Car sales strong, but increased incentives are worrying

[Haltech]

Filed under: Car Buying, Earnings/Financials



The auto industry in the US is doing great in 2014. According to our latest By The Numbers report, the Seasonally Adjusted Sales Rate climbed in August to about 17.5 million units, the highest figure since 2006. However, when you scratch underneath the positive surface, the rosy situation might not be as good as it seems. There continues to be a concern among insiders and analysts that while sales are strong now, they might not be sustainable. To keep financial results looking encouraging, some automakers might be going after buyers who can't necessarily comfortably afford a new vehicle.

According to a report by The Detroit News, companies are throwing cash on the hoods of their vehicles to keep customers coming into dealers. As of July, the average incentive was $2,702, 5.5 percent higher than last year, and automakers are predicted to keep sweetening the pot even further in the coming years. However, analysts think that the huge growth in the industry is over and peak sales may be almost here in the next two or three years.

While the rising incentives are just one issue, the state of auto lending might be a problem, too. The average loan is now 66 months long, and according to The Detroit News citing data from LMC Automotive, 32 percent of them are now 72 months or longer, compared to 23 percent in 2008. Also, 26 percent of vehicles are leased these days, up from 18 percent in 2008.

In an effort to find more customers, there's also more subprime lending, which now amounts to about $46.2 billion, an eight-year high, according to a recent study by Equifax. They also account for about 12 percent of all auto loans, according to The Detroit News.

"It could be a disaster later on," said Morgan Stanley analyst Adam Jonas to The Detroit News. "We're clearly robbing Peter to pay Paul."

Some people in the industry are trying to fight back against these trends. Notably, American Honda Executive Vice President of Sales John Mendel recently shot back against the practices. The automaker won't do "stupid things in the short-term that damage the person who bought yesterday," he said.Car sales strong, but increased incentives are worrying originally appeared on Autoblog on Fri, 05 Sep 2014 10:15:00 EST. Please see our terms for use of feeds.



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