By on March 2, 2011

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 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.

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24 Comments on “February Sales: Leasing, Incentives and Price Wars, Oh My!...”

  • avatar

    The advertised lease deals you could get on a Cruze, Malibu or Regal here in the Northeast was actually pretty amazing – I think the Regal was $189/mo with zero out of pocket for 39 months
    I forgot to look at the expected lease end value but I don’t expect it to come close to reality.
    The fleet penetration was probably less about GM discipline and more about the fleet guys not needing as much from anybody as last February.

  • avatar

    Sounds like GM has filled up the hole they dug years ago and began digging another one. Hope they wise up in time. Across all makes, though, this is a disturbing trend. The middle class is shrinking and living standards are dropping in many areas. Cars are just too expensive with all the gadgets and safety equipment, so they cheapen the other stuff that doesn’t affect safety – like bland, charcoal interiors and lack of exterior ornamentation that discourages pride in ownership.

    • 0 avatar
      Educator(of teachers)Dan

      Sounds like GM has filled up the hole they dug years ago and began digging another one. Hope they wise up in time.
      I sometimes wonder if in Business there’s the same gap we talk about in Education.  The “knowing-doing” gap.  We know what the right thing is to do, why don’t we do it?  When will we stop blaming others, roll up our sleeves and do the hard work to make things right, help increase the achievement of our students or (in GMs case)  make our business profitable?

    • 0 avatar

      Hello, Dan. Question: The “Knowing-doing” gap – does that have anything to do with the fact that the more money that is tossed to education, the kids know less and less? That’s not a joke, either, but all you hear is how “education” needs more and more money, but the quality of education compared to other countries is seriously lacking year after year. Or is that a demographic problem? All these issues, be it in the auto industry, education or manufacturing goes into the same barrel. Or seems to. As you are a teacher (likewise my daughte), I’d like your opinion, based on where you live.

    • 0 avatar

      Zackman, you have the best comment of the day, cars are too expensive, too loaded with gadgets and this will keep incentives going until someone comes with a decontented, gadgetless basic car with proper safety equipment and good build quality. I’m not holding my breath for that though. Buyers expect even the mst basic transportation to be as luxurious as a Rolls now.

    • 0 avatar

      Zackman, as with education, manufacturers are never going to admit to the possibility that government money is not helping, and possibly worsening. As with, say, Israel’s receipt of US foreign aid despite its reducing Israeli sovereignty – the temptation of more mammon is too great.
      As for demographic differences accounting for educational differences, that is simply unmentionable in the current climate.

    • 0 avatar

      It’s funny there are “cars are too expensive today” comments on the same day that Consumer Reports (debate their importance at your leisure, but they’ve been at-it for a while, through a number of cycles) reported today is an outstanding time to be a buyer of budget cars (sub-30k).  It truly is amazing what content you get for under $30k these days, with the most obvious examples being a loaded $20k Elantra or a loaded $25k Sonata.

    • 0 avatar

      The middle class is shrinking and living standards are dropping in many areas. Cars are just too expensive with all the gadgets and safety equipment
      The purchase prices may be higher, not sure about that one.
      But I am sure that modern cars remain reliable for far longer than older ones, and require less maintenance while doing so.
      I expect that a new car purchased today offers significantly lower per-mile costs over its useful life than whatever “good old days” example you’re thinking of, along with substantial increases in safety, comfort, efficiency, and utility.  Probably a hell of a lot faster in a given market segment, too.
      As near as I can tell, modern cars have a much better value proposition than cars of generations past.
      Didn’t cars used to come with 1 year 12k mile warranties?  Didn’t odometers used to only go up to 100k before rolling over?
      Gadjets and safety equipment are cheap compared to the cost of a new car that’s out of warranty in a year and in need of major work after 6.

    • 0 avatar

      GM’s leasing problem of old was on trucks, trucks that dramatically lost value when gas prices spiked.  If truck/SUV/CUV leasing is high, then they are making the same mistake.  If it is only high on cars, there isn’t a much of a problem.

    • 0 avatar

      vbofw, That’s only true if you still have a good job.  Median income has been falling for some time and inflation has been gentle… but relentless.  There have been more than a few reluctant early retirements hereabouts and outright layoffs that resulted in people getting jobs that weren’t nearly as good.  Aggregate real consumer purchasing power is being eroded.

    • 0 avatar
      Educator(of teachers)Dan

      I’m never one to advocate throwing money at the problem.  Knowing-doing is more about the fact that we know Program X is effective but we wait for people to buy into it or sit around and wait for people to get over their personal biases until we fully implement it.  We do this knowing full well that “the time is always ripe to do what is right.”  We wait and wait till failure happens and then decide we need to spend more money on a different program cause “this one isn’t working.”  Somehow we ignore the fact that the real problem was not the “content” of the program but the “depth” of it’s implementation.
      Not that it will necessarily give anyone around here solace but the younger generation of educators that is coming up through the ranks (at all levels of teaching & administration) is committed to making schools better, not just having a cushy secure job.

    • 0 avatar

      “GM’s leasing problem of old was on trucks, trucks that dramatically lost value when gas prices spiked.  If truck/SUV/CUV leasing is high, then they are making the same mistake.  If it is only high on cars, there isn’t a much of a problem.”

