Questioning the Logic of New-Car Sales Incentives

The vehicle remarketing industry has grappled with the ill-effects of incentive-driven new-car sales since 9/11. So it came as no surprise that subvention was a hot-button topic at this year's Conference of Automotive Remarketing (CAR), held Feb. 16-18 at Mandalay Bay Resort in Las Vegas. But how many consignors in attendance, including car rental operators, anticipated that the conference's harshest criticism of runaway incentives would come from the manufacturer ranks?

In his keynote speech, Jed Connelly, senior vice president of sales and marketing for Nissan North America, argued that excessive incentives cut too deeply into industry profits. Each dollar spent on incentives roughly translates into a dollar lost in profits. As a result, he said, manufacturers are left with fewer resources for research and development of new technologies, including those to improve fuel efficiency and safety.

"We as an industry have to take a long, hard look at what else we're giving away besides pockets full of cash and billions in residual value. I think we're giving away our future," Connelly told conference attendees.

In 2004, new-vehicle marketers sold 16.9 million units, Connelly said. If the industry averaged a $3,000-per-vehicle incentive last year, that translates to nearly $51 billion off the bottom line. And that's money that didn't become available for future R&D.

Compared to many competitors, Nissan last year showed restraint in offering incentives, Connelly said, with the average incentive level at about $1,900. In spite of this, Nissan increased sales 26% compared to 2003, while Infiniti increased sales 10% over the previous year. At the same time, residuals on some of the most popular models rose dramatically.

But even with incentives much less than the industry average, "we're still spending way more than we had planned and way more than we would like to spend," Connelly said. The overall industry's reliance on cash rebates, low-interest loans and longer loan terms doesn't leave Nissan with much choice if the company wishes to remain competitive, he said.

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