Incentives: the drug of the auto industry

Incentives are addictive, and it will be tough to get consumers to kick that habit, says Rik Kinney, vice president of the Dohring Co., an automotive industry research firm.

“Incentives have become like a drug,” he says. And, he adds, rehab won't be easy. “I don't know if there is a methadone for incentives. I think they're here to stay.”

Incentives propped up last year's record high vehicle sales as automakers fought for market share.

If incentives were taken away or cut substantially, it would hurt new-car sales, “and really push people into the used-vehicle market,” Mr. Kinney says.

As automakers mull over what level of profit-draining incentives to offer, the public's appetite for them grows.

Fifty-three percent of the people polled in Dohring's latest annual survey of American car buying patterns say incentives put them into the new-vehicle market. That's up from 45% last year and 36% the year before that.

Nearly 60% of those polled say incentives influence the make and model vehicle they buy.

If incentives get people into the marketplace, it's at a high cost.

Generous incentives played a big part in the Chrysler Group's staggering financial losses of late. Chrysler's new president, Dieter Zetsche, says he'd like to ultimately back away from incentives and the like.

“It would be very interesting to see if he can get Chrysler off incentives,” says Mr. Kinney. “I think he'll find consumers will go to other makes which do offer incentives.”

That was the dilemma faced by Mr. Zetsche's predecessor at Chrysler, James Holden, who lost his job when Chrysler lost so much money.

Mr. Holden knew hefty incentives were clawing into Chrysler's profits. He openly scorned General Motors Corp. for upping the incentive stakes to reduce bloated inventories. He called it “mortgaging your future.”

Then he went ahead and matched GM's hefty incentives. Despite Mr. Zetsche's distaste for them, Chrysler last month upped its incentives on a number of models.

Automakers could play with the numbers to cushion the effects of incentives. For instance, they could increase the MSRP of a vehicle by, say, $2,000, then knock off $2,000 through incentives. That's risky however.

“To some extent, that's probably going on right now,” says Mr. Kinney. “But there comes a point where your product gets knocked off shopping lists if it's priced too high.”

People in the used-car business would love to see incentives end — or at least reduced.

Incentives on new cars hurt the value of used vehicles, says Tom Kontos, an automotive remarketing analyst.

“For the used-car market, there's a dollar-to-dollar ratio on incentives,” he says. “For every dollar you put out as an incentive, there's an equal downward impact on the used side.”