Dealers Have Incentives to Sell

It’s an autumnal rite, the auto industry’s equivalent of a housecleaning, as car dealers struggle to get rid of last year’s models before new ones fill up their lots.

With inventories of new cars and light trucks at an all-time high of 3.7 million units nationwide, automakers have few options this season but to jack up the special deals they offer to move unpopular or overstocked 2004 models before the 2005s arrive.

“You can sell any car if the price is low enough” said Fritz Hitchcock, who peddles Fords, BMWs, Toyotas, Hondas and Volkswagens at six Southern California dealerships.

Paring the backlog is crucial because most dealers borrow to finance their inventories. It costs an average of $40 a day to keep a car or truck around, so a vehicle that isn’t sold after 60 days eats up $2,400 in interest.

At the moment, Ford Motor Co.’s dealers nationally are taking an average of 76 days to turn over their inventories, compared with 74 days for DaimlerChrysler’s Chrysler Group brands and 72 days at General Motors Corp.’s dealerships, according to Ward’s AutoInfoBank.

“People were expecting a stronger economy, and we ordered aggressively,” said Michael Maroone, president of AutoNation Inc. The Ft. Lauderdale, Fla., company is the nation’s largest new-car dealership chain, with 318 stores, including 42 in Southern California. “But we figured the manufacturers would support us with aggressive incentives on the 2004s at the end of the model year, and they have.”

At AutoNation’s Power Chevrolet Irvine, more than 200 gas-guzzling Chevy Suburbans were in stock as the Labor Day weekend began. To trim that number, the dealership cut prices by as much as $7,300. And that was before applying GM rebates that could save an additional $5,000, producing a total discount of as much as 30% from the $41,250 sticker price of a fully loaded Suburban.

The dealership sold about 50 Suburbans last weekend, said general manager Larry Smith, who noted that the big price breaks would continue.

Said Paul Ballew, head of market analysis at GM: “The dealers are our customers, and we don’t make any money if they aren’t ordering our cars. That’s why you’re seeing these aggressive incentives.”

Cash rebates and incentives have become commonplace in the automotive business since GM started using them heavily to spur sales after the 9/11 terrorist attacks. Ford and Chrysler Group joined in, with European and Japanese automakers adding them as well.

Automakers explain that the incentives provide an agility that formal price changes can’t.

“A manufacturer can change incentives repeatedly, apply them regionally, even by model and equipment level,” said Tom Libby, senior director of industry analysis at Power Information Network, a Westlake Village research firm. “They can’t do that with retail price changes.”

Although many discounts aimed at clearing out 2004 models are widely advertised, others -- especially among import brands protective of their image -- are barely whispered. Even companies without inventory woes are forced to play the incentive game to stay competitive.

“We don’t publish them, and we don’t use incentives very much,” said Xavier Dominicis, spokesman for Torrance-based Toyota Motor Sales USA, which had only a 33-day supply of cars at the end of August. “We want buyers to come to Toyota because they want a Toyota, not the deal of the day.”

Maybe so, but the Toyota Motor Corp. unit is offering cash-back incentives of $750 to $2,000 this month on most of its 2004 model pickup trucks and sport utility vehicles and $500 rebates on ’04 Camry sedans and ’04 and ’05 Corollas.

Similarly, its Japanese rival Honda Motor Co. doesn’t tout its cash-back rebates, but it is giving its Acura dealers an extra $3,500 for each 2004 RL model on their lots. Dealers can use the cash in negotiations with buyers to cut prices on the $45,600 sedans without advertising the fact.

Among European brands, BMW dealers are receiving $4,500 to reduce the $33,600 base price of the Z4 roadster without shouting “distress sale” to the public at large. And Volkswagen, whose U.S. sales are down 13% this year, has used zero-interest financing to help slow the slump.

All told, special deals from automakers averaged $2,721 per vehicle sold in August, according to automotive shopping service Edmunds.com. That varied from $23 on BMW’s Mini cars to $5,912 for Ford’s Lincoln brand cars and trucks. GM was the incentives leader, offering $3,981 per vehicle, followed by Ford at $3,973 and Chrysler at $3,394.

European automakers averaged $2,174 and South Korean carmakers $1,882. The Japanese were the most parsimonious, averaging $862 to close a sale.

In some eyes, the biggest surprise is how early some manufacturers, led again by GM and Ford, are offering incentives on ’05 models.

“When we see brand-new vehicles hitting the lots with incentives already attached,” asked Jesse Toprak, Edmunds.com’s pricing director, “where do we go from there?”

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Sitting on the lot Many auto dealers have more vehicles sitting on their lots this year as they try to get rid of the 2004 models.

Inventory of cars and light trucks by company, August 2004 versus August 2003 (in thousands)

General Motors August 2004: 1,154.8 August 2003: 989.0

Ford August 2004: 810.0 August 2003: 765.1

Chrysler August 2004: 528.4 August 2003: 468.6

Toyota August 2004: 234.6 August 2003: 186.9

Nissan August 2004: 199.3 August 2003: 149.9

Honda August 2004: 173.8 August 2003: 153.0

Volkswagen August 2004: 114.6 August 2003: 124.7

Subaru August 2004: 42.3 August 2003: 36.0

BMW August 2004: 31.6 August 2003: 27.4

Mercedes-Benz August 2004: 29.4 August 2003: 30.6

Source: WardÕs AutoInfoBank