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Japanese pump up incentives

Spending up sharply, but still behind Big 3

LOS ANGELES — Already formidable competitors on the basis of their products and quality, Japanese carmakers have moved to leverage their advantages in the American marketplace by dramatically increasing their spending on lease and interest-rate incentives.

According to data compiled by J.D. Power Information Network and CNW Marketing Research, incentives spending by the Japanese has risen sharply this year, both in absolute terms and as a percentage of all sales. Nearly three-quarters of all Nissan transactions this summer have involved subvented leases or APR deals, Power says, while one-third of all Toyota deals have involved incentives, up from the low teens for all of last year.

At the same time, per-vehicle spending by the three biggest Japanese marques on all incentives, including leases and APR deals, has soared. According to CNW, which tracks incentives spending, Nissan's spending for July 2001 was up 80 percent from July 2000, Toyota's was up 62.5 percent in the same period and Honda's was up 60 percent.

The Japanese push comes as the Big 3 have been forced to reduce their own incentives spending because of lagging profits, further hurting them in the marketplace.

To be sure, the Japanese still trail the domestic makers in overall incentives spending. Indeed, Toyota and Honda are spending barely half as much per vehicle on incentives as the domestics, while Nissan and the second-tier Japanese still trail the domestics by several hundred dollars per vehicle, according to data from CNW Marketing Research.

But narrowing the spending gap has allowed the Japanese to add to their growing advantage in customer perception and appeal for their products.

Their lineups flush with new vehicles made more price-attractive by subsidized lease and APR deals, the Japanese have captured a record 26.5 percent of the U.S. light-vehicle market through July. And Toyota is on pace to become the first foreign automaker to capture 10 percent of the U.S. market for a year.

Art Spinella, who tracks incentives for CNW, points out that small incentives on Japanese products carry more weight with consumers than big cash back on a domestic product.

"Ford has to give away $2,300 per unit, while Toyota is at $1,300. And even though that doesn't bring the Camry price down anywhere near the Taurus price, Toyota's value perception with consumers shows that Toyota can get away with it," Spinella said.

Strong dollar helps

One major factor allowing the Japanese to crank up their incentive spending is the strong dollar. Sales generated in a strong dollar translate into more yen profit when repatriated back to Japan. This puts the parent company in a strong competitive position by allowing them to consider several options, such as holding prices steady while adding content to their vehicles, increasing incentives spending, mounting a marketing blitz — or all three.

Foreign-exchange gains have been fueling profits for the Japanese for the past year. Honda Motor Co., for example, cited foreign-exchange gains when it reported a record first-quarter profit of $715 million.

Speaking last week at the Management Briefing Seminars in Traverse City, Mich., General Motors CFO John Devine said the strong dollar is a major competitive disadvantage for American companies.

"It is destroying the manufacturing competitiveness of this country," he said.

But a Toyota spokesman called the exchange-rate scenario a worn-out excuse.

Six years ago, he pointed out, 80 yen bought a dollar (compared with 123 last week), and Japanese automakers had to decontent their vehicles and increase prices just to break even. Just the same, he said, the Japanese were able to hold market share.

Out with the old

Many of the incentives are going toward vehicles ending their model runs. In Toyota's case, three major products — the Camry, Corolla and 4Runner — are all long in the tooth.

Steve Sturm, Toyota vice president of marketing, said, "The industry is down 1 million units from last year, so it's softer and more competitive. We have a lot of new product, but some of our models are older. We still have to compete at some level."

Tom Libby, analyst with J.D. Power in Troy, Mich., says, "Toyota is focused on sales, which would push profits down the list of priorities, and that would explain why they are incentivizing."

Similarly, Nissan dealers do not want leftover Altimas on their lots when a strikingly different model arrives this fall. Facing competition such as this from its rivals, Honda has to keep pace with deals on its 4-year-old Accord that still has a year left to go.

Nearly half of all Accord sales this summer have been APR deals done by American Honda Finance, Honda reports.

APR, not cash back

Honda does not offer customer cash, because the company feels it weakens the brand, while Toyota typically limits its cash-back offers to older products.

Nissan is the leader of the Japanese Big Three in cash-back deals, but in July it still trailed Ford Division by $188 per vehicle sold, Chevrolet by $477, and Dodge by $825, according to Power figures.

"The trend is away from dealer and customer cash and more toward consumer-friendly APR deals. It is better for the brand and more credible to consumers than other types of incentives," said John Spoon, Nissan Division director of operations.

"We're definitely sensitive to the need to remain competitive, but we're practicing more patience and putting incentives out in the right way. We're not going to inflate our residuals like we did a few years back."

Big 3 still bigger

Spinella says it's important to note that Japanese spending levels still are far below what the Big 3 spend on a per-vehicle basis.

But he says the cash-strapped second-tier Japanese — Mazda, Mitsubishi and Isuzu — also are spending less than the domestics, but only because they have to.

"They can't afford to go higher," he said.

"They would add to their incentive level if they could, but they don't have the resources. Even though Mazda has Ford's deep pockets to dig into, Ford is pretty strict with the purse strings."

Spinella said zero-percent APR deals can cost much more in the long run than a cash-back incentive, although its cost is spread out over the life of the loan.

Spinella estimates a 0.9 percent APR deal on a typical mid-sized sedan costs the manufacturer about $3,000 to $3,500 over the life of the loan.

Dick Colliver, American Honda executive vice president, says nearly 40 percent of Honda Finance's APR deals have been at the relatively inexpensive 5.9 percent rate.

"If you put $1,000 cash back on a car and you sell 30,000 cars, that's $30 million you just spent," Colliver said. "But if you do a 5.9 percent APR program, that's $580 per deal, but it's only on 40 percent of your cars, so that's very inexpensive for us." c

You can reach Mark Rechtin at mrechtin@crain.com

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