Discounted Cars Benefit Buyers, but May Spell Trouble for Industry

Discounted Cars Benefit Buyers, but May Spell Trouble for Industry


The hefty price cuts are the latest signs of difficulty in the auto industry. In April, sales declined 4.7 percent, to 1.4 million cars and light trucks. Forecasters expect sales of about 17.2 million vehicles in 2017, down from last year’s record of 17.5 million.

While that is still a healthy level, cash discounts are one of the first tactics automakers typically turn to when they feel the need to lure more shoppers into new-car lots.

The trouble is, big price cuts, if maintained for extended periods, can hurt automakers by eating into their profit margins and lowering the value of used cars. A decade ago, offers of “cash on the hood” reached a frenzy when General Motors offered employee pricing to all customers, and other automakers rushed to match the deal. Such discounting helped push the industry into crisis, and G.M. into bankruptcy.

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A 2010 Chevy HHR at Extreme Dodge in Jackson, Mich. Used cars are creating additional competition for new cars rolling out of the factories.

Credit
Brittany Greeson for The New York Times

Mr. Lutz’s franchise is offering a gray 2017 Dodge Challenger coupe for $27,900 — $6,680 under its list price — thanks to an incentive program that Fiat Chrysler Automobiles ran last month allowing dealers to discount the price on certain models by up to 20 percent.

“This is a great deal. Consumers win. Dealers win. I can sell a lot of cars if I have $7,000 discounts,” he said. “It’s not so great for the manufacturers, though.”

There appear to be few types of vehicles without discounts. The trucks, S.U.V.s and other roomy vehicles that Americans favor these days are also being offered at bargain prices. Bomnin Chevrolet in Miami is selling a white 2017 Colorado pickup truck for $19,281 — $4,854 below its sticker price, a saleswoman at the dealership confirmed. It will lower the price by $1,000 more for customers who finance the truck through the dealership. Yet another discount of $1,250 is available if a customer can show he has a family member who leases a vehicle from a competing manufacturer.

In Snohomish, Wash., near Seattle, Bickford Ford has slashed the prices of Escape S.U.V.s. This week one front-wheel-drive model, in a brownish color known as “Canyon Ridge Metallic,” was on sale at $24,645 — $9,000 below the list price.

Many heavily discounted vehicles are not stripped-down, basic models, but fully loaded versions with all the bells and whistles. Leckner Nissan has discounts of up to $10,000 off the price of several Murano S.U.V.s equipped with navigation systems, heated seats, all-wheel drive and other features.

Luxury brands are also cutting prices but tend to offer smaller cash discounts and limit them to certain slow-selling models. Consumers who hunt around can find deals on sedans like the BMW 320, the Cadillac ATS and the Infiniti Q50, though.

“It’s a good time to buy a car. The consumer is in the driver’s seat,” said Mark Scarpelli, owner of Chevrolet, Kia and Chrysler Jeep franchises in the Chicago area.

Tom Maltic is the kind of potential buyer they’re looking for. A retiree living near Jackson, Mich., about 60 miles west of Detroit, he has just started shopping for a used pickup truck to tow a recreational vehicle and haul his hockey gear.

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Extreme Dodge is offering up to 20 percent off on vehicles as an incentive for buyers at a time when manufacturers have more inventory.

Credit
Brittany Greeson for The New York Times

“But now I’m thinking maybe I should buy new,” he said. “If there are some really nice discounts, maybe I pay a little bit more but I don’t have to worry if something is going to break down.”

To manage the flow of unsold cars, automakers can also change production levels. General Motors and Ford Motor have recently cut shifts at a handful of plants in the United States, for example. Fiat Chrysler has stopped making compact and midsize cars altogether.

But these days, new cars rolling out of the factory also face increasing competition from used cars, an inventory that is largely out of automakers’ control. Some 3.5 million vehicles that were leased for the last two or three years will be returned and sold as gently used cars this year, and even more are coming in 2018, according to Edmunds.com. Sometimes consumers can choose between a new car and a two-year-old model that has been driven just 20,000 miles and is selling for half the price.

As the industry rebounded over the last seven years, automakers had been careful to limit pure cash discounts and try more subtle ways of offering deals. Sometimes they give dealers discounts to allow them more leeway to negotiate prices with customers. Or they give dealers discounts tied to aggressive sales targets, a practice that sometimes results in very little profit for dealers while preserving the manufacturer’s margins.

Automakers have also turned more heavily to leasing, and longer loans of 72 or 84 months, which keep the customer’s monthly payment affordable.

Michelle Krebs, a senior analyst at Autotrader.com, said the current wave of discounts was not yet a repeat of the mistakes the industry had made in the past. Most of the price cuts offered so far are limited to certain models, or certain regions of the country, as opposed to the big, across-the-board campaigns of the last decade that applied to all vehicles in stock, Ms. Krebs said.

“They’re much more targeted. They’re not plastering them all over like they used to,” she said. “So I don’t see this as the sins of the past.”

G.M. and Ford continue to rack up big profits, underpinning that view. But troublesome signs are cropping up. On Wednesday, Toyota Motor said it lost money in North America in the quarter that ended March 31, its first loss in the region in five years.

One of the reasons it cited: rising sales incentives.



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