By on April 13, 2017

dealership

Every industry analyst is beginning to sing the same tune. Despite things looking good now, the worm is about to turn. Global sales look poised to remain strong this year but the market has peaked and sales should persist on a graph as a flat line. Next year could be a different story, however, and there’s much apprehension surrounding lengthening loan terms and the upsurge of subprime lessees.

Rising incentives are also causing alarm; J.D. Power and Associates expects the average incentive per new unit to top $4,000 in 2017. While that tactic may get people into dealerships now, it might also harm long-term profitability as the automotive industry swings toward leaner times.  

“Looking at the top line, it looks great. We should be giving each other high-fives,” Thomas King, vice president Power Information Network, media, and marketing for J.D. Power, said at New York’s NADA Forum.

Current transaction prices and automaker profit margins are high enough now for a $4,000 incentive average to not be a big deal. But that won’t always be the case and automakers cannot suddenly half their incentive spending when they realize they’re bottom line is shrinking.

“Incentives at industry level only ever rise, they basically never come back down … because everybody is chasing that short-term fix,” King said. “Inevitably, with each escalation [in incentives], you’re going to see some margin pressure on manufacturers [and retailers].”

Although, while King may see this as short sighted, he has yet to announce that the sky is falling. While many analysts anticipate a full-scale disaster, he thinks the industry can come out somewhat unscathed thanks to logistical flexibility and a greater profitability margin. Automotive companies are much better prepared for hard times now than they were in the years leading up to the recession.

Interest rates, while creeping ever upward, are also still relatively low. Chief economist for IHS Markit Nariman Behravesh also spoke at NADA, saying “Short-term and long-term rates are exceptionally low … Even after raising for a couple of years, they will still be exceptionally low by historical standards.” It would seem that, while darker days are definitely coming, just how bleak they will actually be is up for debate.

[Image: Faris/Flickr (CC BY 2.0)]    [Source: Automotive News]

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37 Comments on “Record High Automotive Incentives Could Harm Sustained Profitability...”


  • avatar
    highdesertcat

    “Every industry analyst is beginning to sing the same tune.”

    The ones who knew their stuff were ahead of their time.

    If the current administration can get somethings done, like job creation and tax reform, it could boost the industry once again.

    But based on the first 82 days, and the infighting within, I am not optimistic, nor hopeful.

    SSDD in DC.

    • 0 avatar
      Krivka

      What kind of tax reform can boost the economy? Do you mean bringing back manufacturing jobs? If a company is paying $3.00 a day or even $30.00 a day for unskilled labor ANYWHERE but here, what level of welfare does the country have to provide to corporations to bring jobs back? You do realize that it is one part of the definition of fascism? The days when the American worker ruled the roost are along gone never to return. We were the place to be after WWII because the USA was untouched by the war and provided about 45% of all goods to the rest of the world. And while the rest of there world rebuilt, the American corporations just sat around raking in money, paying off politicians and here we are, a country with a crumbling infrastructure, millions of unskilled people looking and praying for jobs and depending on a fruitcake to make things better. People in this country can not afford cars anymore. Not to buy or not to repair. I go past a Ford, GM and Chevy dealer every day and there are so many pre-owned trucks on the lot that my head spins.

      • 0 avatar
        highdesertcat

        Krivka, there is a sizeable amount of US money kept outside of the US for tax reasons, for starters. Bringing that money back to the US at a lower tax rate will result in more money being available for investment in the US economy.

        Other tax mandates force employers to minimize their hiring and expansion. The ACA is just another tax on employers. Repeal and replace the ACA and that one obstabcle would be eliminated.

        But like I wrote, I’m not optimistic about anything getting done in DC this go’round either.

        Too much infighting. Too much enmity. Too much effort AGAINST the people instead of FOR the people’.

        The first 100 days of any administration are always telling. This one is no different.

        • 0 avatar
          sportyaccordy

          Even if all corporate taxes were abolished and all that money came back, it wouldn’t bring jobs back. The majority of factory jobs that left are low skill stuff killed by automation. Manufacturing actually is coming back, but the jobs it brings back are far less numerous and far more demanding in skills. If this administration wants to get the ball rolling on jobs they should let go of a past that will never return and invest in training and infrastructure to get people into fields of employment that are actually in demand.

          • 0 avatar
            28-Cars-Later

            …or anti-trust legislation to break up mega corps into smaller ones, eliminate H1-B, and then ensure offshoring extremely is difficult.

          • 0 avatar
            highdesertcat

            sportyaccordy, your argument is, of course, the core of the current jobs debate.

