Peter Schiff (the man who saw the financial meltdown coming from a mile away) continually asserts that financial stimulus isn’t cure, it prolongs or postpones the problem. Any hardcore free capitalist will find it hard to disagree with Mr Schiff. There is no governmental stimulus such as in Europe. There is plenty of stimulus from the car makers.
March sales for the United States are forecast to explode according to ecreditdaily. They report that JD Power & Associates forecast that new vehicle retail sales going to increase 25 percent. New vehicle sales for the month of March 2010 are expected to be around 883,300 units. The majority of the growth is expected to come from a certain manufacturer who’s been in the media for other reasons. Our own Darth Niedermeyer, saw this coming.
As predicted, incentives are the reason behind Toyota’s rocketing sales figures. Namely, 0 percent financing. Easy money is back again. (For the select few with the right credit score.) For the first half of March 2010, Toyota’s daily retail sales rate was 40 percent higher than March 2009 (around the time of “Carmageddon”) and 70 percent higher than last month (we all know what happened then). Toyota officials are so thrilled with the way things are going that they may extend the incentives. But, that would be a bad idea as Jeff Schuster, executive director at J.D Power points out “While this may lead to a temporary increase in sales momentum, it could also potentially slow the pace of long-term recovery,” and there’s reason to believe him. In order to maintain their growth, GM and Ford are also ratcheting up their incentives by offering 0 percent financing. Which will have long term effects on Ford (who are just puling themselves out of a hole), GM (who are trying to make a case to the US government for the taxpayers’ “investment”) and Toyota (who’s chipping away at one of the reasons for owning a Toyota, namely resale value). As a certain sassy lassie once wrote “(we) have an interesting next few months ahead“
While it’s 25% higher than last year’s disastrous March, I would hardly call a 10.5M annual sales rate “explosive.” In spite of all the incentives.
Please Miss Corrigan understand where I’m coming from and don’t intepret this as an attack, but rather I really want to know why is it that 0% financing is so bad for Toyota. What’s your take on that?
I think this will incentive a lot of people to consider a Toyota, who wouldn’t because of the “safety” issues, plus it’ll give them positive news. How will this affect resale values?
I for one am a value shopper. I buy quality but I don’t pay extra for the brand (let’s say if I was in the US I’d be a prime Hyundai or Ford candidate, similar quality less price than Toyota or Honda). So maybe this would be the 1st time I’d really look at a Toyota. A conquest sale so to speak. Why again is that bad?
And again, don’t mean to troll. Just would like to understand better.
It’s not that 0% financing is bad, as such. It’s just that We all know that Toyota was planning on ratcheting up the incentives and the fact that it’s bearing fruit in the shape of more vehicles sold, might encourage them to continue with the incentives.
And as we’ve seen with Detroit, incentives kill resale value (one of Toyota’s pluspoints). Because the real value of the cars gets undermined. If people paid close to list price for their car, they’d be more likely to hold onto it or hold out for a better price on the used car market. However, if someone bought the car at a knockdown price, they’ll be more likely to sell it at a low price, because they didn’t pay as much for the car. Therefore, more Toyotas come onto the used car market, thereby, depressing prices. It’s a bit like Hyundai in the UK. New, they’re fantastic bargains, but when it comes to selling it on, you’ll lose money hand over fist, because the second hand car market is full of Japanese and European cars at bargain prices. So the price of your Hyundai has to fall a long way in order to be attractive to the next buyer. That’s the way I see it.
But maybe I’m not giving Toyota enough credit (no pun intended) and maybe they’ll use these incentives just to stimulate sales growth. But a few weeks ago if someone had said “Toyota would have a reliability scandal on their hands” you’d have said they were drinking too much brake fluid.
Thank you for your answer!
Well maybe my view is skewed. In my country 2nd-hand cars hold up their value pretty well. And the difference in prices between brands (at least for smaller cars which account for 70% of the market down here) when they reach the used market is really marginal. Another difference is that the most sold the car is when brand new the more it is sought after in the secondhand market. And the higher the price. There’s a saying that having a Gol or nowadays a Palio is like having cash in hand because they’ll sell within a week of being put on the market. The Clio or a Peugeot 206 though (not comparing quality here) that are out sold by the other 2 cars at least 10 to 1 is a rather different matter. It’ll usually take a least a month and some discounts. But again, more sales, more demand in the used market.
Maybe this has to do with Brazil not being a “mature” market yet.
@ FromBrazil
Here in Venezuela we see a similar situation. I think it’s because of availability of spare parts / repair knowledge.
Thieves like them a lot too.
Very popular cars here were the Corsa and currently the Aveo.
Hey Stingray!!
Yes, yes, yes. To all your points. In Brazil, the most robbed car is still the VW Beetle (which makes it uninsurable), followed closely by the VW Gol. All of this helped Fiat take over VW for 1st place in this market since, as a rule of thumb, VW cars are always the most expensive to insure. However, this only stops them selling to more affluent (informed?) clients as most people here in Brazil still drive w/out insurance.
