Question: What do Nissan, Hyundai, Suzuki, Kia, Mazda, and Mitsubishi have in common?
Answer: Each seems to be offering at least one 0% auto lending deal in October.
Is this the return of the 0% loan?
Zero percent financing came into the car-buying lexicon after 9/11, and boy did it provide a shot in the arm to the US auto industry. But 0% melted away amid the roar of the credit crisis. Now capital costs have modulated to such a degree — credit spreads on Wall Street are nearing “normal” levels — that bringing a 0% financing deal to market won’t erode a manufacturer’s profit margin. Whether we’ll see a wholesale return to the marketing ploy is another question entirely.
It should be noted that subvention ratcheted up last month after five months of declining incentives for consumers, according to Edmunds.com. The average automotive manufacturer incentive in the U.S. climbed 3.4% last month to $2,557 per vehicle sold. The market is heating up.
The takeaway from all this is that the automotive sector seems to be returning to familiar place: severe price competition and price-driven marketing. Is that a good thing? Depends how you look at it. Assuming price competition accelerates (not a sure thing), the key will be whether manufacturers maintain their margin discipline, something they did not do in the mid 2000s. That said, it’s good to see that competitive spirit alive in the market. It certainly beats the bankruptcy bell sounding in the auto industry just a few months ago.
I certainly prefer to see financing subventions rather than rebates. Rebates seem to cheapen a brand more than subventions. Rebates certainly impact resale values to a greater extent. Zero percent is a strong incentive to buy but it is no substitute for short term leasing, especially in the case of luxury and near luxury brands.
It seems to me that shortening the term is a critical component of what an OEM should be trying to accomplish. And with a lease, the lender gets to hold title and take depreciation. And leases still burnish a brand rather then tarnish. I wonder if zero percent is easier to accomplish than leasing in today’s credit environment?
It also occurs to me that if the domestic OEMs can stay away from rebates, it should positively impact their resale values. If they can show restraint in the rental and fleet area, they could recover some of they value they’ve given away in recent years. This opens the door to increased residuals, which means cheaper payments for short term leases to cycle buyers more often. In addition, they might find their recent buyers aren’t upside down as much and for as long and can actually come back for another vehicle sooner and get it financed. Toyota and Honda figured these things out long ago while Detroit has operated like a bunch of amateurs.
I’m less certain that it’s the manufacturers “competitive spirit” than that. It seem much more likely to me that the combination or Cash-4-Clunkers hangover plus the need to dump slower selling models is more like it. Habits, especially bad ones, are hard to break. So we will see car makers will go with the standard “sell the sizzle” approach to fix sales/inventory problems. Most of Nissan’s 0% deals are on 2009’s (the notable exceptions are Armada and Titan – notoriously problematic models for Nissan dealers). There is no question that it makes more business sense to offer 0% now than over the past several months when credit cost were higher, so from that perspective their action is rational. And let’s face it, the manufacturers, and now our very own government, have been conditioning customers to wait for the sizzling deal, rather than compete on quality, price, service, etc. We might like that or we might not, but it seems accurate to me. And I don’t think the auto business is the only one like that. Consequently, don’t jump to the conclusion that bankruptcy is out of the question any more. Ask yourself this, “how have the manufacturers fixed their business models?” What have they actually done?
Brad,
You have asked the major question. All Chrysler and GM have succeeded in doing is shed some costs and dealers. In my mind, the latter was counter productive. I see evidence that GM, Ford, and Chrysler are trying to bring some discipline into their operations, but the jury is still out. We went through this with Chrysler when they swore they would abolish “sales bank” forever. What a surprise when Cerberus brought it back.
Yes, Detroit has trained consumers not to buy until there is an incentive. But I have not seen major rebates from the importers, especially the luxury importers. But with so much over production capacity in the world, I don’t know how they avoid the familiar business model of over production followed by incentives to clear out inventories so they can build again. In my mind, how it is done is what is critical. Will they follow the Honda/Toyota incentive model, or the old Detroit model?
The imports have also made similar mistakes, but not to the same extent.