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Incentive wars, 1999 model
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October 6, 1998: 6:28 p.m. ET
Amid breakneck competition, carmakers can't cut prices fast enough
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NEW YORK (CNNfn) - Sometimes, what's bad for General Motors is good for America.
As the auto industry revs its engines for the new model season, GM's quest to recapture sizable chunks of market share lost to a 54-day strike last summer has ignited a bruising price war among the Big Three rivals that is dragging other carmakers in tow.
Faced with intensifying competition and swelling capacity in a depressed global economy, dealers and manufacturers are retooling their marketing approaches with an eye on deflation.
The upshot, for carbuyers, is a budget-friendly hodge-podge of lower sticker prices, rebates and rock-bottom financing rates that occasionally dip below 1 percent.
So what else is new, you ask?
Well, while price wars have been a fixture on the automotive landscape for years, they are coming faster and fiercer than ever before, analysts say. And where once they stuck around a month or two, these days rebates are evergreen.
"GM is really forcing a much higher level of incentive activity on the '99 models than you would normally see, and that makes it a great time to buy," said Michael Lucky, the president of Lucky Consulting, an automotive research firm.
For GM's 1999 vehicles, the incentives, rolled out in September, range from $500 to $2,000 cash back or financing from 3.9 percent to 6.9 percent, with the best deals on small cars.
Discount financing as low as 0.9 percent
GM also fired off a rebate of $5,000 on its '98 Cadillac DeVille Concours. Annual percentage rates on discount financing can run as low as 0.9 percent.
Ford's incentives include low interest rates on its 1999 Taurus midsize sedan and Explorer sport-utility vehicle -- ranging from 1.9 percent for financing up to 36 months, to 5.9 percent on terms from 49 to 60 months -- or $500 cash back.
Ford's anchor '99 Taurus LX sedan is $1,000 cheaper than its comparably outfitted '98 counterpart; similar rebates are available on the Taurus twin Mercury Sable.
On 1998 models, Ford is offering $2,000 cash back on the Mercury Villager minivan or 0.9 percent financing for 48 months, through Nov. 3.
Until the offer expired Monday, Chrysler Corp. was offering $500 cash back on the '99 Dodge Dakota Regular Cab and an $800 rebate on leased Jeep Cherokee SE Sports models.
GM is pushing the envelope on the incentive Grand Prix, analysts say, precisely because the alternative -- playing by the conventional rules -- would be tantamount to treading water.
The sense of in-house urgency is tangible: GM's car and truck sales fell by 3.1 percent in September from the year-ago period, even as Ford sales climbed 4.1 percent and Chrysler vehicle sales rose 18 percent.
GM's market share has cratered as well, from around 31 percent previously to 21 percent in July and August. The company has vowed, in the words of Mike DiGiovanni, GM's chief forecaster, "to get back by the end of the year to where we were."
In the first three weeks of September, the average incentive -- including dealer and manufacturer markdowns -- on vehicles purchased in showrooms was $3,664, while the average sticker price, before the incentive, was $22,618, according to Art Spinella of CNW Marketing Research.
Cars losing their cachet of yore
By contrast, incentives averaged $3,022 in September 1997, or 21.2 percent less. The statistics, Spinella said, underscore a long-term trend in favor of earlier and bigger incentives.
A decade ago, incentives typically totaled about 8 or 9 percent of a car's sticker price. "Today, it's around 16 percent," Spinella said. "Today we find that cars simply don't have the status they once did. What drives the demand today is the incentive."
To bolster this contention, CNW compiled an "overall wish list" of items most desired by consumers at five-year intervals since 1985. In that year, 31.2 percent of respondents said they wanted a new car, ranking it third on the wish list, after a new home (36.2 percent) and a long foreign trip (40.2 percent).
Today, a new car has fallen to 12th place on the wish list.
Greg Salchow, an auto analyst at Roney & Co., said the relative weakness of the yen has contributed to the battle of price attrition among automakers.
Japanese manufacturers, which account for roughly 25 percent of the American market, have been able to offer lower monthly lease payments on vehicles and still remain profitable.
The exchange rate also gives the Japanese an edge in stepping up the incentive showdown. Nissan Motor Corp. USA, the U.S. subsidiary of Japan's Nissan Motor Co., has cut prices 5 percent in its 1999-model Frontier pickup trucks and Sentra cars.
Salchow said that while demand still exists, talk of declining consumer confidence and increased competition makes automakers feel they must do more to get leery buyers to part with their money.
Lower demand at the margins
"I'm talking about just at the margin," Salchow said. "Nine out of 10 might have felt that it was O.K. to buy a new car a year ago. Maybe now you're talking eight out of 10."
Thanks to recent streamlining and cost-cutting efforts, auto analysts say, the big carmakers have reaped billions of dollars in savings. These savings now may serve as a buffer against a greater profit hit as manufacturers go bumper-to-bumper in the industry price wars.
"Carmakers will be taking profit hits, but you can still remain quite profitable," said Salchow.
At Ford, spokeswoman Joy Wolfe said all the talk about '99 incentives is a bit overdrawn. She depicted the pressures across the auto industry as similar to those confronting other big industries in a global economy in the throes of a painful economic transition.
"We recognize that there is very stiff competition and that this in return is resulting in relative restraint in pricing," she said, adding: "We are in unique position in the world right now. … It all comes down to globalization of the marketplace. You can't overcapacitize and be successful, You have to keep bringing out new products."
Will that alone bring consumers back? Other factors may intervene.
Dealership floor traffic fell 17.6 percent in September from the year-earlier period, according to CNW Market Research.
Much of that decline, Spinella wrote in CNW's September Retail Automotive report, may be traced to "middle-upper and upper income consumers who were shaken by the stock market's roller coaster ride and delayed any additions to their vehicle fleet."
For automakers, the ramifications of this slump in dealer traffic are clear: Incentives are here to stay.
"At the end of the model year, it's always a good time to pick up the old model," said Lucky, of Lucky Consulting. "But to pay for a new model, it's usually an expensive time to buy."
Not any more.
--By staff writer Douglas Herbert
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