Incentives Lowest Since 2005

By Michelle Krebs May 3, 2011

April 2011 Incentive Drop.jpg

Incentives on vehicles sold in April hit their lowest level since 2005, according to Edmunds.com, which estimates the average incentive paid by automakers was $2,118 per vehicle sold last month. The previous low was $1,962 in October 2005. "This is the clearest indication yet that automakers are gearing up for inventory shortages," said Jessica Caldwell, Edmunds.com’s director of industry analysis. "Demand for new cars has been growing as the economic recovery has strengthened, but consumers will likely be deterred by higher net prices."

Automakers report April sales today. Edmunds.com forecasts the industry sold 1,171,000 vehicles at fleet and retail in April, up 19 percent from last April but down 6 percent from this March. Edmunds.com predicts a Seasonally Adjusted Annualized Rate (SAAR) of sales at 13.3 million vehicles in April, up from 13.1 million in March.

April 2011 TCI sales forecast  SAAR Forecast.jpgSupply and Demand
The basic economic principle of supply and demand is at work in the U.S. automotive market. Inventories of new vehicles are becoming tighter due to the combination of brisker consumer demand due to a strengthening economic recovery and less availability of vehicles as a result of the Japan earthquake, tsunami and nuclear plant disasters that have disrupted vehicle production. In addition, Detroit automakers closed plants and dramatically scaled back manufacturing capacity even before the great recession.

As a result, automakers don’t need to offer rich incentives to move the metal because there’s less of it to move. April’s average $2,118 per unit True Cost of Incentive (TCI is Edmunds.com’s proprietary calculation of incentives) marks a decrease of $250 per vehicle from March and a hefty $515 – or a nearly 20 percent – decline from April a year ago.

April 2011 TCI Sales MOM YOY.jpgThe decrease in incentive spending is largely across the board by manufacturers regardless of country of origin, with the notable exception of Korean automakers Hyundai and Kia, which are the least affected by the Japan disasters and clearly are trying to capitalize on Japanese automakers’ woes. Korean automakers are believed to be the only manufacturers – when based on region of origin – to increase incentive spending from March to April – by $38 to an average of $1,285 per vehicle sold, according to Edmunds.com.

Domestic automakers, which spend the most, showed the largest decline in incentives from March; the Big Three averaged $2,683 per vehicle sold in April, down $398 from March. Japanese automakers had the second largest decline with an average incentive of $1,696 per vehicle, down $236 from March. European automakers averaged $1,885 per vehicle, down $37.

April 2011 TCI sales TCI by Region.jpgThat put the industry's aggregate incentive spending at approximately $2.5 billion, down 15.9 percent from March. Chrysler, Ford and General Motors spent an aggregate of $1.4 billion, or 56.9 percent of the total; Japanese manufacturers spent $751 million, or 30.3 percent; European manufacturers spent $186 million, or 7.5 percent; and Korean manufacturers spent $133 million, or 5.4 percent.

April 2011 TCI Sales Chart Big 6.jpgIncentives by Segment, Brand
Another area in which the law of supply and demand is at play is in the segments offering the least and most incentives. With rising gas prices, large vehicles have the heftiest incentives while smaller, fuel-efficient ones have the least. Among vehicle segments, large cars had the highest average incentives at $4,220 per vehicle sold, premium sport cars followed at $3,349. In contrast, subcompact cars had the lowest average incentives per vehicle sold – $974 – followed by sport cars at $1,427.  Analysis of incentives expenditures as a percentage of average sticker price for each segment shows large cars averaged the highest with 13.3 percent, followed by large trucks at 8.5 percent of sticker price. Premium sport cars averaged the lowest with 3.1 percent and premium luxury cars followed with 3.4 percent of sticker price.

Comparing all brands in April, smart spent the least at $260 per vehicle, followed by Subaru at $485 per vehicle sold. At the other end of the spectrum, Saab spent the most, $6,517, followed by Cadillac at $4,618 per vehicle sold. Relative to their vehicle prices, Saab and Buick spent the most at 16.4 percent and 9.5 percent of sticker price, respectively. Porsche at 0.9 and smart at 1.5 percent spent the lowest based on sticker price.

Edmunds.com's monthly True Cost of Incentives (TCI) report takes into account all automakers' various U.S. incentives programs, including subvented interest rates and lease programs, as well as cash rebates to consumers and dealers. To ensure the greatest possible accuracy, Edmunds.com bases its calculations on sales volume, including the mix of vehicle makes and models for each month, as well as on the proportion of vehicles for which each type of incentive was used.

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