As our own Tim Cain reported this morning, if not for the mid-sized truck sector, total U.S. new vehicle sales volume would have risen by less than one-tenth of one percent. Now, forecasters are reducing their outlook for the remainder of 2016, leading some automakers to start fighting the stagnating market by deploying aggressive incentives.
Sound dangerously familiar? It should. A quote from George Santayana is very appropriate at this juncture: “Those who cannot remember the past are condemned to repeat it.”
According to Automotive News, the Detroit Three spent $655 more per vehicle on incentives last month than in July 2015, an 18 percent increase. The average industry incentive in July was $3,225 – a year-over-year increase of $159 per vehicle sold.
Through July, incentives on full-sized pickups from Ford, Chevrolet, and Ram — traditionally a high incentive segment — were over $1,000 higher than in the first seven months of 2015. Yet, sales of the Silverado and Ford F-series declined in July, while Ram posted a gain of just 1.7 percent.
In seven months this year, automakers sold over 10 million vehicles to American consumers, nearly matching the twelve-month total of 10.4 million during the dark days of 2009. This past July was the fifth consecutive month in which sales topped 1.5 million units — the third time in history this has happened, according to numbers from the Automotive News Data Center.
As we well know, massive incentives was one of the reasons some automakers struggled mightily to post profits in the late ‘90s and beyond. A plateau is a comfortable and profitable place in which to find oneself. However, the auto industry is predicated on the ceaseless demand of year over year sales increases, so incentives are a quick and tempting fix to juice sales numbers. The trouble is, manufacturers have played this game before, and we all know how it ended. Today’s cartoon at Automotive News sums it up well.
[Frankieleon/Flickr)
“Those who cannot remember the past are condemned to repeat it.”
Please stop.
You can’t imagine the effect that hoary old bromide has on Boomers who’ve heard it ten thousand times from every smug weenie that ever outgassed in front of a class or as a talking head.
Besides, how on earth are social and economic trends reducible to individual behavior? I love me a good old ecological fallacy.
People would probably invoke it less if it wasn’t proven true so often.
Yes, THIS! If it didn’t apply, it wouldn’t have been used. Wake up, America!
I prefer the quotation of Carlos Santana, not George Santayana, that says “Oye como va, mi ritmo.” A catchier tune also…
Or, how about:
Well, Frankie Lee and Judas Priest
They were the best of friends
So when Frankie Lee needed money one day
Judas quickly pulled out a roll of tens
And placed them on a footstool
Just above the plotted plain
Sayin’, “Take your pick, Frankie Boy
My loss will be your gain”
If you didn’t experience the past, you can’t remember it. That may be true for a lot of current auto executives. Most people don’t remember – and comprehend – much before the age of ten, and not a whole lot for a few years after that. Otherwise there wouldn’t be shows like “Are You Smarter Than A Fifth Grader?”, a show that highlights how much useless information we teach kids.
If Santayana had taken more time, he might have referred to learning and remembering the LESSONS of the past. One thing school teaches, if you flunk the lesson, you get to repeat it until you pass or reach dropout age.
Too big to fail twice?
That’ll be cash on the barrelhead, Son
You can take your choice
You’re twenty one
No money down
No credit plan
No time to chase you
‘Cause I’m a busy man.
I love poems. Here’s one. It’s called “Outsourced ‘Murica”
Zionist bankers loot it all
Sold out whored out politicians take the fall
For a profit its now all in China
All the while on TV they show
Kardashian vagina
“Zionist Bankers”?
Really?
Yeah, apparently it’s subtitled “Mein Kampf”.
Does that include Caitlyn?
I have a lot of Jewish friends. I’ve obviously chosen the wrong ones, as not a single one of them owns a bank.
Pch101 – not everyone can be a member of the Illuminati ;)
It’s not funny. Bigoted language like Runs_On_ Hitlereraid’s is unacceptable. It is an embarrassment to TTAC to enable this garbage.
On the contrary, I find it utterly hilarious that people can post links to Breitbart and Zero Hedge as if they’re news sources or whine about “zionist bankers” without realizing that it only makes them look like idiots. Some folks are missing the self-awareness gene.
