Have we got a loan for you!
`THE next thing you know,'' chortled one of our skeptical friends recently, ``Detroit will be offering interest-free loans.'' And what do you know, before a day had elapsed, American Motors Company had followed its US counterparts GM, Ford, and Chrysler in announcing not just special low-interest new car financing rates and rebates, but zero-interest payments. More crucial in this than our friend's prescience is what the current wave of ultra-low-cost financing suggests about the soaring costs of ``big ticket'' items in the US consumer market, including cars.Skip to next paragraph
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What Detroit is now about comes a bit late in this year's car-selling game, what with Japanese and other foreign imports more than holding their own. Not that the US incentives are not welcome. They are.
What needs to be asked, however, is whether Detroit, and other US producers of consumer goods -- makers of freezers, refrigerators, electric ranges, and the like -- are now thinking through the far-reaching implications of changes in tax policy, coupled with the general lowering of the inflation rate in the past year or so, as compared with the double-digit inflation rates of the late 1970s. The new tax reform law, expected to pass Congress soon, removes the interest deduction on consumer loans, including cars. It also takes away the sales tax deduction.
Granted, not all consumers would take such deductions into account when making a big ticket purchase; many taxpayers do not itemize. Still, for much of the home-owning middle class, where itemizing had become a way of life, the terms of the loan were significant when working out income taxes -- and contemplating a purchase.
The point is that Detroit has become accustomed to the $10,000-plus car, give or take a thousand dollars or so for extras. From here on out consumers, according to many financial analysts, are going to be especially sensitive to incentives, price, and quality. Domestic auto sales plummeted 12 percent in late August, down from a year earlier, when strong incentives were in place. Now that incentives have been restored, people are again flocking into showrooms. Meanwhile, consumers continue to buy expensive Japanese cars.
Does Detroit really want to leave the low-cost, no-frills car to the Koreans, Yugoslavs, and others? And can Detroit really compete with premium manufacturers like the Japanese, without (a) getting prices down (which means lowering labor and production costs), or (b) offering special incentives?
Detroit should start drawing up sales plans based on the clear evidence at hand -- when the price package is affordable, consumers will buy. And other big-ticket manufacturers should follow suit.