Is the auto market being held up by incentives. Is it about to repeat the pattern of the early 90's after the 89 incentives faltered?
bloomberg.com
U.S. Auto Discounts Boosting Market
Commentary. Doron Levin is a columnist for Bloomberg
News. His opinions are his own.
By Doron Levin
Southfield, Michigan, June 28 (Bloomberg) -- As midyear approaches, the U.S.
automotive market is defying low expectations. It's nearly as robust as it's ever
been.
Considering that a record 17.4 million light vehicles were sold in 2000, many
economists expected 2001 to be a stinker. They thought that good deals from
automakers had pulled ahead a number of last year's purchases, and this year
would be payback time.
But after a weak December 2000, consumers again began taking out their wallets
as the deals got even juicier.
Automakers now estimate that they are likely to sell a million more vehicles than
predictions. The view reflects a consensus of economists and sales forecasters,
and puts the industry on track for the second- or third-best year ever, meaning
16.5 million vehicles or more.
``I couldn't even say for sure that this year won't be the peak,'' said George Pipas,
sales analyst for Ford Motor Co.
What's going on? The simplest explanation is that automakers are piling on
discounts in the form of cash rebates, low-interest financing and subsidized
leases. The average discount per vehicle in May was $1,874, an 11 percent
increase from April, according to Merrill Lynch & Co.
More Affordable
DaimlerChrysler AG, Mitsubishi Motor Corp., Mazda Motor Corp., General Motors
Corp. and Ford Motor Co. had the largest discounts in May, according to Merrill
Lynch's data. Honda Motor Co., Volkswagen AG, Hyundai Motor Co. and Toyota
Motor Corp. are cutting prices the least,
The heftiest discounts in May by an individual car line came from General Motors'
Saab unit. Saabs were selling for an average $6,277 off retail price, according to
Merrill Lynch.
Rebates and cheap financing have made new vehicles as affordable as they have
been since the late 1970s, a time when carmakers were slashing prices amid
slow economic growth, high inflation and tight oil supplies, according to an index
devised by David Littmann, chief economist of Comerica Inc.
Littmann calculates that the average new vehicle cost the equivalent of 22 weeks
of income for the average U.S. household during the first quarter of 2001, down 0.6
week from the fourth quarter of 2000. By contrast, the average new vehicle during
the 1991 Gulf War cost 31 weeks of income.
These calculations are based on the transaction price, net of rebates, and the
cost of financing.
Rates, Dollar Help
Automakers are in a better position to offer cut-rate loans because interest rates
have dropped this year, lowering the cost of borrowing. Yesterday, the Federal
Reserve cut its benchmark rate for the sixth time since January.
Lower rates have also spurred sales by boosting consumers' optimism and
willingness to spend, ``not just for our industry but for every industry,'' said Jim
Schroer, DaimlerChrysler's vice president of global marketing.
Manufacturers that import many of their parts and components, such as Toyota
and DaimlerChrysler's Mercedes unit, have even greater flexibility to offer
discounts and still make a decent profit because the dollar has been strong this
year. It's risen about 9 percent against both the yen and the euro.
Moreover, models such as the Honda Accord and the Mercedes S Class have
been able to command prices closer to full retail, as the Merrill Lynch study
shows.
Detroit-based automakers, for their part, are hoping that discounts will help them
avoid losing any further market share. Through June 1, they had 66.5 percent of
the U.S. market, down from 69.6 percent in the same period last year.
Replay of 1989?
At the current rate of sales, the difference represents about 500,000 fewer
vehicles and more than $2 billion in lost pretax profit.
None of these companies is in any position to back off. General Motors' market
share already hovers at historically low levels; Ford Motor's sales have been
disrupted by the continuing Firestone mess; and DaimlerChrysler's new U.S.
management must prove it can withstand the world's most competitive market.
Instead, automakers are hoping discounting pressure will ease toward the end of
the year, as the Fed's interest-rate cuts stimulate demand. Presumably,
automakers may then be able to sell vehicles with smaller discounts.
If the demand doesn't materialize, automakers will have the uncomfortable choice
of trimming the discounts or watching sales and market share fall off a cliff. They
don't have to look back far for a precedent.
To John Casesa, Merrill Lynch's automotive analyst, the current market
resembles that of 1989, when bigger and bigger rebates began to lose their
magic. Sales fell from 14.5 million that year to 13.9 million in 1990 and 12.3
million in 1991, a cyclical trough.
Risk Still Low
``This has been a durable cycle, but it's also showing signs of old age,'' Casesa
said. Starting in 1994, the industry hasn't dropped below 15 million in U.S. sales.
Buying will cool off if automakers -- most likely General Motors, Ford Motor and
DaimlerChrysler -- decide to throw in the towel on their defense of market share
and lower rebates. A bad quarterly earnings report or a stock-price drop might
trigger such a move.
For now, though, the big question is: What is the risk that sales suddenly may
collapse? Absent a surprise such as an energy shortage or an interest-rate spike,
it may not be all that high. Heavy discounting may last until at least the fourth
quarter.
In other words, those who expected sales to slump this year may still find their
market predictions off the mark. |
