Automakers have sworn for years that their product is not a commodity. To that end, they’ve tried differentiation through trim packages, service plans and credit offerings. The bottom line remains, however, that new cars and light trucks are as much a commodity as wheat or sugar.
I visited with executives in October from two U.S. manufacturers and then spent three days in Columbia, South Carolina visiting auto dealers there. I work for a company that supplies the industry, so in the course of my work, I’ve found that everyone keeps coming back to the current zero percent financing panic and the carnage expected on U.S. auto sales next year.
Mind you, car dealers don’t make profit on new cars. I can show you thousands of examples. New cars are not profitable. After market products, financing and other products and services are profitable, but a Toyota Camry at ABC Toyota is about as profitable as a Camry at DEF Toyota.
“We’re going to get killed next year,” a director at one of the Big Three told me on Tuesday morning. “Used is going to slip even more and there’s no way that we’re simply capturing the people who stayed out of the market in September.”
He’s right.
In a frenzy to avoid a downturn that began even before the September 11 terrorist acts that hastened the economy’s paralysis, automakers rolled out zero percent financing to qualified buyers. A Chevrolet dealer in the Midwest told me last week that he no longer has any 2001 vehicles in stock. That’s normal for a franchise with hot product; say, a Toyota or a Honda dealership, but Chevys have been known to stick around into the snow. Not this year.
With the whirling purchasing going on, Americans are forsaking used vehicles to drive new. The zero percent-financing craze was originally capped to 36 months and was to only last six weeks. Manufacturers extended both. Now most plans are available for 60 months and will be available until almost Thanksgiving.
General Motors announced November 2 that they expect new car sales to fall by two million units next year. They sold 17.2 million units last year and should do the same again this year. Dropping to 15 million or below will be a death blow. With so many more consumers in one year old vehicles and more and more off-lease vehicles reaching the wholesale auction market, prices will plummet. That’s a simple supply and demand lesson.
What should you do? Well, the last week in October was truly the time to buy. There was still a varied selection and wild sales incentives, marks formerly considered unattainable, were suddenly within reach. There are still deals to be had. After all, financing 25,000 now for 60 months means a car payment of $416.67. Financing the same amount at only 5 percent interest drives the monthly rate to $471. That $55 increment is huge in dealership circles. A more likely 7.5% rate sends the monthly payment to $500 - all for an “average” new vehicle.
My advice: if you can stick it out another year and don’t mind driving a two year old used vehicle, the deals will be even better late next summer and early next fall. Yes, you’ll pay interest, but here’s the kicker. The automakers didn’t do anything special this time around. They just took their standard rebate money and moved it to the financing side of the house. No one is offering $2000 cash back and zero percent financing. And next year, with plummeting demand, prices are going to fall in the wholesale market, which should eventually translate to better deals for consumers.
Now your question: Did the automakers panic too early? They’ve tried next year for today in the hopes that an economic recovery will be beginning. What do you think?
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