BTW, we never got the Aveo in Brazil. And the Corsa, except in its 1st generation, has always been an also-ran. They’re hoping to change the situation w/ the Agile (seen it in Venezuela yet?), but I wouldn’t keep my fingers crossed.
Saludos!
Cammy you should replace the leaper in your profile graphic with a Ford logo. After all, you drive an X-Type.
Incentives are something to watch, no doubt. That and fleet sales are what’s destroyed the D3’s resale value, imo. If Toyota does either or both, long term, they’ll wind up in the same boat as the D3.
I notice a local Toyota dealer is offering 24 months free maintenance, too. Even if it’s just oil changes and tire rotations, that’s gotta be $300-500 or so. May not affect resale value though, and it gives their shop some work, in between recalls. ;-)
Peter Schiff (the man who saw the financial meltdown coming from a mile away)
Cammy forgot to mention that Peter is the son of convicted tax cheat Eric Schiff who continually asserts that not paying taxed is the cure for big government.
Cammy also forgot to mention that who Peter Schiff’s dad is, is irrelevant. So because his dad is a tax cheat (or a tax protestor, depending who you are), that means that what Peter Schiff does is undermined?
Knowing who his dad is doesn’t fit even tangentially into this. That being said, I’m going to ask my dad what he thinks. As far as abstaining from paying taxes being a cure for big government, just off the top of my head I imagine that if no one paid taxes, that’d pretty much wrap it up.
Cammy also forgot to mention that who Peter Schiff’s dad is, is irrelevant.
It has as much relevance as Peter’s ability to predict the economy has to do with March car sales or Toyota offering 0%.
So because his dad is a tax cheat (or a tax protestor, depending who you are), that means that what Peter Schiff does is undermined?
Not if they had dissimilar views on taxes and economy, but that doesn’t seem to be case. IRS might want to take a long hard look at son’s returns too.
According to your YouTube video, Mr. Schiff was forecasting a stock market debacle on 5/9/02, a few months before the S&P 500 began a five-year run. The S&P began May 2002 at 1067 and began October 2007 at 1549! And he calls himself an investment advisor?
As far as whether government stimulus can jump start the economy, Mr. Schiff is still fighting Franklin Roosevelt’s actions during the depression. Little wonder that he’s an economic advisor to Ron Paul, who ran for President on the Libertarian ticket. I’m sorry, but when banks refuse to lend to consumers, 90%+ of those of us with advanced degrees in economics support increased government spending. When I drove across the country last August, crews were repairing almost every highway I traveled. These guys were bringing home paychecks and spending money at the local hardware store, etc. If it weren’t for the stimulus, real GDP wouldn’t have resumed growing in the third quarter of last year.
Finally, new car incentives only borrow sales from future months. I’ve never met anyone who said, “Hey, Toyota is offering a great price, I think I’ll drive a car to the supermarket instead of carrying my bags home.” But I’ve met dozens of people who said, “I wasn’t planning to buy a car until later this year, but the deal was too good.” Remember, whoever buys a new car generates a used car. When new car sales are artificially high because of incentives, used car prices fall, making it more difficult for the next guy to buy a car (since most sales are accompanied by trade-ins).
In the 2002 interview, Peter said the market was still overvalued, when the S&P was in the mid 1000’s. In 2009, it was in the mid 600’s. Considering how stock values traditionally rise over time, I’d call that a pretty prescient call.
As far as investment advisors go, I tend to agree with you. Being a fundamentals fundamentalist unfortunately isn’t the most profitable strategy in a world where governments and central banks are simultaneously both bent on, and capable, of distorting asset markets as if their lives depended on it. At least in the short to medium term. Long term, then fundamentals will eventually assert themselves, but I’m not sure how much solace Schiff’s clients will take in that.
What is truly sad, is that we live in such a world; where people who are supposed to be allocating capital to their best uses, are instead paid according to their success rate in psycho analyzing Greenspan, Bernanke and whichever clown brigade happens to hold court in Washington at any given time. To the extent fundamentals guys like Schiff are wrong, America as a whole suffers.
And man, how nice would it have been if Schiff and those of a similar persuasion had indeed had a bit more success in their fight against Rooseveltian nonsense. For starters, no Fanny and Freddie to underwrite and help blow housing bubbles. And about twice as many guys working the highway crews you mentioned, for the same cost to tax payers, absent union sellouts like prevailing wage legislation. Assuming the highways were in need of repair in the first place, of course.
Your last paragraph, about resale values, is a good example of why people should listen to economists, as economics is indeed the way to predict and explain how people act, as well as what the often counter intuitive results of their actions will be. And economists are generally pretty good at economics. It’s only when they start disregarding it in favor of various religious cultisms like Keynesianism and monetarism, that they start to lose the plot.
Look at the long term stock market, and even the housing market, the values all dropped to a pre bubble pricing levels. But with the printing press running over time, we are quickly going right back into another bubble that cannot be sustained. Eventually this govt will run out of paper and ink. Peter Shiff’s basic premise is the financial system is nothing more then a house of cards. To a certain extent, he’s right, because the system is based on trust. If that trust falters, we could have some serious consequences.