      The lease for the Regal is $11,466 for 39 months.  That means GM needs to resell these lease returns for 55% of MSRP to break even.  Look at what rate GM currently sells 3 year old Lucerne and Lacrosse returns for.  Closer to 35%.  These leases are a guaranteed $4k loss in a few years.

  • avatar

    I don’t understand these figures.  Could the reduced average transaction price possibly just signal a difference in the mix of models sold, like, more small, inexpensive cars and fewer large, expensive SUVs and trucks?

  • avatar

    And this is how we get our bailout money back. Basically, the government created a well-off, flush-with-cash entity that has a dire need to grab market share at all costs, and the resulting benefit is all auto companies (foreign and domestic) leaking money into our pockets as they struggle to match GM on price.
    I’d rather have a $1000 tax refund check, GM in the hands of Fiat/Nissan/Chinese/whatever, and a healthy Ford. I’m not into taking money away from success and giving it to failure.

  • avatar

    Hyundai has significantly reduced their incentives spending and Honda has done the opposite.  Shows how much competitive products do not need fire sales to sell.  Meanwhile Honda is killing the 8 year old Element (a cult favorite) which if it ever got a cycle refresh would do much better – even as old as it is, it is still outselling the CR-Z and the Ridgeline and not long may outsell the Crosstour.

    • 0 avatar

      “Shows how much competitive products do not need fire sales to sell.”
      THIS is the key takeaway for auto execs.  Those who are most nimble on content, efficiency, and styling will exceed.  Currently that is Hyundai and to a lesser extent Ford (who is still discounting a bunch but well below its traditional peers).

  • avatar
    Carlson Fan

    Cars aren’t too expensive. People in the US just refuse to live within their means. Self entitlement. How else do you explain all the credit card debt. A lease for most is just another way for them to buy something they truly can’t afford and probably don’t need. But hey the next guy has it so why not me? Remember back when people used to actually scrimp and save to buy that new car or other material possesion. No one believes in that anymore. Give it to me and give it to me now. I’ll worry about paying for it later.  

  • avatar

    GM BigWig: “We at GM consistently have to ‘spend’ $3,000 on this $25,000 car model to get it to move out the door.”
    Onlooker: “Obviously it is only worth $22,000 to the actual consumer, so why don’t you just price it at $22,000 with minor market price adjustments every few months?”
    GM BigWig: “Nah, we like the double-talk and self delusion that the model in question is really worth $25K, so we ‘spend’ $3,000 on $25,000 then sell it at $22,000”.

    • 0 avatar
      SVX pearlie

      Given that GM’s average customer *expects* a discount of some sort, based on the past several decades of car buying and selling, going to a true price / no discount model simply won’t work.

      Pricing at $22k gets the customer asking “OK, what’s the *real* price?” Stonewalling at a floor of $21.8k irritates the customer who expects it to be more like $19k, thinking the dealer is holding back on $2k in extra profit.

      Nobody wants to be treated like a chump and taken to the cleaners by the dealer, but that’s exactly what the impression would be if GM suddenly changed their price model.

      The best approach would be for GM to step down incentives in a disciplined way, say 1% per month over the next 5 to 10 years. It needs to be done over at least 5 years (2 car replacements), so the message gets through that there are discounts, but they are a little bit smaller than before.

      That sends a strong message: Better buy now, because the discount gets smaller each month and each year. The dealer can still give a pretty decent discount to make the customer somewhat happier.

      But this takes discipline and years. Hopefully GM is on a footing to make this happen.

    • 0 avatar

      The real question is, who replaces 2 new cars in 5 years…

  • avatar

    Here you go.

    138 per month on a CTS sedan, 139 per month on a coupe and 209 per month on an SRX

    • 0 avatar

      I’m looking at some of those leases and trying to figure out how they actually make sense…
      Take the CTS lease – 10% plus fees down on a cap cost of $31,595.  So, figure 10% down at $3,160, and probably an acquisition fee of around $599.  We’ll leave out taxes, tags, dealer fees, etc, as those have to be paid, but they don’t go to GM.  The total of the payments to GM is 138×24, so $3,312.  So, in total the customer is paying out $7,071 plus tax, tags, and dealer fee to use this car for two years.
      Trade in on a 2009 base model CTS (which based on the price listed on this lease is what the car is) with 20,000 miles (10K per year) is $21,000 based on KBB good condition.  Based on this lease deal, GMAC (or Ally, or whoever finances this lease) is going to have had the car payed down by the customer to $24,524 at lease end (assuming all of the payments go to principal, which isn’t the case, there is some interest in every lease).
      So, either GM anticipates that the residual value of the CTS is going to go up considerably in the next couple years, or they are planning on showing the profits for the sales this year, and then writing off the losses in a couple years when these leases come due, hoping they are in a better position by then.  If I were a GM investor, I’d be worried.

    • 0 avatar

      Were those for real?  Two days later, it’s $339 for CTS sedan, $369 for CTS coupe.  Mistakes maybe?

  • avatar

    Do transaction price numbers take into account MSRPs?  The reason I ask… say GM sold (or leased) more cars this month than it did before.  Transaction price would go down because of that.  Seeing that Cruze sales are up, could this be the cause of the transaction price decline?  Could we also get dealer incentives numbers as a function of the transaction price?  I think that would be very interesting data.

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