||Standoff: No Incentives, Thus Few Buyers
Slow May Sales Could Set the Tone Until Fall
Unless the factories break out big advertising and incentive programs -- and don't look for that anytime soon -- the slow sales of May are likely to continue well into summer.
Despite Toyota's marketing blitz last week, following its lousy May results, automakers and dealers don't expect a big industrywide sales push until Japanese brands restock.
So the market is stuck in limbo -- a standoff between automakers unwilling to offer big incentives without adequate inventory and recession-hardened consumers willing to wait for fat spiffs.
The post-earthquake supply shortage for Japanese brands changed all automakers' approach -- no stock, no advertising, no incentives and "retailers letting the customer walk" rather than selling units without firm replacement dates, said Mike Jackson, CEO of AutoNation.
"That kind of pullback in a fragile economy with high fuel prices will have an immediate impact," he said.
The raw numbers were jarring in May. After eight straight months of double-digit growth, light-vehicle sales fell 4 percent from May 2010. The annual selling rate slumped to 11.8 million, down from 13.2 million in April. It was the lowest seasonally adjusted annual sales rate since August.
In addition, quake-related vehicle shortages skewed May results. The Detroit 3 grabbed half the market; Chrysler Group outsold Toyota/Lexus/Scion and Honda/Acura; Japanese brands lost 7.3 points of market share; and Hyundai-Kia gained 2.8 percentage points.
Buyers reacting to gasoline prices that peaked in mid-May at $3.91 a gallon switched to fuel-efficient vehicles, turning a supply shortage of Japanese small cars into a pinch point for the entire industry.
Average per-vehicle incentives fell to $2,017 in May, the lowest monthly level since 2002, said TrueCar.com.
And U.S. transaction prices soared to record levels: an average of $29,817, up $608 from May 2010 and $215 from April.
Those high prices scared off many customers, said Steve Landers Sr., a partner in RLJ-McLarty-Landers, a 20-store group based in Little Rock, Ark. "They're kicking the tires, but without incentives, new-car sales are slowing," he said. "It's getting harder to close the deal."
Japanese automakers are starting to restore production. But until stocks of in-demand fuel-efficient vehicles approach normal, it's a "battle of discipline" between consumers and producers, said Jesse Toprak, vice president of TrueCar.com.
Post-recession, automakers are determined to avoid another cycle of outproducing demand and then moving the surplus with heavy incentives. And wary consumers are willing to wait for lower prices on new vehicles, he said.
So who will break first?
"With stability, it's likely to be consumers," said Jeff Schuster, top forecaster for J.D. Power and Associates, citing pent-up demand, an aging fleet and manufacturers' learning to use incentives only tactically.
But Toprak said consumers will wait out manufacturers -- and in such a volatile market automakers must defend customer bases.
"They can't afford not to use incentives or their market share loss could be permanent." he said. "Toyota already has broken."
After its May sales plunged 33 percent, Toyota Motor Sales on June 1 launched a flurry of financing and leasing incentives on core product lines. That included 0-percent, 60-month financing or leasing deals of less than $200 a month on the Camry, which plunged from America's best-selling car to No. 8 in May.
Toyota's North American plants will return to nearly full production in June, said Bob Carter, general manager of Toyota Division.
"Our availability will be much stronger in June than it was in May," Carter said. "Increasing Prius production remains the top company priority, and Camry and Corolla will be back to full production in June."
Dealer Landers has no doubts which side will break ranks first.
"Customers know if they wait 30 or 60 days they'll get bigger incentives," he said. "They'll wait. We've trained them to be smart."
Restoring U.S. inventories of fuel-efficient vehicles won't be immediate.
"We could have a couple of additional months of lean sales," said Ellen Hughes-Cromwick, Ford's chief economist. "But we fully expect a good recovery."
Jackson also expects inventories -- and incentives and the sales rate -- to pick up in late July or August. He thinks fall sales will get a bounce from buyers who waited for better choices and prices rejoining the market.
The May slowdown won't reduce overall sales, he said.
"When Lehman Brothers failed in 2008, that was demand destruction," he said. "But this is just supply disruption. These customers are going to come back."
(Source: Automotive News, 06/06/11)
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