As Auto Deals Add Up, Will Buyers Bite?by
Jonathan Ezor wasn't really in the market for a new car until yesterday. When the 42-year-old father of three read about Ford's (F) new 0% financing plan, the offer was enough to make him call a dealer. Ezor, a professor and lawyer in West Hempstead, N.Y., says he and his wife had talked about replacing their 2003 Ford Windstar minivan, which is showing its age despite having only 40,000 miles, but "it didn't seem to make economic sense." With interest-free financing, however, he puts the odds of them buying a new Taurus X in the next two months at 50-50.
With the U.S. auto industry in turmoil, Ezor and thousands of other would-be buyers find themselves in a transformed landscape. Manufacturers, dealers, and the Obama Administration are throwing incentives at reluctant buyers to help revive foundering auto sales, which in February were down 41% from the prior year. The latest come-on to buyers includes "payment protection" plans announced by General Motors (GM) and Ford on Mar. 31. The basics: Lose your job and the automakers will pick up your car payments for between 9 and 12 months while you're out of work. The proposals echo the "assurance program" Hyundai rolled out in January: three-month payment protection with the option for people who lose their jobs to return cars within a year. The automaker says it has bolstered sales.
The new incentives come a day after the Obama Administration took a hard line with GM and Chrysler—the domestic automakers that have received federal bailout money—heightening doubts about their respective futures. GM has been given 60 days to come up with a viable plan for proceeding or it will likely end up in Chapter 11 bankruptcy. Chrysler has been given a month to work out a pending alliance with Italy's Fiat (FIA.MI) or be forced into a possibly fatal bankruptcy. While Washington's tough love may ultimately turn out to be the medicine the automakers need, it offers both opportunity and risk for prospective car buyers.
New Cars May Underprice Used Models
The carmakers and Washington are offering an unparalleled package of inducements that could sway reluctant buyers to return to showrooms. Payment protection and 0% financing (already announced by Chrysler in January) are being sweetened with a federal tax deduction for sales taxes paid on new cars and by the Obama Administration's plan to back the warranties for GM and Chrysler buyers, even if those companies go bankrupt. Obama further signaled his support for a proposed "cash for clunkers" law that could give buyers who trade in older, less fuel-efficient cars $3,000 to $5,000 to buy new models.
"This is a terrific time to buy a new vehicle," says Jack Nerad, executive market analyst at Kelley Blue Book. The market favors buyers so much that, with financing rates factored in, some new models are less expensive than year-old, used versions of the same car, according to an analysis by car-buying site Edmunds.com. A back-of-the envelope calculation finds that a Chevrolet Malibu with a $25,000 list price could effectively sell for about $10,000 less if all of the proposed incentives are put in place.
Then why are so few people buying? The tumult in the auto industry has rattled consumers who were already spooked by the bad economy: The Conference Board's measure of consumer confidence barely budged in March from its all-time low in February. "We're still, I guess, nervous right now. We kind of just need everything to stabilize," says Melanie Thompson, a 25-year-old public relations account executive in San Antonio. She and her husband, who have two cars, are considering buying an SUV as they mull having a child. But despite low prices and attractive financing, Thompson is waiting for a better deal—and for a week to pass without more headlines about teetering automakers.
Thompson shouldn't hold her breath. "We're going to face a very turbulent 60 days," Nerad says, as GM scrambles to reconfigure and Chrysler tries to broker a deal with Fiat before the White House deadline. On top of that, more incentives may be on the way, like the plan to pay people to upgrade older cars to cleaner models. Would-be buyers may be waiting to see if the trade-in plan materializes.
Could Trade-in Cash Turn the Tide?
The "cash for clunkers" law could change the game to the automakers' advantage. The idea, which has helped lift Germany's car market, would give people turning in old cars $3,000 to $5,000 in vouchers that they could put toward new vehicles that meet certain fuel-efficiency standards and have been assembled in the U.S. (Recipients could also use the vouchers to pay for mass transit.) Representative Betty Sutton (D-Ohio) introduced such a plan two weeks ago and the idea has gained support from House leaders and President Barack Obama.
"I think that this could be one of the more powerful incentives because it's more direct than any of the others," says Philip Reed, senior consumer advice editor at Edmunds.com. Unlike the federal tax deduction, a trade-in program would put cash immediately into the hands of car buyers trading in older models.
There are two big question marks. Will the incentives be sufficient to lure buyers from the popular import brands? And will foreign automakers be forced to cut prices, too? Nerad says buyers shouldn't expect most of the foreign companies to follow suit. "Frankly, this kind of offer is more in line with say a Ford, Chevy, or Hyundai buyer than it might be with an import buyer," says Nerad, though he adds that it wouldn't surprise him to see second-tier importers offer similar deals.
While the market clearly favors buyers in a big way—and could get even sweeter in the coming months—consumers ultimately need to balance their bargain-hunting instincts with the utility of getting a car when they need one. "You need to be motivated by buying a vehicle when you need a vehicle, and when it's right for you financially," says Reed. "Then you do the best you can within a one-month period."
The flurry of incentives coming from all sides may be enough to push Jonathan Ezor into the market—but there may not be enough people like him to save Detroit.