February Sales: Leasing, Incentives and Price Wars, Oh My!

Remember the phrase “jobless recovery”? Well, the auto industry is having something of a “price dropping recovery.” The headline for February auto sales may have been “the buyers are back,” but beneath the big volume boosts there’s trouble a-brewing. According to TrueCar’s transaction price forecast (above), Hyundai CEO John Krafcik was right to warn of an industry price war, as the industry has lost .3% of its average transaction price during the last year of recovery. Over the last year, Honda, Kia, Toyota and GM have all seen declines in average transaction prices, led by GM’s staggering two percent drop. And falling transaction prices are just the beginning: as we explore after the jump, incentives are also remaining high, and yet another volume-boosting technique is enjoying a boom as the industry once again starts to redline its sales.

Though both TrueCar (top) and Edmunds (bottom) show small declines in average incentive spending, the recovery in volume clearly isn’t having the desired (or expected) effect on incentive spending. And as with transaction prices, GM is the big loser on the incentives front, outspending the competition according to both reports, and recording one of the biggest year-over-year increases in incentive spending. But, argues TrueCar’s Jesse Toprak

The industry average for incentives is the lowest for February since 2007. The perception of a pricing war and overindulgence of using incentives is exaggerated. Automakers are now using incentive programs that are much more favorable. They are no longer spending as much upfront by offering customer and dealer cash and are instead pushing low APR and leasing programs.

But not everyone sees the combination of weak pricing, resilient incentives and high lease penetration as such a benign influence. Edmunds’ Jessica Caldwell argues

General Motors and Nissan are showing the biggest year-over-year boosts in incentives among the top six automakers. It isn’t any coincidence that Edmunds.com also reports that both companies saw their highest single-month lease penetrations in at least the last decade.

And in a WSJ piece, Caldwell singles out GM for a drubbing on this point

“For people who want to come in and buy a Buick or Cadillac, leasing is another alternative that sales people can guide them too,” Caldwell said. And while leasing has helped lift retail sales, it also poses a problem for the auto industry as many of those cars will be re-sold in a few years, flooding the market.

For example, 48% of the Chevrolet Malibu models sold by General Motors Co. (GM) were leased, a figure that is “way too high,” according to Caldwell. Caldwell said leasing made up 38% of Chevrolet Cruze models sold last month, and 69% for the Buick Regal.

GM also spent a lot on incentives this month, which helped lift sales. Caldwell told Dow Jones that when the auto maker’s first-quarter figures come out, “there will be a lot of questions on what they spent on incentives, because it’s going to be a lot.”

Now, a 48% lease mix may be “way too high,” but at least it’s an older vehicle. High numbers for the brand-new Cruze and Regal are far more worrying. And given that GM’s leases are so high, incentives are up (and at the highest levels in the industry), and transaction prices have fallen in the last year, it’s looking like the industry might be OK but GM is trying to buy volume however it can (to be fair, GM’s 21% fleet mix shows some discipline). And if a player as big as GM keeps trying to redline its sales, it’s only a matter of time before it drags the industry into a real price war. That’s good for consumers, but it’s bad news for an industry that’s still trying to recover pricing even as it recovers volume.