As car sales boom, automakers get smarter about incentives

November 23, 2012

Auto sales have been one of the major bright spots in the U.S. economy all year. But here’s the surprising part: Sales have remained strong even as car companies have been spending less and less on rebates and other incentives to pique consumer interest.


(Nam Y. Huh/AP)

Over the past few months, the major auto manufacturers have been steadily paring back their spending on incentives, from cash back offers to subsidized leasing programs. According to Edmunds.com, the average incentive was just $2,124 per vehicle in October. That’s down 3.3 percent from September and 1.4 percent below last year’s level.

Yet U.S. car sales rose to an annualized rate of 14.4 million — a healthy clip, even though Hurricane Sandy had put a dent in activity at the end of the month. A combination of low interest rates and pent-up demand has kept the car market strong.

“Buyers are ignoring the stagnant incentives and are happily jumping back into the new car market,” said Jessica Caldwell, an analyst at Edmunds, earlier this month. “It’s not like they’re getting huge deals on new cars that they couldn’t get two or three months ago. They’re buying new cars quite simply because they’re ready to.”

Automakers typically spend money on incentives for different vehicles, particularly when they want to clear inventory or bolster a model that isn’t selling as well. These programs can include everything from rebates for customers to rewards for car dealerships to low interest rates or subsidized leasing programs.

During the 2000s, some Detroit automakers fell into financial trouble after relying too heavily on rebates and incentives to boost sales. But since then, said Jesse Toprak of TrueCar.com, the big automakers have become smarter about tailoring their incentives to ensure they’re not spending too much.

“Many major automakers have whole departments full of people whose only job is to optimize these incentives,” Toprak said. “There’s now a whole wealth of historical data on how much to spend, how much other companies are spending, where the highest returns are.”

Increasingly, car manufacturers are tailoring their incentives to different states, added Caldwell. The days of car commercials offering all comers $4,000 off are waning. Instead, automakers might offer cash incentives in states like Arkansas where buyers pay in cash while focusing on leasing incentives in, say, Los Angeles.

Leasing in particular has become more widespread, now making up roughly 25 percent of all vehicle sales. 

GM still spends more on incentives than any other automaker, at an average of $3,037 per vehicle in October, according to Edmunds. Ford spent $2,788 per vehicle and Chrysler spent $2,683 per vehicle.

Honda and Toyota, by contrast, spent just $1,420 and $1,621 respectively per vehicle. That continues a longtime trend in which U.S. automakers make up the lion’s share of spending.

Still, the gap in incentive spending between Detroit’s Big Three and Japanese automakers is much narrower than it was a decade ago, Toprak said. That’s partly because U.S. automakers are building more attractive small cars that people want to buy, and partly because all companies are getting better at optimizing their spending.

That, in general, is good news for automakers. The current combination of high sales, low incentive spending and low average transaction prices translates into higher profitability.

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