Incentives Keep Driving Auto Sales

March showed a 4% rise. Nice -- but not enough to let auto execs abandon the rebate habit. That will be one uphill climb

Enticing rebates and the first wave of income-tax refunds helped the U.S. auto industry kick off the spring selling season. Light-vehicle sales were up 4% in March vs. a year ago. Auto execs point to rising sales as proof of rebounding consumer demand, but they're warily keeping one eye on bulging inventories.

The real barometer of optimism -- or lack thereof -- in the car business is incentives. Despite auto execs' hopes of curtailing runaway rebates, lease deals, and cheap financing in 2004, those incentives are still on the rise. CNW Marketing Research in Bandon, Ore., estimates industrywide incentives in March averaged $3,790, up 16% from a year ago.


  And there's more to come. General Motors (GM ) reported a 6% sales increase for the month, led by strong sales of the Chevy Impala family sedan, and Cadillac and Buick SUVs. But even with incentives that are hovering near $4,000 per vehicle, GM still has 1.3 million vehicles in inventory -- about 200,000 more than it considers ideal. So it kicked off a two-month-long "Truckfest" on Apr. 1, offering 0% financing for 60 months, plus $1,000 off nearly all GM pickups and SUVs.

"This aggressive action by GM sends the message clearly that the auto industry intends to sell its way out of its inventory overhang, rather than cut production to reduce oversupply," says Merrill Lynch analyst John Casesa.

Sales at DaimlerChrysler's (DCX ) Chrysler unit slid 2% in March. However Gary Dilts, senior vice-president for sales at Chrysler, says the carmaker's sales "offensive" will pick up steam in the coming months. Thanks to the arrival of its new minivans and midsize sedans, "the company is finally armed with new product," he says. "We're going to fight more with product, and less with incentives."

Nonetheless, Chrysler also announced a $1,500 cash rebate on its new Dodge Durango SUV and $1,000 cash back on its just-launched minivans, the Dodge Caravan and Chrysler Town & Country.


  For auto makers, the only silver lining of the incentive debacle is that customers continue to use some of their rebate to trade up to more expensive, option-laden models. Art Spinella, CNW's president, says consumers now are paying an average of $200 more per vehicle, or $23,507, than they were last March, and $600 more than at the end of 2003.

Ford Motor's (F ) sales increased 2% in March, propelled by strong sales of big pickup trucks, SUVs, and luxury vehicles. Ford sales analyst George Pipas says although incentives are steep, "this pricing environment is about as stable as any we've seen over a three-month period."

One good sign for the economy: Ford says purchases of commercial-use vehicles, such as large vans and heavy-duty pickups, are on the rise. Businesses such as construction companies were major buyers, according to Pipas. Meanwhile, continuing strong sales of big trucks to individuals and businesses alike confounded notions that high gas prices might crimp sales of the gas guzzlers. Dodge Ram pickup sales rose 10%, while Ford's F-series pickup jumped 18%.


  Sales by foreign-brand auto makers were mixed. Overall, Japanese brands were up 7% and European brand down 3%. Nissan North America (NSANY ) sales, fueled by a host of new vehicles including the new Titan pickup, soared 30.3%. American Honda's (HMC ) sales dropped 5%, paced by falling sales of Accord and Civic models.

Troubled Mitsubishi Motors' slowed its recent sales tumble to a 3% drop in March, following steeper declines earlier this year. Industrywide in the first quarter, auto sales ran at an annual pace of 16.7 million vehicles, 4% ahead of last year's first quarter and at about the rate projected for all of 2004.

The Big Three are counting on scads of new entries, especially passenger cars, to spark sales later this year. But before those arrive, the carmakers must first weather factory shutdowns and crimped vehicle supplies during plant changeovers to the new models. Ford, for instance, will shut down factories in Chicago and Dearborn, Mich., in May to prepare for new midsize cars and a new Mustang.

Ford, like its competitors, is hoping these new cars will require far fewer incentives than the current models. Experience so far this year shows that'll be a tough goal to reach.

By Kathleen Kerwin in Detroit

Edited by Patricia O'Connell

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