Carmakers may be on the verge of an incentives war
But it also sent shivers racing down the spines of automotive investors increasingly worried that slowing sales may trigger the sort of incentive wars that trashed industry profits during the years leading up to the recent recession.
All the ingredients are there for a classic price war, automotive analysts warn—one that could be great news for consumers but potentially disastrous for the auto industry.
After January auto sales took a sharp dip that may have been impacted by more than just the cold weather, there are now a growing number of vehicles piling up on dealer lots across the country. That may force manufacturers to sharply increase rebates and other incentives to move the cars.
"Rising inventory levels combined with several more waves of bad weather will result in a short-term spike in incentives," said Eric Lyman, vice president of editorial and consulting for ALG, formerly known as the Automotive Leasing Guide. "The danger is that this could be the beginning of an escalating arms race for market share."
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According to ALG data, the number of days it takes to sell a vehicle after it rolls on to the typical U.S. dealer's lot has been increasing. It's now up to 59 days—more than the average 51 "days to turn" in January 2010, though down from 68 in August 2009—as the auto industry plunged into its worst recession in decades.
That has triggered a modest, though noticeable, trend upward in givebacks over the last few weeks, according to trackers. It's a sharp turnaround for an industry that had been trying to wean itself off the givebacks that cost manufacturers billions of dollars in lost profits.
Last year's surge in demand—U.S. new vehicle sales rose more than 1 million units to 15.6 million for 2013—had permitted makers to trim incentives and demand more for their products, with average transaction prices reaching record levels during the latter half of the year.
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But the average price paid after working in both incentives and options dipped sharply in January to $29,882, down 3 percent from December. And while incentives were actually down in January, some analysts said makers might have gotten too stingy, contributing to lower sales already hurt by cold weather.
While it's still too early to tell what February will bring, ALG is forecasting a "short-term spike," with incentives likely to climb as much as 15 percent to 20 percent longer term. And that's assuming that makers don't decide to ramp up givebacks even more in a bid to boost market share as well as sales.
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There is, warns editor Karl Brauer of Kelley Blue Book, "the very real possibility of an incentives war if sales don't pick up in the coming weeks."
Which is why investors reacted in panic when it was initially reported that GM was going to offer that $7,000 discount across its vast truck lineup. The maker took a 3.4 percent hit to its stock price before it made it clear that the givebacks were limited to only about 10 percent of its Chevrolet Silverado and GMC Sierra full-size pickups.
The real test will come in February and March as automakers wait to see if sales recover.