DETROIT – Big discounts. Six- or seven-year loans, in some cases to buyers who would have been turned down in the past.
As the auto industry strives to sustain its post-recession comeback, car companies are resorting to sales tactics that some experts warn will lead to trouble down the road.
Vehicle discounts have risen by 5.5 percent from a year ago. More than a quarter of new buyers are choosing to lease, a historically high percentage. Auto company lending arms are making more loans to people with low credit scores. The industry is adding factory capacity. And the average price of a car keeps rising, forcing some customers to borrow for longer terms to keep payments down.
Annual auto sales in the United States should top 16 million for the first time in seven years. But the pent-up consumer demand that has driven sales is ebbing. Sales are predicted to grow by 5.5 percent this year, the slowest pace since the financial crisis.
The big discounts and other steps eventually should help push sales above 17 million, most experts say. But Honda Motor Co.’s chief of U.S. sales chief, John Mendel, last week scolded competitors for using “short-term” tactics such as subprime loans, 72-month terms and increased sales to rental car companies to pad their sales. “We have no desire to go there,” said Mendel, whose company’s sales through July have fallen by 1.3 percent, trailing the industry.
“It could be a disaster later on,” says Morgan Stanley analyst Adam Jonas. “We’re clearly robbing Peter to pay Paul.” He sees sales growing to an annual rate of 18 million in 2017 – then sinking to 14 million a year later. This will mean factory closings, restructurings, and thousands of job cuts just for companies to break even.
Not all forecasts are that dire, and no one – not even Jonas – is predicting a repeat of billion-dollar losses and cars piling up on dealer lots. Automakers have cut costs and are better positioned to handle a downturn than they were in 2008 and 2009.
Easier credit brings back not-so-fond memories for one veteran Toyota dealer. “It just seems like 2007 all over again,” said Earl Stewart of North Palm Beach, Fla. “The credit ease with which people are financed is as liberal and loose as it ever was.”
Among the numbers that concern some experts:
• $2,702 – Average discount per new car through July. Automakers need to move the cars because a lot of factory space is committed to building them.
• 12.7 percent – Year-over-year increase in auto loans to “deep subprime” buyers in the last quarter – those with credit scores lower than 550.
• 32 percent – Percentage of auto loans that are 72 months or longer, up from 23 percent in 2008, according to LMC Automotive.
• 26 percent – Percentage of sales that are leases, up from 18 percent in 2008, according to LMC. A flood of expiring leases in three years could depress used-car prices, hurting new-car sales.
• 70 percent – Increase in auto repossessions in the last quarter, according to Experian Automotive. Sixty-day delinquencies are up by 7 percent. Still, both are below 1 percent of all auto loans.
Karl Brauer, senior analyst for Kelley Blue Book, sees trouble in the juicy discounts. In 2007, spending on incentives was just under 9 percent of the average sales price for a vehicle. That dropped to around 8 percent in 2012 and 2013. It’s back up to 8.4 percent and likely will rise toward 9 percent later in the year, he says.
Based on an average sales price of just over $32,000, the additional discounts would cost the industry almost $5.2 billion per year.
“This was the trap that got everyone in trouble before the recession,” Brauer says.