As mentioned above these incentives usually kill resale. However there is a new climate out there, the U.S. new car market is down,
about 30%, and used inventory is light keeping up prices at the auctions. This coupled with closed franchised stores trying to become huge mega used car lots, just might be the fuel in these cases to keep values up, and winning Toyotas bet.
It isn’t incentives that kill resale, it’s the final average selling price. There are lots of ways to play games with mark-up, rebates, dealer cash, etc, to make it look like you have little in incentives, but are really giving away more when it comes down to the bottom line.
For example, GM vehicles, in general, have a lot more mark-up than Ford vehicles. A comparably equipped Chevy Silverado 1500 might have $5,000 worth of markup to play with compared to a Ford F-150 with $2,800, or an Escalade with $8,000 compared to a Navigator with $4,500. In this case even if the FoMoCo product has an extra 1,000 worth of rebate the GM product can still sell, and is often sold, at a lower overall price, hurting both the factory and the dealer.
As another example, the local Toyota dealer is at the moment regularly undercutting our prices on Foci with Corollas. According to the information available, a Corolla has less incentives than a Focus, and option-for-option should sell at a higher price. The dealer certainly isn’t releasing tons of Corollas into the wild at a substantial loss, so the only feasible explanation is that they either have a lot more mark-up to play with, or Toyota has some hidden incentives, either dealer-cash or volume order/sales bonuses to the dealer that don’t get reported to either the public or the media.
@Nullo Modo,
You guessed correctly about the hidden incentives on Toyotas. These incentives can come from the factory or even the importer. These are given directly to the dealer but few people know about them. It gives the dealer some room to move, kind of like the GM dealers, without it being disclosed in newspaper or TV advertising. In fact, even us dogs on the sales floor didn’t always know about them.
Sometimes the sales dogs who kissed the general manager’s rear end were told about them, but they wouldn’t share with the rest of us. It could be a real pressure cooker in those showrooms. Nothing is as much fun as trying to make a deal with one hand tied behind your back. Especially when you are commission only.
The Toyota store I worked in had a tremendous amount of turnover. When I bought my G6 last year, my salesman had done a stint at the local Toyota dealer in our town. I asked him about his experiences, and they were very similar to mine 20 years ago.
We talk as if incentives are an exception to the natural order of things. As though there is one correct absolute law-of-the-universe correct price for a car, and incentives are some kind of aberration.
MSRP are best guesses, placed by carmaker marketing departments and on feedback by pricing consultants.
In this country, credit is collapsing. Credit has been a bubble that has kept prices high.
What we are seeing is deflation. Car prices, as are many other prices of non-essential items, are falling. As is our pay, as is our ability to get credit.
Rebates and other incentives only reflect this. They are a way of effecting price reductions to meet market demand. In other words, they allow the artificially high carmaker price to meet what the market will actually pay.
To say that these affect resale value is just another way of saying the same thing: car prices across the board are pretty much deflating. There is neither an absolute value for new cars or for used cars.
If incentives truly just pull forward future sales, that’s one thing. But this is only true if you think of incentives as a one-time thing. If in the future incentives must be present for cars to sell, there is no more pull ahead aspect. Instead, incentives will decrease until the actual selling price meets equilibirium with the price the market will pay. And that holds for used as well.
If you have a job and need a car and have saved money, this is a good thing for you.
What we are seeing is deflation. Car prices, as are many other prices of non-essential items, are falling. As is our pay, as is our ability to get credit.
+1. A strong argument can be made that a variation of Moore’s law ought to apply to mass produced items, like base model, appliance-grade cars (like most Toyotas). All the technologies are mature – and the cost of design/manufacturing/machining/making precision components IS going down. There’s no reason for prices to keep rising – unless you rent-seek via The Regulators to mandate constant change…
It will be interesting to see how Toyota handles this. Their overcapacity is an issue.
I have to agree with Peter Schiff’s economic assesment, the bailouts, etc. will only prolong the stituation and ultimately make things worse than they would have otherwise been. Billions the government gave GM and other corporations would have had a much greater economic impact as tax credits for consumers to buy vehicles made in the U.S. As it is now, we’re financing GM’s moving production to China. BTW, the tax-cheat exemption only applies to Obama appointees.
Or you could say that the bailouts have prevented another Great Depression. Most feel that the first one could have been prevented with a better hand on the rudder…While I loath the outsourcing of jobs to China, keep in mind who is buying up US debt…
As of this morning Edmunds reports the only general cash incentives for Toyota’s mainstream Corolla LE and Camry LE models is an unimpressive $1,000 rebate, or some 4 – 5% of sticker. (Indeed, the rebate may be less than the ripoff mandatory add-ons to MSRP.) There’s low-rate financing, but the value of that is hard to calculate, plus it’s dependent on whether the customer disposes of the car before the loan term ends. Edmunds reports no marketing support to dealers.
In other words, with its top volume cars Toyota is focusing its marketing efforts on those for whom the monthly payment is everything. Those who probably shouldn’t (and otherwise couldn’t) be splurging on a new car. Toyota must be confident the better-off customers will return and continue paying premium prices.