“The incentive gravy train may be leaving the station.”
So says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., in regards to rising auto industry costs.
Cole, a longtime industry follower and son of the late Ed Cole, a former General Motors president, says the industry may have to try something other than cash on the hood to get buyers in the door.
Volkswagen, for one, has done so. It tested a novel incentive program in Illinois and Wisconsin the first three months of this year. VW offered one year of free auto insurance when buying a 2005 Golf or a Beetle coupe or convertible.
Free insurance
Sales of that trio fell 17 percent nationwide in the period, but rose 23 percent in Illinois and Wisconsin.
Bob Wallach, managing member of Creative Innovators Associates of Long Island, a consulting and marketing firm that created the insurance program for VW, said he’s talking with four other automakers about an insurance incentive offer based on VW’s success.
Wallach said that though VW offered one year of free insurance, the program could be expanded, for example, to two years on a lease and maybe up to five on a purchase. VW is discussing whether to extend the program and, if so, whether regionally or nationally.
Free laptop
Ford also broke the incentive mold in February, when it offered a free Dell laptop computer valued at $800 with the purchase of a Focus.
Focus sales rose 53 percent in the month based on that promotion.
With a $3,000 cash incentive a year earlier, Focus sales rose 9 percent.
Since the computers didn’t cost Ford $800 – but the cash incentive cost it $3,000 – the results are even more dramatic.
“The industry risks selling fewer vehicles by winnowing down incentives, but it’s inevitable in order to become profitable,” Cole said.
“They’ve done a phenomenal job of cutting costs, but there’s not much more they can do.
“A different type of incentive like that at VW becomes important, and we may see a lot more of those,” he said.
The success of the VW and Ford programs hints it might be worth the effort.
Of course, the question is: Who leads the parade?
“When GM went with zero percent financing after 9/11, the rest of the industry was forced to join them,” Cole said.
“Basically the industry is an informal cartel. They can’t sit down with one another and collude, but they can send signals to one another by what they do,” Cole said, meaning the first one to offer incentives other than cash would invite others to follow suit.
Of course, you have to wonder how many will RSVP the invitation to such novelty?
The automakers also keep threatening to set suggested prices closer to transaction prices to kick the incentive habit. But consumers are adept at buying the deal, so that would be a difficult sell. And what do you do when you start with lower prices and the vehicles still don’t sell?
And keep in mind that incentives don’t necessarily come free. Chrysler Group surprised industry watchers when it launched its 300 sedan last May with $1,000 back, a move taken by many as foolish because it made a new vehicle look like distressed merchandise.
The 300, however, especially the Hemi V-8 powered C version, has proved such a roaring success that it has helped bring Chrysler back to profitability.
In a recent interview, Dieter Zetsche, president and chief executive officer of Chrysler Group, was asked whether the automaker simply didn’t raise by $1,000 the manufacturer’s suggested list price to then dangle that amount in front of buyers.
The question was greeted with no response – other than a broad smile.
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(Write to Jim Mateja, Chicago Tribune, 616 Atrium Drive, Vernon Hills, IL 60061-1523, or send e-mail, including name and hometown, to jmatejatribune.com.)
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AP-NY-04-22-05 0618EDT
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