U.S. automakers, seeking to generate business following the September 11 terror attacks, have been offering no-interest financing deals on new vehicles. These customer incentives have sparked a significant rebound in auto sales.
General Motors was the first to offer zero-percent auto loans. Ford quickly followed suit, then came Chrysler.
Several import brands climbed aboard the bandwagon with their own no-interest loan programs: Toyota, Daewoo and Suzuki. Mitsubishi and Nissan have added their names to the list.
According to data gathered by CNW Marketing Research, Inc., zero-percent financing brought buyers back to U.S. auto dealerships. CNW's Art Spinella says results were dramatic. "It, for all intents and purposes, turned the entire sales picture and environment around," Mr. Spinella said. "We're looking at the first half of October probably being on record levels." No-interest loans are just the latest in customer incentives that "grease the skids" for car and truck purchases in America. Cash rebates and low-interest loans have become so commonplace, says Marc Henretta, Manager of Sales Communications for the Chrysler Group, automakers cannot do business without them. "Consumers in this market, the United States, they look to see incentives," Mr. Henretta said. "And no matter where you price, sometimes you've got to have some kind of incentive out there before they'll even be interested in your product."
While incentives pump up sales, there's a downside. Every dollar given back to the consumer in rebates or low-interest loans is a dollar less profit for the manufacturer. But, says Art Spinella, the effect of incentives on profits depends on the vehicle in question. "It's easier on a sport utility [vehicle] where the profit margin may be $12-14,000. You can offer a $3,000 incentive and still be in pretty good shape."
With an economy car, though, where the profit margin may be $500, handing a $1,000 rebate to the customer can hurt the dealer's bottom line.
A few manufacturers seem to thrive without using frequent incentives to lure customers. CNW's Art Spinella says if a company's reputation for quality is strong enough, it will attract customers anyway. He gives Honda as an example. "The reason Honda can do it is because it has such an incredible loyalty base, owner base that's so incredibly loyal to the brand," Mr. Spinella continued. "And the same we see with Toyota.
But for most others, customer incentives have become an unwelcome condition for selling vehicles. Incentives for the auto industry are like riding a tiger: it's exciting while you're aboard, but it may be fatal to climb off.