Foreign OEMs slash incentive spend amid tight supply

Foreign-based automakers cut their U.S. incentive spend amid strong demand and tight supply but expect incentives to tick up in 2023 as inventory rebuilds. Honda Motor Company , Nissan Motor Corp . and Toyota Motor Corp. cut U.S. incentives by 35% year over year, 28% YoY and 49% YoY, respectively, in the third quarter of fiscal year 2022 ending Dec. 31, 2022, according to a Cox Automotive analysis of the manufacturers’ financial results. “We are struggling with the semiconductor situation. We do have good demand; however, we are not able to catch up with the supply,” Masao Kawaguchi, general manager of the accounting division, accounting and finance supervisory unit at Honda, said on the company’s Feb. 10 earnings call, adding that before the pandemic, dealers kept about 60 days of inventory, but the manufacturer has since minimized lot supply. “Inventory at the dealers has been very low. We are seeing that incentives have bottomed out and [will] increase,” he said. Honda’s average incentive spend fell 35% YoY to $1,000 per vehicle in Q3, according to Cox Auto. The OEM’s overall average transaction price (ATP) increased 7.1% YoY to $38,324, and U.S. sales fell 11% YoY to 255,250 units. [caption id="attachment_57334056" align="alignnone" width="656"] Source: Cox Automotive [/caption] “When it comes to keeping down the incentives, this is something that American Honda believes in,” Kawaguchi said on Honda’s call. “The dealers in the states that we work with understand the situation that this leads to keeping down the incentive. We want to make sure that we don’t bring up the inventory level at the dealers to the previous level. “At the same time, for a model there would be some situations where the incentive would need to be raised. However, we want to avoid that situation. We have been trending at the lowest level of incentive originally, so we want to try to keep [incentives low].” Honda is likely to increase incentives on previous generation models as newer models are rolled out, Brian Finkelmeyer, senior director of new-vehicle solutions at Cox told AFN . Nissan incentives down 28% Nissan’s average incentive spend totaled $1,456 per vehicle in Q3, down 28% YoY, according to Cox. Honda’s and Nissan’s decline in incentive spend marked the first time in six years that incentives fell below $2,000 per car for the quarter. Nissan Motor’s U.S. sales fell 2% YoY to 191,012 units in Q3 compared with 300,000 units during the same period in 2017, 2018 and 2019. Nissan’s ATP rose 9% YoY to $38,185. [caption id="attachment_57334057" align="alignnone" width="707"] Source: Cox Automotive [/caption] “We will align our incentives in line with the competition and in line with the markets,” Ashwani Gupta, chief operating officer, said on Nissan’s Feb. 9 Q3 earnings call. “Our incentives are absolutely in line with the market. They are increasing but they are increasing in line with the market, and we are not worried about that.” Industrywide, incentives from October through December 2022 averaged $1,141, according to Cox. Nissan has prioritized rate subvention to be competitive, Chief Financial Officer Stephen Ma said on the call. “We try not to give cash incentives; we try to do more in terms of interest rate subvention or lease support. U.S. consumers [care] about monthly affordability and the interest rate is really hitting them hard in terms of monthly payments,” Ma said. “The way we spend our incentive is more on the sales finance, subvention for interest rate and for some of the lease. We keep [customers] in our captive finance company for a longer term.” Toyota incentive spend drops 49% Toyota cut incentives by 49% YoY to an average of $631 per vehicle in Q3, driven largely by high consumer demand, according to Cox. Incentives fell below $1,000 per car for the first time since 2017. [caption id="attachment_57334058" align="alignnone" width="735"] Source: Cox Automotive [/caption] The ATP sat at $40,721, down 0.4% YoY, while U.S. sales ticked up 13% YoY to 536,740 units. Toyota leverages incentives to keep products competitive, according to a company statement provided to Auto Finance New s, which notes that the company “will do what is necessary to remain competitive, our practice is to always lead with the product, not the deal .” Incentives to climb The COVID-19 pandemic and the semiconductor chip shortage “flipped” the supply and demand relationship across the industry, Cox’s Finkelmeyer said. “The car companies were able to do two things: dramatically reduce their incentive spend and dramatically increase their selling price of the inventory they were building,” he said. “We're seeing across the industry the domestics are coming back with inventory faster.” Incentives are expected to rise in tandem with improving supply . Ford Motor Company , for one, expects higher incentives industrywide in the U.S. in 2023 as “supply and demand come back into balance,” Chief Financial Officer John Lawler said on Ford’s Feb. 2 Q4 2022 earnings call. “We’re starting to see inflationary costs come through with the pricing, and we’re starting to see those margins come off ,” Lawler said. “As we go through the year, particularly in the second half, you’ll start to see prices come down through higher incentives by the OEMs.” Auto Finance Summit East, Auto Finance News’ new spring event, kicks off May 10-12 at the JW Marriott Nashville featuring a fireside chat with Peter Muriungi, CEO of Chase Auto. Visit autofinance.live.

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