VoGo – the dude is just emulating the leader of a certain political party. Turn left 3 times and you end up on the side I’m referring to ;)
“It’s not funny.”
You’d probably plotz if you ever watched the 1968 Mel Brooks film, “The Producers.”
Political correctness is a disease.
Last I heard, you have to be invited to join up. You don’t just apply online and wait to hear back from them. Sort of a don’t call us, we’ll call you. And, if that happens, then you’re in like Flynn…
Lou, did you get your secret decoder ring yet?
28-Cars-Later – still waiting for it. Unionized postal workers aren’t all that reliable especially when they might go on strike.
I suppose you’re going to miss all of our awesome secret meetings until Canada Post sorts out its labor issues.
The US Post Office has been an interesting creature to watch the past decade or so.
“Zionist bankers…” Wow in your spare time you must write for Huffington Post. The #1 anti-semitic “news” site.
PD, you forgot the yodelaayee bit!
As people temporarily migrate to new cheap new cars, this will eventually push down used car prices (due to dried up demand). Buyers will then swing back to used cars, putting further price pressure on the new car market.
Oh, and then there’s easier credit, which always helps.
Will used car prices really drop? Cars of the last decade are loaded with electronics that may not have the longevity of the mechanicals they replaced. I can imagine 5-8 year old cars too expensive to fix will get junked, long before their time. What would that do to the used car market, and how will that affect the new car market during the coming recession?
Except people have been saying “these newfangled cars will never last” since Ford quit using magnetos and the average age of cars on the road has gone nowhere but up.
Incentives are an intrinsic part of the “dynamic pricing” strategy that every manufacturer deploys to sell vehicles.
Incentives keep the entire auto industry going at an ideal momentum, from manufacturers, suppliers, dealers, and the consumer is the recipient of the “better deals” especially to roll over negative equity in a trade in.
As finance terms get longer, incentives get more aggressive to remain within the 36 month cycle.
I just don’t get the obsession with volume and market share. Obviously you don’t want to lose it, but at the same time it’s not worth having if it’s coming at the expense of overall profit
Part of it is hubris, but part of it is the need for scale in order to remain competitive and profitable. What amazes me is that anyone wants to go into, or invest in, the auto industry. With returns that sometimes hover around 2%, the auto industry is one of the most heavily regulated with some of the highest fixed costs in business.
The move downmarket by Merc and BMW is driven purely by a need for scale to help amortize costs since BMW and Merc don’t have Audi’s advantage of sharing the massive parts bin with a larger corporate parent. One can argue that all three of the Germans are moving downmarket in an attempt to bring younger, less affluent buyers into the brand fold in the hopes that they stick around and move up into the true premium/luxury models – but it’s more about scale than anything else.
When vehicle development programs run into the billions of dollars and consumers are demanding faster refresh cycles (which mean more $$$ on tooling/dies/etc.), technology requirements to keep pollution in check and bums comfy and safe – you need to spread those costs out over the largest number of units possible.
You got it, hreardon. An excellent summary which needs to be fully grasped by those not already aware. Spot on.
While generally I agree, if you are losing market share then you can have a snowball effect. When sales volumes and market share slip it can be more difficult to get the attention of customers and sell more cars. For whatever reason, people like to buy popular cars. Want a mid-size sedan? Something like 40% of people will buy an Accord or Camry without even looking at other players in the market. Why? Because those are the biggest sellers, “so they must be doing something right”.
How many people have the stamina to look at every mid-sized car option out there? Very few. I’ve personally looked at a over a dozen different cars (Malibu, Fusion, Chrysler 300, Mazda6, Accord, Sonata, Altima, Passat, TLX, BMW 3- and 5-series, Mercedes C- and E-class, Audi A4/A6, Lexus ES, and probably more that I’ve forgotten) in new and CPO variants to try to decide what to replace my TDI with. And that’s not counting my brief fling with the idea of a crossover. And you know what? It’s exhausting. If I hadn’t started looking for a new car back in February and instead waited until our buybacks started in November I probably would have just said “I’ll take the Accord, please”. It may not be the best in every category, but it’s good enough in all categories that you can’t go wrong with one. And lots of people feel that way.
