December's rising incentives could signal dangers ahead

Average transaction prices had been increasing steadily since 2010 but fell by $201 in December from a year ago, according to TrueCar.com.
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DETROIT -- As auto sales return to pre-recession levels, some of the industry's old incentive games may be creeping back, too.

Rising incentives and slipping transaction prices at the end of 2013 are breeding concern that automakers are starting to lose some of their newfound pricing discipline as they try to gain market share.

Average transaction prices had been increasing steadily since 2010 but fell by $201 in December from a year ago, according to TrueCar.com. Kelley Blue Book said prices were down $318 year over year.

Both figures represent a decline of less than 1 percent. But combined with higher incentives and flat U.S. sales in December, they suggest that automakers are beginning to have a tougher time keeping their results in positive territory

That could be a glimpse of the future. U.S. light-vehicle sales are predicted to be about 16 million units this year. That would be a 3 percent increase over last year -- a far slower growth rate than in post-recession recovery years beginning in 2010. (See box, Page 28.)

Morgan Stanley analyst Adam Jonas, in a report last week, said December's results -- the industry's seasonally adjusted annualized selling rate dipped to 15.4 million from 16.4 million in November -- reflect "an increasingly aggressive incentive environment." Margins likely will decline after surging to record highs since the recession, he said.

"It is becoming increasingly clear to us," Jonas wrote, "that much of the low hanging fruit has been picked and that the incremental customer is getting harder and harder to come by. Faced with a stalling SAAR, growing production capacity, aggressive credit availability, and the Japanese yen at 105, we believe the stage is set for new vehicle pricing to normalize down from the very high levels we have seen since the downturn."

Average incentives rose 4 percent in December from a year ago, according to TrueCar. Three companies raised incentives by double-digit percentages last month, including a 22 percent jump for Ford Motor Co., which is roughly a $600 increase per vehicle. Incentives rose 18 percent for Hyundai-Kia Automotive and 15 percent for American Honda Motor Co., though both remain lower than all other major automakers.

Officials at General Motors cited higher incentives by some rivals as contributing to the company's 6 percent sales decline in December, the worst among the seven largest automakers. Its incentives rose 4 percent to $3,657 per vehicle as transaction prices rose 1 percent to $34,634; both dollar figures are the highest among those manufacturers, showing that GM generates more revenue per vehicle than its rivals even after the above-average discounts.

Ford officials said the incentives increase was largely related to the fact that the model-year change-over for its F-series pickup occurred three months later than in 2012. As a result, 70 percent of F-150s sold in December were the more incentivized outgoing model, whereas just 30 percent were the outgoing model in December 2012.

Ford's chief sales analyst, Erich Merkle, also said Ford had such low supplies of its Fusion sedan a year ago that it didn't need to offer much in the way of incentives at that time.

He pointed out that Ford Motor's average transaction prices, which represent the price customers pay after incentives are factored in, rose by more than $200 in December and by $700 for all of 2013. Ford Motor's sales rose 2 percent in December and 11 percent for the year.

Hyundai spokesman Jim Trainor said the need to remain competitive with other automakers has led to higher incentives, even as Hyundai struggles to meet demand because of production capacity constraints. Hyundai's average incentive of $1,741, as estimated by TrueCar, is less than half that of GM, though Hyundai also has the lowest transaction prices among the major automakers.

"The year-over-year increase is larger than most because our products are aging and we are coming off an extremely low base," Trainor wrote in an e-mail. "This is a typical cycle, not a surprise to us, and will be alleviated with the launch of an all-new product cadence in 2014/2015."

Despite the higher incentives, Hyundai-Kia sales fell 2 percent in December; they were down less than 1 percent for the year. The automaker's retail sales were lower, while fleet deliveries rose 45 percent in December and in all of 2013.

Meanwhile, Chrysler Group's sales gained 6 percent last month as its transaction prices rose 3 percent and incentives fell 9 percent. It was the 45th straight month in which Chrysler sales rose year over year.

"Incentives, as a percentage of transaction price, are up for several brands -- a trend worth keeping an eye on," Larry Dominique, executive vice president of TrueCar and president of ALG, said in a statement.

"Chrysler is one automaker that appears to buck this trend, showing positive momentum with a key product launch imminent," he added, referring to the unveiling of the redesigned Chrysler 200 this week at the Detroit auto show.

Settling in
The pace of U.S. light-vehicle sales growth is expected to slow this year, raising concerns of increased incentives as automakers jockey for share.
   
 Sales units% increase vs. year before
2014*16,000,0003
201315,582,1368
201214,493,09213
201112,779,57610
201011,589,84411
   
*Projection
Source: Automotive News Data Center

You can reach Nick Bunkley at nbunkley@crain.com. -- Follow Nick on Twitter


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