Remember the end of spiffs? Well, war's back on

A six-month truce in the industry's incentive wars is breaking down, and Toyota -- that paragon of marketing discipline -- is getting the blame.

Incentives hit a 20-month low in January after cash-for-clunkers slashed vehicle stocks last summer and sales began to perk up.

Now embattled Toyota is disturbing the peace. Its aggressive finance and leasing package has sparked a surge in marketing spending that could undo the industry's resolve to swear off costly spiffs.

"The domestics had weaned themselves off incentives," said John McEleney, president of McEleney Toyota in Clinton, Iowa.

"Now this is forcing them to respond."

Battling to lure back customers after its safety recall debacle, Toyota Motor Sales U.S.A. raised traditionally low incentives to record levels in February. Sales fell anyhow.

So on March 1 Toyota added 0 percent financing and subsidized leases. That bumped its spiffs another 25 percent, to about $2,500 per vehicle, Edmunds.com said.

General Motors countered with its own 0 percent financing. Ford soon followed suit.

"We'll be fully competitive for our dealers," said Ford Motor Co. sales boss Ken Czubay.

Sales surged. The incentives boosted the U.S. auto market in early March to the best sales pace this year, Edmunds.com said.

Incentives worked

In the first eight days of March, the U.S. seasonally adjusted annualized sales rate was 12.5 million units, Edmunds.com estimated. That's the highest level since the cash-for-clunkers surge in August 2009.

Retail sales of Toyota Motors Sales soared 47 percent above March 2009.

"Incentives are going to be here into the third quarter," said George Magliano, director of North American research, IHS Global Insight. "We're not going to wean consumers off incentives any time soon. We're stuck with it."

Toyota is protecting itself, while GM and Ford are battling for U.S. sales leadership, so none will be outspent -- and the rest must follow the three that control half the market, he said.

"They're all jockeying for position," Magliano added. "After clunkers everybody backed off incentives. Now they're going to the whip again."

A year ago -- with U.S. sales at the lowest point and inventories the highest in decades -- desperate automakers hit an incentives crescendo: $3,165 per vehicle.

Incentives stayed high until the clunkers sales spike in July and August abruptly drained industry stock to the lowest on record -- a 30-day supply on Sept. 1. Transaction prices soared, and automakers eased up on spiffs.

Sales are still well below pre-crash levels. But they're rising, and manufacturers have kept inventories lean. Edmunds.com CEO Jeremy Anwyl expects manufacturers to switch to more targeted spiffs. "Broad incentives are hard to sustain because they are so expensive," he said.

Barclays Capital estimates it costs a manufacturer $4,857 to offer a 0 percent, 60-month loan on a $30,600 vehicle. But McEleney said the loans and lease subsidies have put his business back on track. He wants Toyota to keep them.

"I would hope if it's working that Toyota would extend the program," he said. "They have deep pockets, and they need to do this."

Paul Atkinson, dealer principal of Atkinson Toyota in Bryan and Madisonville, Texas, and head of Toyota's dealer council, said the spiffs have revived floor traffic and sales across the country. "At the current sales pace, we'll be running short of inventory," he said.

No cool-down

The Detroit 3 traditionally have outspent Asian rivals on incentives, while Toyota and American Honda Motor Co. spent the least among major players. But the Detroit 3 cut back since last March while Toyota spending has risen.

Anwyl sees little chance for a cool-down.

"Zero-percent is war, a product-line deal is a skirmish," Anwyl said. "Automakers are always conflicted about profits and market share, but they are opportunistic, so there will be a lot of skirmishes this year."

You can reach Jesse Snyder at jsnyder@crain.com.