What do those zeroes add up to?

Zero percent auto financing is good for car buyers. But is it good for the auto industry?

The top executives of the Big Three differ on that.

Unquestionably 0.0% spurred auto sales after Sept. 11. Dealer showrooms have been busy indeed the last few weeks. October vehicles soared. If all the months of this year were so good, 2001 would end with sales of 21.3 million units.

But it comes with a price. It cuts into profits. And some auto executives worry that it steals from vehicle sales that would have occurred in 2002 without free financing.

General Motors first came up with the plan, calling it “Keep America Rolling.” It was a quick response from a company not known as fast-moving. Domestic competitors, and some import auto companies, quickly followed suit.

“Clearly the sales were off. The question was, ‘What could we do?’” General Motors CEO Richard Wagoner tells Ward's.

He adds, “We knew we had to get things going. I was getting plenty of feedback from the administration on the state of the economy. My bias was that we play in this, we'd like to make something happen rather than sit around and ramp down production, and be part of taking the economy down.”

How many sales has zero percent financing pulled forward from 2002?

“Time will tell,” says Mr. Wagoner. “…The question is what's going to happen when we pull it off. We aren't going to just let things flop. We'll have to find a way to adjust down a bit.

“There are a lot of fair questions about it. I say let's think about the context of how we got into this. Sept. 18 saw huge, negative declines in consumer sentiment, attitudes about car buying; the whole economy really on the edge. What are the options you face? What role can the auto industry play in not letting the bad guys win? In that context, it's played out well.

“To those who say that you've pulled ahead sales, I'd say that we haven't raised production, so our inventories are way down. Some are anticipating a payback. And you will get some reduction in retail. On the other hand, because inventories are down, we've partially addressed some of the concerns of the future already.”

Ford President Nicholas Scheele agrees that zero percent financing did a good job in stimulating sales.

He adds, “But unless the economy grows to offset the degree of sales pulled forward, we'll probably see a payback in the first half of next year. It makes it more difficult to predict.

“With a SAAR (Seasonally Adjusted Annual Rate) of 20 million, even in the headiest of economic times you would have said, ‘Brother, this ain't about to last.’ And this is not the headiest of economic times. When we close out 0.0%, we'll see what the true market is. Until then, forecasts are tenuous.”

If runaway incentives caused Chrysler to lose nearly $2 billion last year, can it afford to participate in 0% financing for long?

“We joined later, and never entirely,” says Chrysler Group President Dieter Zetsche. “We kept our hot-selling products out (most notably Jeep Liberty, Ram trucks and PT Cruiser). “It gave us a great October, the best ever. It was less than some of the competitors due to the fact that we still try to balance between volumes and margins.

“But, yes, we can afford 0%. We all know we have to get out of it, but we can't go back to square one. We have to get out of it in a creative way.”

Mr. Zetsche says that, when he became Chrysler president, he was misquoted as saying he disdained incentives and wanted to wean customers off them.

“What I did say, and what I stand for, is that I want to shift the paradigms step by step from mainly talking about incentives to mainly talking about the product and value. It's somewhat moving from push to pull.”

Whatever zero percent might do to the future, most industry leaders and analysts agree it did its job for the present.

If automakers started posting awful sales numbers after Sept. 11, that could perpetuate the public's perception that it's a bad time to buy.

An awful cycle could kick in. Like: People aren't buying cars because there's a problem. What's the problem? People aren't buying cars.

That's a dead heat on a merry-go-round. A fix was needed to keep vehicle sales up.

Zero percent financing was it.

Mr. Wagoner credits Ron Zarrella, at the time GM's president of North American operations, with spearheading that incentive plan.

One fan of it is Robert Maguire, a New Jersey GM dealer and chairman of the National Automobile Dealers Association.

His business was off 50% right after Sept. 11. Zero percent financing helped reverse that.

Mr. Maguire recalls talking to Mr. Zarrella about how the incentive plan came about.

“He said they wanted a very simple plan and they wanted it tomorrow,” says Mr. Maguire. “That did a lot for the country because the economy was in a nosedive and this industry represents a huge part of the economy.”

Says Mr. Wagoner, “For us, it was a great program.”

Among the program's big winners are publicly traded dealership groups.

They are reaping the benefits with full showrooms and, for the most part, by posting year-over-year earning gains, according to ISI's Auto Survey.

Zero percent financing may eliminate dealers' share of the interest-rate profits on auto loans, but they've countered that by capitalizing on their other sources of revenue, including used-car sales, insurance coverage and parts and service operations, according to ISI.

Zero percent is a drain on corporate profits, “but as interest rates go down, the effect is not as severe as if the prime were in the high sevens,” says analyst Jim Hall of AutoPacific.

But he warns, “The hideous downside to zero percent is whether it becomes an expected way to get people in the door. The first rebates were envisioned as temporary. No one expected, when they started in the mid-70s, that they would be permanent fixtures.”

Yet many dealers say zero percent financing saved them from a fate of near-empty showrooms after Sept. 11. Herb Reedman Jr., vice president of operations for Reedman Chevrolet and other franchises in Langhorne, PA, says he'd hate to think “what would have happened without 0%.”