This Week in Car Buying: Price wars loom; Mustang's brief hiatus caused by Camaro rebates; Pickup trucks the next battlefield; Subprime loans raise eyebrows
As it becomes more apparent that sales have peaked, the auto industry is facing the possibility of an all-out price war if it doesn’t trim output to match demand. Finding this new equilibrium means that hot models will continue to sell, slower moving units will see higher incentives, curtailed production schedules or may even be dropped from lineups. Smart shoppers will find opportunity in chaos.
While most model year-end incentives were slated to expire October 3, many of these programs have been extended through the balance of the month. Rebates on 2017 model year vehicles can range as high as $2,250, while some selected 2016s can have cash back of $4,000 to $6,000 depending on the model.
Although sales are only off marginally from last year’s record levels, some automakers are keen to retain market share in a bid to impress investors. Those makes that are concerned about their stock prices are more likely than not to stick to current production levels and count on incentives to keep their sales momentum going.
“We’ve seen more aggressive pricing activity over the last several months,” Mark LeNeve, Ford’s vice president for U.S. marketing, sales and service, told Automotive News. “The business is as competitive as I’ve seen in my 32 years, but it’s competitive in a very strong industry.”
Mustang on hiatus, Camaro rebates blamed
Proving LeNeve’s point, Ford announced that it was idling its Flat Rock, Michigan, assembly plant for a week to adjust inventory levels of the Mustang. The automaker builds both the 2-door pony car and the new 2017 Lincoln Continental at the suburban Detroit factory. Part of that closure may be to juggle output of the two models to reduce the number of Mustangs in favor of ramping up Continental production.
Mustang sales fell by 32 percent in September and it was outsold for the first time in nearly two years by the Chevrolet Camaro. The GM division sold 6,577 Camaros in September compared to 6,429 Mustangs. Still, through the first nine months of 2016 the Ford outsold the Chevy 87,528 to 54,535. The increase in Camaro sales is attributed to incentives that were nearly tripled to more than $3,400 compared to the average discount of $2,600 on the Mustang.
Despite the high spiffs on both, sales of the pony cars are off year-to-date by 11 percent for the Chevy and 9 percent for the Ford. Inventories had been climbing—the Camaro grew to 139 days’ supply before the higher incentives were offered. The deals managed to reduce that number to 120 days, but that’s still twice the number considered normal by industry standards. Mustang inventories stand at 89 days, up from 71 days a month earlier. The high Camaro incentives were targeted at existing 2016 models only, with just $500 cash back available on 2017 Camaros that are now beginning to arrive in Chevrolet showrooms.
Pickup Truck Deals Warm Up
Traditionally, pickup trucks provide the Detroit 3 with a steady stream of customers paying higher transaction prices, which in turn means bigger margins. However, that formula will change soon as larger discounts are appearing on trucks at a time when new competitors, like the redesigned Honda Ridgeline and the Nissan Titan, come to the market in greater numbers.
Leading the incentives charge is Fiat Chrysler Automobiles which raised its average incentive spend on Ram pickups to over $7,000, according to J.D. Power. When Ford rolled out its aluminum-bodied F-150 a year ago, it also repriced some models dropping MSRPs by as much as $10,000. Ford’s incentives average just over $5,000, while Chevrolet, though not quite generous as Ram, has seen discounts grow by just over 20 percent to about $5,600. As a result of Ram’s aggressive incentive spending, the FCA truck outsold Silverado in September for the first time since 2010.
While pickup sales continue to grow at a 5 percent clip, it’s down from an earlier, more robust rate of 15 percent. As the market cools somewhat, analysts are expecting that the pressure will grow to raise incentives even more. One thing to keep in mind is that while the rebates may look large, pay attention to the vehicle’s MSRP. As pickups have added features and trim levels, the average price has climbed rapidly. A big discount on a high priced truck may in fact be worth less than a smaller rebate on a less expensive truck.
Subprime loans raise eyebrows
Are subprime loans a problem, or not? That seems to be the question making the rounds as some analysts believe the higher risk loans are not a big threat to overall lending, while others see an uptick in late payments and delinquencies as a harbinger of problems ahead.
The latest red flag has been raised by S&P Global Ratings which reports that subprime borrowers, those with low credit ratings who have higher interest loans because of the risk, were 60 days late on 4.85 percent of auto loans in August, up from 4.14 percent a year earlier. This is the highest level of arrears since 2010. Delinquencies during the month grew to 5.0 percent from 4.1 percent. S&P Global Ratings also reports that more subprime loans are being approved with the rejection rate dropping from 11.1 percent in June 2015 to 5.2 percent a year later. “The auto industry has also become intensely competitive, which has led to price competition, loosening of credit standards and higher charge-offs,” S&P said in a statement. It also observed that lenders are making longer term loans and that used car prices are falling, which could hurt resale values on repossessed vehicles and loan recoveries.
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