 1999, the world's automakers built 56.3 million cars and trucks but sold only 55.7 million of them, according to industry figures.
Consequently, competition for sales is intense — the main reason that many dealers don't expect incentives to end soon.
"It's going to take some time to realign supply and demand," said Ray Huffines, who operates Ray Huffines Chevrolet and Huffines Chrysler-Jeep-Hyundai in Plano, Texas.
"And I think the manufacturers are going to have to shut down some plants. But they still need to be competitive, and they're not going to back off of these incentives."

Sign up for Daily Newsletters

Copyright © 2019 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.


Click to Read More and View Comments

Click to Hide