Factory Incentive Outlook: Q4 2016 and Beyond

factory incentives

I talk about factory incentives on my radio show a lot and the reason is, it signals to me the best time for consumers to buy a new vehicle.  Rebates and low interest rates ebb and flow, and I do my best to keep up with them.

I think it is important that people understand the reason behind all this money being handed out.  It is not because the automakers are being benevolent; the automakers are trying to get cars off the dealers’ lots so they will reorder more of them.  It is truly that simple, but the good news is, it is the consumers who benefit from it.

As we know, 2015 was a record year for auto sales in the United States, and this year, every automaker has tried to keep up that pace.  The truth is, it has taken a lot more incentives this year to stay even with 2015, and so far, it has worked.  However, there are signs that incentives are losing their luster.

Incentive spending for September 2016 averaged over $3900 per vehicle sold.  To put it in perspective, that is more money per car than the industry was spending in 2008 when General Motors and Chrysler were forced into bankruptcy, and it seems like perhaps that has been forgotten. 

So, what is the outlook for the rest of 2016?  I think the incentives will remain strong through the end of December 2016, as automakers try to buoy confidence in new vehicle sales, and no automaker wants to show fewer sales in 2016 than 2015.  Car companies live and die by market share, that is to say they protect the percentage of total sales they get.  For this reason, I think the rest of 2016 looks positive for great deals for Americans.  In years past, December brought the best incentives of the year as the automakers fight for sales and share, and I don’t see that changing this year.

What about 2017?  It is always hard to predict, but I think there is a good chance we’ll see a large de-escalation in incentive spending.  Will that slow sales?  Of course, but I don’t think anyone has the illusion that selling 17.5 million vehicles per year can last forever.  The auto industry was very healthy selling 16 million vehicles per year, because it spent less money on incentives per vehicle.

There are only two ways to remain profitable as a car company.  One is to build cars at a rapid pace, spend a ton of money on incentives, and try to keep the roll going.  Unfortunately, there is a price to pay for that.  The more cars you build, the more problems each car has.  Automakers are forced to squeeze suppliers for every penny and you end up with a Takata airbag disaster.

Is there an alternative?  Yes.  Build fewer cars so you don’t have to force them down the dealers’ throats and you don’t have to spend $7000 per car in some cases to make them move off the lots.  You slow things down and concentrate on making cars people want to buy without a reliance on incentives.  A byproduct of this is fewer warranty claims being paid, way fewer recalls, and long-term it will produce more loyal customers.

Will any or all of the automakers prescribe to the necessary change, or will we see a repeat of the 2008/2009 car company failures?  Stay tuned, only time will tell.

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