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The incentives debate: Who's being 'stupid'?

Honda's Mendel: Long loans can lead to trouble.

American Honda’s top sales executive turned heads last week with a grim warning — doing “stupid things” now to juice sales could mean big trouble later.

Except that John Mendel’s sense of alarm isn’t shared by some of Honda’s biggest rivals, and there are no signs they’ll back off from the kinds of actions that Mendel finds so troubling.

Mendel, the dean of U.S. import executives, had harsh words for rivals that are increasingly luring customers with seven-year loans, courting riskier subprime buyers and shipping larger percentages of their vehicles to rental-car lots.

“It’s a very, very short-term tactic,” he said, “especially in the subprime area, because you not only are pulling sales forward, you’re probably pulling people out of used cars into a new car that maybe they can’t afford.”

The debate shows the industry at a crossroads. The days of double-digit sales may be over and carmakers must work out how to proceed.

Mendel is the most prominent auto executive to publicly condemn practices that have helped the industry achieve some of its best months in eight years. Adam Jonas of Morgan Stanley said such strategies have created “a dark side” to the market.

But others say they see no reason to be concerned.

“There’s been a trend toward longer-term financing, but it’s been paired with low cost of credit and improving residual values,” GM spokesman Jim Cain said. “People are making very rational decisions to buy the vehicle they really want to buy and take advantage of historically low interest rates for as long as they can. We don’t see cause for alarm right now; in fact, we think the industry is very healthy.”

GM is offering 0 percent financing for 72 months on many 2014 Chevrolets as part of its Labor Day promotion and 0 percent for 84 months on most 2014 models in Canada. Ford, Nissan and Volkswagen also have 0-for-72 deals right now, and some dealers are using 84 months as the default term when calculating monthly payments in their advertisements. The average U.S. loan term in the first quarter was a record 66 months, according to Experian Automotive.

“Customers who are financing for these longer terms are well-qualified, meaning they get the benefits of a more affordable payment while enjoying the benefits of buying new,” Nissan spokesman Brian Brockman said. “These loans are good business for Nissan and do not present substantial risk for the company. We have also not seen a change in trade cycles as a result.”

Gregg Cullen, general manager of Ray Cullen Chevrolet-Buick-GMC in London, Ontario, said longer loans have been important since the recession in making payments affordable for customers, though it means those customers stay underwater longer and may delay their next purchase.

“I do get concerned when there isn’t 0 percent,” Cullen said. “Even 2.99 percent adds up. That’s thousands of dollars over the course of the loan. At that point people have to keep their cars longer because they’re in a deficit position.”

Steven Szakaly, chief economist for the National Automobile Dealers Association, said longer loans are reasonable because people keep their vehicles longer than they used to. And subprime auto lending won’t lead to the same kind of consequences that subprime mortgages did when the housing bubble burst, he said.

“I am not worried about subprime,” Szakaly said. “It’s still a very, very small part of the market.”

Brockman said Nissan’s captive financing arm has had little change in the average credit score of its customers but that outside lenders have been more willing to approve buyers with lower scores. “This helps customers who experienced challenges during the recession, as well as younger buyers, get the dependable transportation they need,” he said.

Mendel’s comments come after Honda’s U.S. market share fell from 9.7 percent a year ago to 9.1 percent for the first seven months of 2014. Despite that drop, he said, Honda is sticking to its conservative, retail-focused strategy, avoiding “stupid things in the short-term that damage the person who bought yesterday.”

At the moment, the result of that approach is that Honda sales are down 1 percent in a year when overall auto sales have risen 5 percent.

“Honda is very protective of their brand, and that has always served them well,” said Karl Brauer, senior director of insights at Kelley Blue Book. “But it’s costing them sales and share right now. I know there’s frustration right now within Honda to see a rising tide and not be lifted like everyone else.”

That tide is expected to rise more slowly in the coming years, increasing the pressure on automakers to steal share from competitors if they want to avoid ugly negative numbers and downtime at plants they have opened or restarted since the recession.

Sales are on pace to top 16.3 million this year for the first time since 2006. But while a few analysts see the industry topping 17 million soon, many don’t see it crossing that threshold anytime soon. Mendel said 16.5 million was a good estimate to use for near-term planning.

That would mean increases of no more than 1 or 2 percent a year, compared with 8 percent last year and 13 percent in 2012. Most forecasts assume 2014 will wind up with a gain of about 5 percent.

“That’s when the gloves are going to come off because everyone’s not going to be growing,” said Jeff Schuster, senior vice president of forecasting at LMC Automotive. “We’re going to see the potential for some brands declining and some brands just treading water, versus the growth that we’ve experienced since 2009.”

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