Carmakers May Be Flooding The Engine
Did somebody say "deal?" Tempted by cash rebates, low-interest financing, and cut-rate leases, Americans decided April was a fine time to buy a car. After slipping 2.8% in the first quarter, U.S. auto sales surged 6.3% in April, to a roaring 15.5 million-unit annual pace. Hot trucks pushed General Motors Corp. and Chrysler Corp. sales up 8%. Crows GM sales chief Ronald L. Zarrella: "Our game plan is kicking in."
There's more where that came from--at least as long as Detroit is doling out big incentives. This spring's innovation: Owners of vehicles made by the Big Three are getting grocery-style coupons in the mail. But instead of pennies off, these coupons can knock $1,000 off the sticker of a new car or truck. What's more, Ford Motor Co. and Chrysler say they'll honor coupons issued by rivals. Incentives helped Ford, which has dropped six models since last spring, hold sales even with last year. Those bargains are expected to keep auto sales humming through May.
Trouble is, the boom can't last. And the discount-induced sales may simply paper over an underlying weakness in the market--and postpone a downturn. When the incentive frenzy abates, auto sales are likely to hit a pothole, analysts say. Concedes Steven A. Torok, Chrysler's sales chief: "There will be some payback in July and August."
And when the bubble bursts, carmakers will surely be tempted to pile on new rebates to pump up sales again. "This probably foreshadows even more reckless behavior in the future," warns Merrill Lynch & Co. analyst Nicholas Lobaccaro.
So far, earnings haven't suffered in Detroit because carmakers cut costs fast enough in the first quarter to outpace rising incentives. But discounts surged 24% in April and are still climbing, says Art Spinella, general manager of CNW Marketing/Research in Bandon, Ore. "How long can you afford to buy the market?" asks Michael Seergy, vice-president of Nissan Motor Corp. USA. "What are you going to tell shareholders when volume goes back down and incentives are still high?"
BEETLEMANIA. There are a few exceptions to the rebate rule. Some luxury cars and trucks sold briskly with few rebates. Volkswagen sales soared 59%, thanks to a flood of orders for the new Beetle. Lexus, propelled by RX 300 and LX 470 sport utility vehicles, gained 55%, while sales rose 75% at Mercedes-Benz on hot sales of the SLK roadster and ML320.
Carmakers who try to kick the rebate habit often go through nasty withdrawal. Take Nissan, where sales plummeted 26% in April. Nissan hopes to reverse its skid with a new advertising campaign, but it pledges not to return to wholesale rebates. "It only makes you worse off in the long term," says Seergy. That's a lesson other auto manufacturers still seem determined to learn the hard way.