            I’m of the mind that it is better to try a different tactic to bring jobs back than it is to continue the tack of the past eight years.

            Without getting political, I want to give the new guy a chance to do his “thing.”

            And I’m going to tell you upfront, I’m no Trump fan, but so far, 85 days into his presidency, he has impressed ME all to hell, and back.

            Trump has done more in eight weeks than other presidents have done in eight years.

            Most of it won’t last past his term(s) in office, and that’s the catch.

            I don’t expect Trump to accomplish anything of lasting impact through legislation because no one in the swamp is going to help him do things FOR the American citizens.

            And if Trump cannot keep the promises he made to the people who got him elected, he’ll be a one-term president.

          • 0 avatar
            FreedMike

            “Keeping jobs here,” HDC? Sure. But the problem is that there are two kinds of “jobs” you’re talking about in manufacturing – the ones that pay, and the ones that don’t. The latter tends to be for low-cost, low-margin consumer items, and to quote The Boss, those jobs are goin’, boys, and they ain’t coming back to your hometown. Not now, not ever. Americans making cheap consumer goods can’t work for pennies an hour like they do in Vietnam, India, or wherever. That ship has sailed.

            And the demand for the manufacturing jobs that do pay will limit incomes for those, by dent of simple supply/demand economics.

            The answer to “keep jobs,” therefore, is to stimulate introduction of new industries and new products within existing ones, with both leveraging our technology. Those are high-margin industries, and they can afford more expensive American labor. Government funding or tax incentives can prove indispensable for this.

            The EV business is an obvious example. Demand for this type of vehicle – a big-ticket, high-tech item that would have ideally be made by American workers – could easily take off in the next few years. But I’ll shake my head and wonder why the f**k Trump seems dead set against continuing tax credits for these…or emphasizing the kind of clean energy sources that would make these cars far more environmentally sound.

            And while we’re on the topic of clean energy, whoever invents a workable fusion reactor will have a license to print money and create untold numbers of jobs. And that’ll be a technology that American companies can sell to the whole world. Why can’t we produce a better, cheaper mousetrap that just happens to be kind to Mother Earth, and sell the energy everywhere, just like Russia, Canada, Mexico, Saudi Arabia or other countries that are net energy exporters do? We have the know how. All it takes is money, and the government has it.

            Why isn’t the government continuing to back things like this? I fear they’re too held back by a) entrenched energy interests, and b) too blinded by ideology. Unfortunately, nothing I see from Trump tells me he’s much different. He’s sold on the idea that tax cuts will solve all our ills. And on that count, he’s partially correct. It’ll also create other ills (you’ll recall what happened to the deficit under the first years of Reagan, and the whole “trickle down economics” concept was proven to be bunk around the same time). I think tax policy and immigration policy just rearranges the deck chairs on a floundering ship.

          • 0 avatar
            highdesertcat

            FreedMike, that’s the thing about elections having consequences and new administrations using different styles of governing.

            Hey, what you say makes perfect sense, from your perspective. My perspective is from another angle because I have never been employed since I retired from the military at age 38, after 20 years service.

            That doesn’t mean I didn’t work every day. I did work. For myself. Not as someone’s employee.

            I never trusted “The System” to provide me with a job at the income level I felt I was worth, so I struck out on my own. I think I did well.

            It is entirely possible that Trump will fail, and with the help of the ‘crats, the GOP and the media all working against him, his odds of success are indeed slim to none.

            But I believe it is better that Trump TRY to bring back the jobs for those people who want to work, than not try at all.

            After all, what have WE, THE PEOPLE, got to lose? It can’t get any worse than the past eight years have been.

        • 0 avatar
          bd2

          While the US tax code can certainly be simplified (only reason why it is so long and complex as it is due to all the special provisions for the “special interests” – i.e.- big corporations), the US has a pretty low EFFECTIVE tax rate.

          Even if the tax rate were made lower, would not stop corporations from moving to a “tax shelter” country.

          The wealthy have been rewarded with tax cut after tax cut and yet, they still hide their $$ in overseas tax shelters, etc.

      • 0 avatar
        Sigivald

        I am sorely tempted to quote HAL 9000 here, but instead will just point out that manufacturing is not “the economy”, and manufacturing *jobs* are down, but manufacturing *output* is very high.

  • avatar
    SCE to AUX

    Weaker players will suffer the most, such as FCA. They’re already giving away Fiats just to move metal, yet they still have a 3-month supply on hand.

    And how is GM going to unload their 5 months of Camaro inventory?

