Detroit may find sales without prods are like cars without gas
Detroit — For the first time in many months, the Big Three US carmakers are selling their products without the assistance of any sales incentives. The last round of incentives - which featured rebates and the lowest finance rates ever offered in the United States - ended last month, and top auto industry executives continue to insist they will try to wean the public from the costly programs.
The incentives were clearly good news for American car buyers, who rushed to take advantage of deals that could mean several thousand dollars less in interest payments on some models.
But while they boosted sales to near-record levels, incentives trimmed third-quarter profits about $250 million at General Motors and $100 million at Chrysler.
``I'm ready to cool down this incentive war,'' Chrysler chairman Lee Iacocca said recently. But Mr. Iacocca conceded that it is far from certain that incentives have really gone the way of automotive tail fins. Most industry analysts also wonder how long the carmakers can go without some promotional assistance.
The answer depends on what will happen without incentives. While new car sales actually increased by 2.3 percent during the middle 10 days of October compared with year-earlier levels, the numbers are misleading because of a sharp decline during the period in 1985.
A more accurate indication of mid-October sales is the seasonally adjusted annual rate, which totaled 5.8 million, compared with 8.2 million for the year as a whole. (The rate hit a near-record 17 million during early September, at the start of the incentive programs.)
``I'd say our sales dropped at least 45 percent,'' says Lee Fortice, new-car sales manager at Archer Motors in Houston. ``With the incentives, everybody was out looking ... but it's been pretty quiet around here now.''
There are several reasons behind the decline. For one thing, the last round of incentives ``borrowed'' future sales. In other words, those who might not have purchased cars until later this year or early in 1987 rushed into their dealers' showrooms to take advantage of the limited-duration incentives, meaning there is now a smaller pool of potential customers.
Others are biding their time. ``I think people are waiting and holding off in this [incentive] game,'' says Don Nietzke, general sales manager of Marty Feldman Chevrolet in suburban Detroit. ``They've learned that if they wait long enough,'' they will see new incentives.
Things could get worse before they get better, according to auto analyst David Healy of Drexel Burnham Lambert. He notes that new-car demand should remain relatively strong for the next few months ``because of people buying cars before the end of the year to preserve the sales tax deduction.''
But that could mean even less demand come January.
According to several industry sources, Chrysler may be the first to launch a new round of rebates, low-interest loans, or both. Iacocca, however, insists it will be his No. 1 competitor that calls the shots.
``It depends on whether or not General Motors can bring its inventories under control,'' he says.
GM launched the last round of incentives just before Labor Day to clear out a bulging backlog of unsold 1986 vehicles that was close to 100 days overall and approaching a 200-day supply for some models. A normal inventory is about a 60-day supply.
The incentives virtually depleted not only GM's backlog but most everyone else's. But even though the automaker has trimmed production plans for the fourth quarter, that may not be enough to hold inventories to manageable levels in the near future.
Further, it appears that GM may be forced to launch new incentives to prevent further erosion in its total share of the new-car market. This is believed to be a top priority of the chairman of the board, Roger Smith.
Regardless of which company blinks first, most industry-watchers say it is just a matter of time.
``There are already plans in the works,'' says John Hammond, automotive analyst with Data Resources Inc. in Lexington, Mass. ``Limited incentives are likely before November on a few models, with full-blown incentives coming by January.''