Incentives Come Out Swinging This Year

New light-vehicle sales should hit 16.8 million units this year, says National Automobile Dealers Assn. Chief Economist Paul Taylor.

He was ready to forecast fewer sales than that. Then auto makers kicked off 2004 with a new round of incentives.

“I would have predicted a smaller number had I not seen that surge of incentives,” says Taylor. “Manufacturers are bringing incentives to market earlier this year, despite talk of reducing them.”

Citing Ward's data, he predicts sales of cross/utility vehicles — vehicles that look like SUVs but are on car platforms — will spur the most growth in 2004 as they did last year.

Light-vehicle sales in 2003 hit 16.6 million units. Taylor had predicted 16.5 million, mulling over how much a war in Iraq might hurt vehicle sales. The answer: Not much.

He says auto makers will try to sell all-new models with little or no incentives, but those enticements “will continue to be a key part of the industry.”

Last year, domestic auto makers' incentives averaged $3,712 per vehicle, compared with $2,560 the year before. Industry-wide, incentives averaged $2,664 per vehicle in 2003 and $1,873 in 2002.

Costly incentives may be a necessary evil for manufacturers, who continue to decry them while using them to stimulate sales. Dealers seem to like incentives, period. “I haven't talked to a lot of dealers who dislike them,” says Taylor.

Stoked by incentives, auto sales of the last five years have set records despite a “mild recession” that started in 2001, the same year incentives took off. Despite the recession, consumers continued to buy vehicles at high levels.

“It's been an extraordinary 5-year period,” says Taylor. “That's why we anticipate some moderation of sales, but above the 16 million mark. I'd be remiss to say it will be as good for the next five years.”

It's good enough to keep dealer confidence levels high. Moreover, consumer confidence is coming back as the economy improves. That's evidenced by a 4.5% increase in the gross domestic product, says Taylor.

He estimates dealer profits will fall from 2.1% to 2% in 2004.

Dealers faced some major expense increases in 2003, led by advertising costs that rose 15%, followed by utilities (14%) and payroll (8%).

Taylor expects the prime interest rate, now at 4%, to increase a full percentage point by 2005. That will affect floor-planning costs, “a key element for dealers.”

After falling below 4% in 2001, the unemployment rate climbed to 5.7% in 2003. “We'd love to see that come down,” says Taylor, who believes it would stimulate used-car sales.