  • avatar
    ShoogyBee

    Speaking of incentives, there should be another midsize sedan death watch column discussing the $3350 to $6000 incentives on the 2017 Sonata. I realize that Hyundai and Kia tend to offer higher incentives than most manufacturers, but this doesn’t bode well for their brand or the midsize sedan segment in general. Canary in the coal mine?

    • 0 avatar
      KingShango

      This! Had my Sonata in for recall work today and naturally was chatting up the guys on the sales floor. I can’t believe the money they’re putting on the hood. I assume they’re trying to move as many as they can before the 2018 hits but the way cars are selling this year they’re going to take a beating.

    • 0 avatar
      FreedMike

      I don’t know if this a) bodes badly for Hyundai, or b) it’s just the way they’ve always executed their pricing strategy. I’m voting for b).

      But if they want to really compete with Honda and Toyota, they need to do things differently.

  • avatar
    Jeff S

    I do agree with making the tax rates fairer for corporations and individuals but even if the rates were 0 much of the money will still be kept overseas. Many seem to forget that most of these corporations are multinational and do business globally. Another thing to consider is that many businesses that are bringing manufacturing back to the USA are automating more with less jobs available. Carrier can promise to keep manufacturing in the USA but they will spend more to automate and reduce the number of workers. One can argue that they would do this eventually but it just means that they are doing it sooner instead of later. I doubt there will be too much change in Washington with the political infighting. I doubt either political party has the interest of the USA or their constituents as a primary concern, they are more interested in the special interest groups that pay for their campaigns and promise them further wealth once they leave office. It is better not to count on Washington for the answers. There has come a point where many cannot afford a new vehicle or anything else–if one is working minimum wage and several jobs just having food, clothing, and shelter is a challenge. The types of jobs that are available are the ones requiring skill and education which is needed to operate and maintain the automation that is used in manufacturing. The training is critical for getting these jobs.

    Auto manufacturing like any business has its ups and downs. One of the main reasons for the boom in auto sales is because of pent up demand with many who post phoned buying a new vehicle during the Financial Meltdown of 2008 have already bought new vehicles to replace their old vehicles. Low and no interest along with favorable lease rates have kept sales going but there is only so much sales that can be sustained using those incentives. What is critical for the manufacturers is to be flexible enough to adjust manufacturing to what the actual demand is and to have the right product available (more crossovers than sedans). This is harder to do since the manufacturers real customers are the dealers who order their products. Accurate inventory and being flexible to adjust to changes in demand are very critical to success.

  • avatar
    eggsalad

    Story time!

    In July 1989, I made a deal to buy my first-ever new car, a stripped-out Dodge Omni. The deal was for $6800 out-the-door.

    Then I called my insurance agent, who gave me an astronomical quote, because I was 24 years old. In those days, under-25 drivers in Michigan paid ridiculous insurance rates.

    I called the salesman back and told him I couldn’t make the deal until August 9th, my 25th birthday. He was mad, but whatever.

    I showed up on my birthday, where the salesman greeted me with great news. Chrysler had upped the rebate another $1500 (almost 25% off!) so my deal was now for $5300. I danced the happy dance!

    Lesson learned. If you have a choice of when to buy a new car, August is good, September is even better.

    • 0 avatar

      Dec is good, Jan too. in truth anytime of year is. the real key is end of the month usually.

      • 0 avatar
        elimgarak

        Bought a honda civic in the end of dec 2007 and the dealer (a dc area dealer) barely budged in price. Price shopped among 10-20+ dealers in the dc-baltimore area and no one was moving on price. it really comes down to model.

        i hear dealers aren’t really giving that great of deals on honda civic hatches or subarus.

        i think all of this really comes down to individual model economics.

        • 0 avatar
          thornmark

          I believe the VP of one automaker pointed at one second tier Japanese company for destroying the market by pushing its dubious ware on the credit impaired and moving demand forward.

  • avatar
    Jeff S

    A good thing to remember. Also not to be desperate to buy if you can avoid it. A friend of mine had to buy a new car right after Cash for Clunkers ended because the transmission went out on his aging Toyota Corolla during a long trip. He sold it to a salvage yard and took a bus home. He said if the transmission would have gone out closer to home he would have had it towed and the transmission replaced. Many of the dealers were low on their stock of compact and subcompact cars after Cash for Clunkers and would not budge on price. He also looked at used compact cars which were high in price with high mileage and not very good condition. He ended up getting a new Hyundai Accent in a hurry. I had lent him my S-10 and told him to take his time but he didn’t want to inconvenience me even though I told him that I had another truck and a car that I used.

