ANAHEIM – In an attack on incentives that was distinctive for its urgency and specificity, North America Sales and Marketing Senior Vice President Jed Connelly says extravagant vehicle spiffs are threatening the future of the automotive industry.
He urges auto makers – particularyCorp., Motor Co. and Group – to have more patience when launching new cars and trucks before piling on incentives.
“Despite the fact that incentives are moving vehicles, reducing inventory levels from outrageous to merely unsatisfactory, we have to look hard and long at what else we are giving away besides a pocket full of cash,” Connelly says in a speech at the California International Auto Show here. “We are giving away our future.”
’s Jed Connelly says incentives are threatening the auto industry’s future.
Bob Lutz, chairman-GM North America, is unapologetic for GM’s use of spiffs. “That’s his (Connelly’s) opinion,” Lutz says following the introduction of the ’06 Hummer H3 midsize SUV.
“We play our game,” he says. “We do what works for us. We’ve got to keep our plants running to drive revenue because we have huge (employee health-care and pension) costs.”
But Connelly says auto makers actually are losing money by heavily using incentives. Citing an Edmunds.com estimate of an industry average incentive of more than $3,000 per vehicle, Connelly claims auto makers are losing $51 billion in profits with U.S. sales running at 17 million deliveries annually.
“Now imagine what you could be doing with this money instead,” Connelly says. “What should you be doing with it? Profits given away in incentive marketing programs take away from new plants to build those new products; the development of new technologies, including safety and environmental programs; and from refining our existing products.”
Connelly says Nissan’s incentives average about $1,800 per vehicle. Incentives at GM,and average $4,279 per vehicle, Connelly says, referencing Edmunds.com.
“We stand at a critical departure point,” Connelly says. “We can continue to follow the path of escalating incentives; or we can start to dial it back and compete on the strength of our products, rather than the size of the discount.”
Connelly says Nissan cannot pull back on incentives because the auto maker’s sales would suffer. But the use of incentives will not increase, either.
Nissan’s U.S. sales in the first nine months are up 22.0%; it has grabbed a point of market share and the auto maker’s 10% operating profits are among the best in the industry, Connelly points out. It is not Nissan that is the cause for concern, he says, but rather the industry’s future and its effect on the U.S. economy.
Sales may suffer initially as auto makers reduce incentives, but it will be a brief downturn, Connelly says. “This is all about patience. Of course there is going to be an immediate reaction. But the question is: Are you in this thing forever or are you in this thing for 30 days?
“The problem is we have a 10-day mentality in an industry that’s been around for 100 years. GM, Ford and Chrysler have great products. It just takes some patience.”
It’s not that simple, counters Gary Cowger, president-GM North America. “We’ve backed off on (incentives) a few times,” Cowger tells Ward’s. “We found that everyone else has raised them.”
At the same time, he says the current concern over incentives likely will subside as spiffs decline from high levels in September, when they were used to clear high inventories of outgoing ’04 models.
Says Cowger: “When you see the kind of level of incentives we saw in September, I think that (it) will mitigate itself.”