Best-ever rebates rob auto profits
Big 3 keep incentive war alive; deals average $3,655
By Sarah A. Webster / The Detroit News
TROY -- In a development that further threatens the profit outlook for Detroit automakers, GM, Ford and Chrysler are now offering new car and truck rebates that average $3,655 per model -- more than triple that of Asian automakers and double that of European rivals.
Industrywide, incentives on new cars and trucks have reached a staggering $2,724 -- up sharply from $1,681 a year ago -- undercutting profits as automakers scramble to boost sales and trim inventories in a soft economy. While rebates from Detroit's automakers remain near record highs, Asian automakers are offering discounts that average $1,197, and European brands are spending an average $1,847 on new model discounts.
The generous cash-back deals and zero- or low-percent loans show no signs of slowing, even as some experts question their effectiveness. Ford on Thursday followed GM and Daimler Chrysler AG's Chrysler Group in extending and expanding new car and truck discounts.
Spurred by a 3 percent drop in industry sales so far this year, the blistering incentive war is squeezing Big Three revenues and profits. This week, Chrysler warned it would lose $1.2 billion during the second-quarter, largely because of growing rebates.
All three automakers have accelerated cost reduction efforts to absorb the fatter deals. Yet the incentives are draining cash automakers need to fund product development, and pension and health care obligations.
According to data released Thursday by Autodata, GM is now leading the discount spree with rebates that averaged $3,827 per vehicle at the end of May, up 83 percent from a year ago. Chrysler has hiked incentives by 61 percent from a year ago to $3,624, while Ford's discounts have jumped 52 percent to $3,437.
Even with the higher discounts, May sales were mixed for Detroit automakers. At GM, new model demand grew 4 percent, but sales at Chrysler and Ford were off by 3 percent and 6 percent, respectively. All three companies sharply increased discounts in mid-May when sales got off to a slow start early in the month.
The gap between rebates offered by domestic and import brands remains about the same as last year, but some foreign makers have stepped up incentives to keep pace with Big Three moves.
At Toyota Motor Corp., discounts have jumped 89 percent -- the biggest increase of any automaker -- to an average of $1,018.
Detroit automakers are spending more to woo consumers in part to overcome concerns about lagging quality and reliability, though surveys show the gap between the dependability of domestic and foreign models has narrowed, analysts say.
"A Honda dollar is worth more than a Chrysler dollar," said Art Spinella, vice president of CNW Marketing/Research Inc. in Bandon, Ore.
Detroit automakers have enhanced incentives in recent weeks. In addition to no- or low-interest loans, cash-back deals have reached $4,500 at Chrysler, $4,000 at GM, and $3,000 at Ford on certain vehicles.
Paul Ballew, GM's sales analyst, stressed that Detroit automakers have adopted a different pricing strategy than foreign rivals.
"We've been more aggressive in terms of incentives and they've been more aggressive in terms of sticker price," he said. "We all face a difficult pricing environment."
Bob Schnorbus, chief economist at J.D. Power and Associates in Troy, said foreign automakers are "pricing their products more closely to what the market is willing to pay and therefore they don't have to discount it."
Domestic makers, meanwhile, are trying to appeal more to the nation's sale-happy culture.
"We Americans love our sales, and incentives are a way to always have a sales price available," Schnorbus said. "The incentives are beneficial in stirring up traffic."
But in another troubling development, Detroit automakers are raising rebates on trucks and SUVs -- a key source of fat profits for years. GM, Ford and Chrysler are now offering rebates of $3,776 versus $3,424 on cars.
But some analysts say it's smart to boost rebates on trucks -- where profits can easily top $10,000 or more.
Spinella said there is evidence that incentives are encouraging some consumers to buy more expensive vehicles -- well-equipped SUVs, pickups and crossover vehicles -- that tend to be more profitable.
My first car was a 67 Mustang Coupe, 2nd one was a 67 Cougar XR-7, 3rd one was a 66 Mustang Coupe. Why did I get rid of these cars for ? I know why, because I'm stupid, stupid, stupid.
My next Ford.....