    • 0 avatar
      JohnTaurus

      That was a nice thing you offered, man.

      He may take you up on it when the timing belt breaks and the service guys laugh when he says “warranty?”

      Disposable car, that. Use it like a Kleenex: get the good out of it, then toss it.

      • 0 avatar
        tmport

        Why would the timing belt break? I’ve spent a fair amount of time on Hyundai and Kia forums, and (to put it mildly) that’s not a widespread problem with these cars. If you are negligent enough to fail to replace the timing belt on time, then a subsequent broken belt is the result of owner stupidity, not a bad engine.

  • avatar
    TomHend

    Profitability, what a concept.

    Amazon has made a total of $2B since it was founded and is valued at $420B

    • 0 avatar
      28-Cars-Later

      Pays to be juiced in to a rigged market. Ask Elon.

    • 0 avatar
      sportyaccordy

      Amazon’s business model makes sense. Instead of paying that money out to shareholders they reinvest in the business. As their perpetually skyrocketing growth shows their strategy is clearly working.

      Obviously automakers are held to different constraints but you have to wonder how much different the industry would look if automakers were free to focus solely on the business and not dividends, rebates and pension obligations. Lot of money wasted on things that don’t help the business move forward.

    • 0 avatar
      thornmark

      Tesla is worth more than GM and Ford and depends on government welfare for its existence.

      • 0 avatar
        FreedMike

        “Government welfare”? Bunk. It’s “government investment.” As in, “government provides tax incentives to stimulate a new type of product or industry, which in turn creates jobs and tax revenue.”

        Want proof? The same model was used to develop all the technology that was turned into the personal computer you typed your silly argument on, and the Internet that brought it to me so I could mock it. Now, aside from the chuckles you gave me, I’ll ask a serious question: how much net wealth – and by extension, tax revenue – was generated from that “welfare”?

        Ask Bill Gates. Or Jeff Bezos. Or Michael Dell.

        Or Donald Trump, for that matter.

        • 0 avatar
          stuki

          Yup! That’s how it works!

          The Soviet Union did the government “investment” thing to an order of magnitude greater extent than “us.” Which is why their economy is so much better.

          On a much less obvious note; since Nixon took the country full retard in ’71; “we” have in fact done pretty well catching up with old Soviets in that respect. With similar rates of real income growth for Americans to show for it.

    • 0 avatar
      Sigivald

      Market cap has little to do with past and even current profitability.

      It’s about (the rational side, that is) future expected value.

      (The irrational side is, well, why stocks fluctuate on every stupid bit of “news” that actually doesn’t affect expected value rationally at all.)

      • 0 avatar
        stuki

        “Market Value” of paper, is mostly related to how many dollars have been redistributed, from those who primarily spend their incomes on things, to those who predominantly spend it on paper.

  • avatar
    Robbie

    Instead of a Midsize Sedan Death Watch, perhaps we can start a Sedan Death Watch?

  • avatar
    Barndoors4life

    Are they really incentives? The manufacture is setting the MSRP for the vehicle and then offering money off of it. It’s all a mental game we’re playing. If you take a average midsize sedan and price it at 50 thousand and offer 25 thousand in incentives it’s no different than pricing it at 30 thousand and offering 5 grand off. The manufacture has realized the profit curve for the amount of cars they need to sell, at what price they have to sell them, and what the market will actually pay. The whole MSRP-incentive game is a joke. Automakers won’t need to half there incentives because they can always just raise the MSRP and keep the same incentive and the purchase price will still rise. The consumer won’t know the difference and will still think they’re getting a great deal. It’s possible I’m missing the point of this article, but a manufacturer can decide to sell a lot of cars at a small profit margin or a small amount of cars at a large profit. The incentive game is how they swing back and forth between the two to max profits. I wouldn’t take rising or falling incentives as a sign of anything, especially when their based on an arbitrary MSRP.

    • 0 avatar
      stuki

      Touche!

      ALG 3 year residuals times 2 is a much better representation of “new price” than whatever stream of arbitrariness many auto marketers are operating with.

      The saddest thing is that those makers who do focus on keeping residuals reasonable by keeping MSRP at realistic levels; over time become the chosen brands of those consumers with decent enough credit to be fairly unproblematic even in tougher times. While those who do not, get to fight for the business of the “0 down, 100 year term, friends of Repo Man,” crowd.

  • avatar
    Joss

    Crystal ball meth.. say analysts we all know the market’s cyclical.

    Rates are low, monies cheap. Folks are taking on debt.

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