Incentives Drive Up Auto Sales; Makers May Pay Down Road

The deal to end all deals is going on at thousands of car showrooms around the country, as consumers scoop up no-interest auto loans and beleaguered dealers begin to move metal again after the Sept. 11 attacks. But for the auto makers, working on thin margins for many product lines, short-term gain may turn to long-term pain.

It costs auto manufacturers $1,500 to $3,000 per vehicle to offer 0% interest under deals announced after the attacks, said David Bradley, J.P. Morgan auto analyst.

Such steep costs have put a big dent in profit, certainly on smaller cars and even on higher-margin pickups and sport-utility vehicles, analysts said, and come on top of the Big Three’s previous heavy reliance on incentives.

The new loans had an immediate effect, with General Motors Corp. sales rising 58% from Sept. 25 to Oct. 1, compared with the week before the attacks, according to a J.D. Power & Associates survey of major metropolitan markets.

“There’s no question that dealers and consumers recognize this offer as the most generous in automotive history,” said George Pipas, Ford Motor Co. director of sales analysis.

Dealers get paid, consumers get a bargain--and the financing arms of the auto makers still get money to make up for what they would have made on interest-bearing loans. But that money has to come out of someone’s bottom line, in this case from the auto makers’ North American operations.

GM was the first to announce the 0% and low-interest financing deals, on Sept. 19. It insists its costs are manageable. “The marketing program is not breaking the bank,” said Paul Ballew, executive director for market and industry analysis.

The auto maker, No. 1 in U.S. sales, is funding the campaign by canceling or delaying other incentive programs. Ballew won’t quantify them but said they include dealer cash, customer cash and other low-interest loans.

The company appears able to absorb the pain by wolfing up market share in high-margin large trucks, analysts said, pointing to such vehicles as the Silverado full-size pickup and SUVs including the Chevy Tahoe and Suburban, their GMC counterparts and the Cadillac Escalade.

GM won 36% of that market in September 2000 but 51% last month, and earns on the order of $10,000 per vehicle, analyst Bradley said. By contrast, Ford’s share of the lucrative segment dwindled from 30% to 17% and DaimlerChrysler’s U.S. group from 20% to 13%.

Ford, No. 2 in U.S. sales, acknowledges that marketing costs will rise in the fourth quarter from 14.5% of revenue to 16%, a hefty increase. That’s part of the reason the auto maker has twice revised its third-quarter expectations, saying it probably will lose more than 30 cents per share. Fourth-quarter revenue also will be heavily affected by the finance deals, analysts said.

Industrywide sales plunged in the first days after the attacks. But the interest-free campaign salvaged sales for GM and for Ford, which quickly matched its rival’s incentives. GM sales overall fell a modest 2.8% last month from a year ago and Ford sales declined 9.9%.

GM says it is seeing record traffic on its online shopping and buying site, GMBuyPower.com, with a 131% increase in leads sent to dealers. From those leads, sales registered a high 21%, or 2,887 vehicles, sold during the week of Oct. 1-7, compared with 1,249 sales during an average week.

But money-losing Chrysler Group, which is marching through a restructuring plan that had called for reductions in costly incentives, waited a week before grudgingly matching the deals on most of its models--but too late to lift September sales, which plummeted 28%.

For buyers, the savings can be substantial.

“People that were normally coming in and were wanting to buy, say, a $25,000 truck can now afford a $30,000 truck with the same payment,” said Mike Kohnke, general manager of Rio Rancho Pontiac GMC Buick in Pomona. Incentives have become a permanent fixture in the automotive landscape, rising steadily among the Big Three since 1997 and spreading among imported brands.

For certain, much of the sales boom in recent weeks has been pulled forward from the fourth quarter. Given October’s strong performance thus far, some weakness in November, when the interest-free loans are scheduled to end, or beyond would be expected.

“Later in 2002, they’ll get new people who may be getting reemployed, with some money in their pocket,” said George Magliano, director of Americas forecasting at consultant DRI-WEFA.

J.P. Morgan’s Bradley is optimistic the market will recover sooner rather than later, but he warns: “The worst-case scenario is that they continue incentives, sales continue to be higher, and no one makes any money. For the economy it’s good; for shareholders it’s a bad thing.”

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COMING SUNDAY

Auto financing: The deals can cut the cost of a new car by thousands of dollars. But should buyers bite? In Business, Sunday

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Out of the Slow Lane

Sales of new cars and light trucks have rebounded in the last two weeks to levels higher than before the Sept. 11 attacks, according to J.D. Power & Associates. The U.S. Big Three have shown the biggest gains, fueled in part by low-cost loans. Results, by manufacturer, compared with sales the week before the attacks:

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Sept. 11-17 Sept. 18-24 Sept. 25-Oct.1 Oct. 2-8 General Motors --20% --3% +58% +48% Ford --23 --11 +45 +32 Chrysler Group --22 --17 +20 0 Toyota --22 --15 +6 --7 Nissan --25 --18 +6 --15 Honda --18 --13 +4 --17 Other --22 --16 +8 --21 Industry average --22 --12 +29 +12

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Source: J.D. Power & Associates