Sales Are Rising, But Incentive-Happy Automakers Are Kneecapping Profits

Light vehicle sales haven’t peaked in the U.S., but the way they’re being sold is putting automakers in some financial peril.

That warning was delivered by Thomas King, vice-president of the Power Information Network, ahead of this weekend’s National Automobile Dealers Association, Wards Auto reports.

Speaking at the J.D. Power Automotive Summit, King said retail sales of cars and light trucks will rise this year and next, even after a very healthy 2015. Last year saw 14.2 million units reach customers, with volume projected to hit 14.7 million in 2017.

Despite moving more vehicles and rising MRSPs, automakers risk forgoing the financial benefits due to incentives and a growing trend towards leasing.

On average, incentives account for 9.6 percent of a vehicle’s suggested retail price, King said, and that number is up by 0.7 points. That’s drawing close to pre-recession levels.

Cars are more incentivized than trucks, averaging 12.3 percent (or $3,660 per vehicle), while trucks average 8.2 percent. Leasing incentives average $6,710 per vehicle, and the popularity of leasing is booming.

The troubling news for manufacturers and dealers doesn’t end there. Returning off-lease vehicles are flooding dealer lots, negatively effecting residual values. The growing volume of returning cars recently prompted Toyota to start offering pre-owned leasing.

Loan lengths are growing as credit scores are falling, adding to the risk, while an oversupply situation has 31 percent of vehicles resting on lots for 90 days or more. No dealer wants trees growing around their inventory, so the urge to move units in any way possible grows.

“So that’s a pain point for retailers, particularly with the skinny margins (for dealers) on vehicle (sales),” King said.

All of these factors could easily cause automakers to double down on incentives, but King urged “discipline” in order to preserve the industry’s long term health.