About The Authors

Friday, April 16, 2010

Conspiracy Theory and Push Marketing

After the taxpayers took ownership in General Motors and Chrysler there have been a couple of interesting conspiracy theories take arise. The first was the assertion that the Democratic administration singled out Republican dealers for termination. I haven’t heard much about that one recently. It might have been because it was determined that the majority of auto dealers self identified as Republicans in the first place. The second was the assertion that the government had sat on information that Toyota had experienced a raft of sudden acceleration occurrences and had only brought it to light recently to give the domestic manufacturers, including the two owned by taxpayers, the opportunity to gain ground on the industry leader. Talk show host Michael Savage seems to be the only one talking about that these days.

Toyota hasn’t taken their problems lying down and has launched the most aggressive incentives in their history in an effort to stem their recent loss of market share and volume. Their sales results were up 41% from March 2009. Toyota’s incentives, valued by Edmunds.com, averaged $2,256 per vehicle. This represents a record high for Toyota.

In an effort to keep pace the other OEMs, including the Detroit 3, have also launched aggressive incentives of their own. These “push marketing” strategies include some dramatically sub vented leases which include residuals that most likely won’t “come true” at lease end. This practice allows an OEM to avoid a large up front rebate that immediately comes off the corporate books in its entirety, in exchange for a real number dictated by whatever the market dictates at lease termination down the road. While OEMs may set up some reserves in anticipation of future losses, it is quite likely the end result is that current quarterly results will look better than they should.

As GM is aiming for an Initial Public Offering this year to buy out the taxpayers, there may be some additional motivation to shape current quarterly results.

In the case of Ford, the UAW is selling a large block of Ford stock to fund it’s VEBA (Voluntary Employee Beneficiary Association). Ford intends to sell additional stock this year to produce cash to reduce their debt load. This dilution of Ford stock could reduce it’s stock price, which is considered to be fully valued in the range of $12.00 to $13.00 per share. Showing healthy profits now, while gambling on a minimal loss down the road in an attempt to maintain the current stock price, might also be a part of Ford’s strategy. Ford is promoting extremely aggressive short term leases, in particular on select Lincoln models.

In the meantime, Chrysler is just trying to maintain whatever market share they can until they can bring new products to market.

The industry was up 24% over March 2009. Before the exultation begins, let’s recall how horrible March 2009 was. But the news from March 2010 was mostly favorable. But the bottom line is the results were largely incentive driven. Are we back to full bore “push marketing?” The upshot? Downward pressure on the value of late model pre-owned vehicles which impacts consumers who own them, rental car companies, and fleets. Brand image suffers. And it becomes increasingly likely that the projected residuals will fall short of projections.

“Push marketing” sells new vehicles, produces lots of tax revenue, and creates jobs. OEMs might add over time to their schedules, put on additional shifts, and/or call back laid off workers. If GM and Chrysler launch even more aggressive incentives it might spur the other OEMs, especially the ones who manufacture in the U.S., to follow suit. There might even be a reopening of shuttered assembly plants. The impact would ripple through the supplier base. States and municipalities would welcome the additional sales tax revenue. And the administration could show a decrease in that bothersome unemployment statistic in an election year. That's my conspiracy theory.

The D3 has shed enough cost through the Chapter 11 bankruptcies, and subsequent concessions to Ford, that they can actually make money at aggressive rates of incentives.

The long term incentive situation is further fueled by the fact that OEMs, in particular the ones partially owned by taxpayers, have made a major commitment to smaller more fuel efficient vehicles. The near term CAFÉ requirements will mean aggressive incentives on those vehicles if consumers don’t buy them in large numbers in the face of steady fuel prices.
We have mostly been on the incentive drugs since Joe Garagiola hooked us in 1975. Given the fact that the government could, in theory, "encourage" GM and Chrysler to return to even more aggressive “push marketing,” what are the chances?
Or will the Toyota recall situation, which fueled the current round of aggressive incentives, die down and allow the industry to let normal demand dictate production and sales, protecting the value of consumer’s vehicles?

written by David Ruggles for Auto Finance News

1 comment: