Carmakers to Car Buyers: BUY! BUY! BUY!
You know that old saying, "If it seems too good to be true, it is"?
Anyone currently considering a new car purchase may have this phrase floating through his or her head. It's an understandable response. After all, one glance through the Edmunds.com Incentives and Rebates section sends a powerful message: Automakers really want to sell you a car!
In a recent automotive trade publication, Chrysler's COO Wolfgang Bernard was quoted as saying, "This is the way you conduct business in this time." The comment is an about-face on Chrysler's longstanding position that it would eventually get off the "incentive and rebate merry-go-round," as it is sometimes labeled. Instead, Chrysler is letting the world know that it is prepared to meet the relentless incentive and rebate gauntlet that was thrown down by GM just after September 11, 2001.
One could essentially view this change in policy as most historians view the fall of communist Russia, only this time it was GM and Chrysler facing off, rather than the U.S and the Soviet Union. In both cases, the ability of one entity to constantly outdistance the other, in terms of economic success, eventually leads to a change in policy. Carrying the metaphor further, the real question might be: Is GM's chosen path to economic success as well founded as the United States' capitalist-based economy that eventually thwarted the Big Red Dog?
Once again, glancing through the various Big Three's current incentive programs would suggest that Wolfgang is correct about how to sell cars in the modern world. During April 2003, Ford is offering between $2,000 and $3,000 cash back on every model except the Escape (which gets "only" a $1,000 cash back allowance). Chrysler, as part of its new stance, gives at least $1,000 cash back on every 2003 model except the PT Cruiser, and the company's minivans and the Dodge Durango send $3,500 and $4,500 back to the buyer, respectively. Of course, GM is still out in front with $3,000 cash back on every model except the Pontiac Vibe, Chevrolet Corvette and Saturn Vue and Ion. Those last four models offer "only" $2,000 cash back.
It doesn't seem so long ago that Saturn was aggressively insulated from any incentive program. And $2,000 cash back on a Corvette?! That car is already a great bargain in terms of bang-for-the-buck, and now you get to slice $2,000 right off the top before you have even begun to grind the dealer? Let's not forget the zero-percent financing being offered for 60 months on all of the General's products, including the Corvette (but not including the Hummer H1 or H2).
You'd think GM would be satisfied with its recent incentive blitz (the company has successfully halted its market-share slide in recent months), but the automaker still has a few tricks up its sleeve. An additional sales tactic, offered during the second half of April and designed to bring non-GM buyers into the fold, includes an overnight test-drive. Yup, that means you keep the car overnight and, as you might expect, a salesman isn't present the entire time (which would have taken the phrase "chasing your commission" to a whole new level). Cars exempted from the overnight test-drive include the Hummer H1 (but not the H2), Chevrolet's Corvette and SSR, and the Cadillac XLR. The program's long-term health will depend on the success (and potential costs and liabilities) recorded during this initial trial period.
So what do all these incentives mean? Well, for the Big Three they represent an unprecedented effort to sell cars in a market that is more competitive than ever. But they also mean a further reduction in profit, and they are absolutely slaughtering the used car market. You may wonder why anyone would buy a slightly used Corvette when they can get a new one at $2,000 off the sticker price, or financed with zero-percent financing for five years. The answer is they wouldn't, and if you don't think so just ask anyone trying to sell a near new C5 Corvette. The same is true of just about any near new domestic model, and this is where you, the buyer, come in.
Recent discussions in our Town Hall community have focused on what happens to people who buy a new car and then need to sell it a short time later. Everyone knows a car loses a huge chunk of its value as soon as the ink dries on the sales contract, and no one wants to be in a position to sell a near new car that they expected to own for several years. But as the saying goes, stuff happens, and if you do purchase a vehicle with massive incentives, you better hope there's no need to sell it in the next three to five years. If you do, you'll likely be "upside down" on the loan, meaning you'll owe more on the vehicle than it is worth. This situation is hardly new, and I'm not suggesting that these latest rounds of incentives have just created it. But the potential severity of the "upside downness," if you will, is much like the incentives themselves, greater than ever. And if you take advantage of something like Mitsubishi's "zero down, zero interest and zero payments" deal, which gives you up to a year before you have to start making payments, be prepared to never sell that car. Or, at the very least, keep a large chunk of cash on hand in case you do have to sell it, because the term "upside down" won't even begin to describe your situation try tailspin.
You may have noticed that, with the exception of Mitsubishi, I haven't mentioned any import brands in this incentive analysis. For the record, the various import brands are offering various incentives, too, but these programs are considerably less aggressive than the Big Three's.
It would appear the imports are focused on a different form of incentive program: desirable product.