12/06/07

Detroit 3 to Cut Production to Avoid Incentives

As the US enters a recession for 2008, events in the car industry will not mirror the 2001 "911 attack" downturn.

Detroit's Big Three will be hurt the most by sales declines due to brand weakness, over-exposure to the pickup/SUV market, and lack of competitive compact cars.

As predicted here, the big winner for 2008 is Honda.

US carmakers have needed to wean themselves, and "deal" seeking consumers, from heavy incentives for several years. Cash back hurts residual values and weakens a brand, as well as producing losses for Detroit.

US car builders spend far more on incentives than the Japanese competition, an average of around $3,200 for November 2007 verses $1,300.

Back in 2001, automakers responded to the panic with strong incentives to lure buyers nervous after the 9/11 attacks. Instead of idling plants, GM followed Federal Reserve chairman Alan Greenspan's example and offered incentives, no-interest loans, and a public relations campaign called "Keep America Rolling."

This time automakers will cut production rather than add significantly to already sky-high incentives.

Monday, General Motors and Ford both released lower first quarter 2008 production targets.

GM intends to build 950,000 vehicles next quarter, off 11% from last year. And Ford expects to make 685,000 units in North America, a 7.4% drop. These are the lowest quarterly numbers since the recession of 1991.

Chrysler, no longer a public company, doesn't release its production projections, but they are downsizing rapidly.

Shrinking demand in the full-size truck segment is the biggest problem for Detroit. How could they have bet the farm on this sector after previous US fuel crises?

GM will attempt to match supply to demand for the Chevrolet Silverado and GMC Sierra and avoid higher incentives.

Domestic automakers' incentives, especially for the pickups, are a much higher percentage of purchase price than they were in 2001.

Edmunds.com's November Incentives Report reveals that incentive spending in the U.S. is still rising.

Mean November incentive per vehicle, across all manufacturers, was $2,309, a 6.2% increase over October and up 0.9% from the November 2006.

Japanese carmakers, much less dependent on kick-backs, also increased incentive spending last month. Toyota raised it's average to $888 per car from $857, Nissan went to $2,113 from $2,056, and Honda raised to $865 from $499.

Buyers should look for targeted programs based on demand for particular models, rather than blanket incentives by brand.

Incentives, which have never been any kind of good "deal," will now be even less "incentive" to buy. They merely reflect soft demand for the car or truck, and will be made up in rapid first year depreciation.

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