The market is not that strong - Kobe's Beef

Automotive Industries, June, 2002 by Gerry Kobe

I keep hearing about how the auto market has remained "surprisingly strong" during this economic downturn, but I don't believe for two seconds that market strength can be ascertained by counting sales. I guess if all other factors remained equal it would be a fairly logical way of measuring it, but since automakers -- particularly domestic automakers -- continue to "seed the clouds" with incentives, the sales numbers can't be taken at face value. And when I factor in how many people are simply acting on today's irresistible combination of sky-high rebates, record tax refunds and historically low interest rates, I shudder to think what the real demand is for new cars.

Think about it.

A number of last year's tax relief checks were put toward new cars, but that was a onetime shot. And the new lower tax rates that have gone into effect have people adjusting their withholding strategy instead of letting Uncle Sam refund the excess in a lump sum next spring. Poof! There goes a couple million ready-made downpayments.

Meanwhile, Mr. Greenspan wants to bump the prime rate backup to where it makes sense and that will undoubtedly begin in the second half of this year. Will potential car buyers still be anxious to make a purchase when their monthly note goes up $100 or more in interest? The answer is no. Never in history have rising interest rates ever had anything but a negative impact on auto sales and I doubt this time will be any different.

Which brings us back to an incentive-driven market If automakers could afford to continue manufacturing demand by spending even more incentive dollars, I might be on-board with the idea of a strong market ahead. But domestic OEMs are strung-out on the incentive drug that they wish they never got hooked on.

Right now Honda pays a paltry $350 in incentive spending per vehicle. General Motors, Ford and DaimlerChrysler spend between six and seven times that amount Even more disturbing is that Honda reduced its incentives by $130 or so over the last year while gaining market share. The domestic Big 3 boosted their incentives by an average of $170 and they are losing customers to foreign automakers.

Oh, and it isn't just Honda either. Toyota is gaining share and it dropped its incentives by over $500. And Nissan is gaining share and it has cut incentives by $700. The fact is, foreign automakers are taking a larger share of a shrinking market and if the domestics weren't spending billions of incentive dollars to lure customers into their showrooms, I don't think we'd be talking about a strong market at all.

The thing that scares me is that automakers are acting like the danger is past because they got through the last six months with good sales. And plans are already underway to rebuild inventory for a strong second half. Well, production will certainly be strong because they are building inventory, but that ties up a heck of a lot of money until those units are sold. And if they need bigger and better incentives to sell off that inventory as interest rates climb and 2003 models are launching, I think automakers will continue their pattern of hurting today's profit picture while borrowing from tomorrow's sales.

Let's face it, the market is not that strong.