@notwho –
Agreed. Brands and branding matter – especially in a highly competitive marketplace where there are a lot of players. If the luxury players in particular can get people in the door earlier and keep them in the brand, they’re less likely to defect down the road if they’re happy.
Look at the players who have tried to compete against or bump BMW from their perch. Whatever the purists may think is irrelevant, “The Ultimate Driving Machine” is a brand to be reckoned with, and you won’t find a large percentage of their buyers *seriously* cross shopping all that much.
Everytime a new 3 series, A4 or C Class is released and the auto press moans about how little changed it appears – just remember: they’re trying not to scare away their existing loyal base.
Totally agree. It’s exhausting even if you know what make and model you want, let alone cross-shopping a whole market segment.
It’s exhausting even if you know what make and model you want…”
Why? If you know what you want, what makes it exhausting?
“I just don’t get the obsession with volume and market share.”
If you don’t make the sale, then some other guy will. And that other guy will use the profits from that sale to bury you.
The business requires scale, and there isn’t enough of a market to make more pie for everyone. Some effort has to be made to do business at the competitor’s expense.
Great point, Pch.
This may go with that story below about how Dodge Challengers are outselling Camaros.
Dealers down here in the southeast are throwing LOTS of cash on the hoods of Chargers and Challengers (not to mention Darts) to get them out the door.
No thanks, I don’t car how much cash you stack on the hood. My 11 year old Ford with 200,000 miles on it needs replaced. I’m going used. No turbos, on CVTs, and good on gas. I’ll be ready for the next crash this time.
Ho-hum… Wake me up when they’re “Buy one, get one Free.”
I like the way you think! Like: Buy a Camry or Highlander, and get a free Yaris!
Wasn’t there a Hyundai dealer doing free Accents with a lease of a Sonata or something ?
I distinctly remember some Chevy dealers doing “buy a Silverado get an Aveo for free” deal during the gas crunch in ’08. The logic is actually pretty sound from a marketing perspective: they need to move thirsty pickup trucks during a time of high gas prices, well throw in a fuel efficient ‘dinghy’ of disposable lot poison like the Aveo while selling the trucks at MSRP. Two birds with one stone!
Just part of the natural cycle. Stocks leading indicators, employment a lagging…
The upside? Thousands of cleaner, safer vehicles on America’s roads. With less worn components and stronger spot welds.
Lot’s of vehicles at the end of their lifecycle as well.
Quite simply, automakers both want and need greater sales of their products, and they will resort to almost anything which helps them achieve that end. It should come as no surprise. They need volume, and the profits which result from it, in order to have profits in order to refresh the line or develop all-new products. It’s a cycle which never ends. And, it seems that the costs involved in bringing a new product to market continue to increase. Wash, rinse, repeat.
Wait a few years and we might see a Cash for Clunkers again if the economy takes a nose dive. I will then be ready to take advantage of it.
No need to panic yet folks. The Big Three are much smaller & leaner than 2008/2009, so raising incentives do not automatically crush profits like they used to in the past. In addition, flexible factories assist the Big Three on managing their inventories; as a whole inventory is much better managed in the past.
For example, look what FCA is doing with the 200 – instead of adding more and more incentives to it to keep a factory running like they would have done pre-2008, they killed it and moved product around to make better use of the factory capacity for models that are selling. None of the big three had that kind of flexibility pre-2008.
Yes, they are adding incentives to help sell what they have already built or planned to build for 3rd qt, but most of the big three have already downgraded their forecasts for full year sales and are planning on build less product in the 4th qtr of this year. So, overall they are acting more sensible then they used to in the past.
“Look what FCA is doing with the 200”
FCA is dropping the 200 and Dart for capacity to produce more SUVs. That makes sense today when gas is cheap. But if gas prices rise significantly, or if the EPA stands firm on CAFE targets, FCA is toast.
From a corporate governance perspective, this is terrible risk management.
If you want to make an intelligent column on incentives, you should include WHY these over-abundances of vehicles exist. They are caused by boom bust cycles which are caused by easy credit.
Years of 0% financing (again) and ridiculous 72 month loans send signals to the market to buy more car than otherwise. This causes manufacturers to assume this is normal and ramp up production, just in time for the bust to come and leave them with massive inventories to get rid of.