Incentivitis Hits The Car Industry

Most economists would reason that as demand for a product rises so should a producer’s opportunity to raise or at least hold price steady. The auto and airline industries have ignored that rule for years and it has contributed to the enormous losses each sector has suffered.

Toyota (TM) strongly hinted that it will extend the big incentives it offers new buyers beyond the current April 5 expiration date. Toyota brand sales director Bob Carter said to Reuters, “We always adjust inventory and such, but I will give you a broad statement: Why would I change? I would have to have my head examined to change these programs.”

Toyota’s effort to lure buyers during the last month was successful. Edmunds expects the Japanese car company’s market share to move above 16.3%  in March which would put it within two points of its best month ever. Toyota’s domestic share fell to 12.9% in February as it was hit by news that it would recall 8.8 million cars worldwide.

Incentives are deadly, particularly in a year when the companies that dominate the American car market hope that they will make a profits after a disastrous period in 2008 and 2009. Their price leverage with consumers should be good as buyers stream back into showrooms, which is happening. Domestic car and light vehicles sales are expected to by up 30% in March compared to the same month last year.

But, Toyota will spoil the party for most of its competition as it uses its balance sheet to hand out incentives as a way to keep and gain customers frightened by the recall news. Edmunds says that the average incentive paid by car companies in February was $3,394. That number was up from $2.968 in January.

Toyota has begun to offer incentives as high as $5,000 in cash back and zero percent financing for up to 60 months. The Japanese car company’s competition will have to match these offers, and for an industry that operates on razor-thin margins, the profitability on vehicles sold in the US could evaporate.

Toyota appeared to be in trouble and many analysts thought that trouble would affect its US sales for months. That has not turned out to be true and it will cost the industry dearly.

Douglas A. McIntyre