Whats Next After 0%

DETROIT Reuters reports that U.S. automakers pulled off an escape to make Houdini proud when they boosted sales with interest-free loans in the wake of the Sept. 11 attacks. The question now is: What do they do for an encore?

While the zero percent deals are being discontinued, automakers appear poised to replace them with other incentives that may be just as expensive. And with U.S. consumer confidence perking up, some executives are starting to question whether boosting rebates to prop up sales does more harm than good to their finances and their standing with buyers.

``We've got our two primary competitors dropping nuclear bombs all the time,'' said Jim Schroer, the sales chief for the Chrysler arm of DaimlerChrysler AG. ``In a nuclear war, nobody wins.''

The deals pushed industry sales to their second-highest total in 2001, averting the steep plunge forecast immediately after Sept. 11. But the deals also helped push Chrysler and Ford Motor Co. into losses; only General Motors Corp. made money on its automotive business.

The first to offer interest-free loans, GM was also the first to end the deals, saying last week it would instead offer a $2,002 rebate plus a reduced-rate loan on almost all its models.

GM contends one national rebate gives it an edge among consumers, allowing them to easily understand prices. Before Sept. 11, most automakers offered deals that varied by model and region. GM executives have also said the new deals do not cost more than the zero percent offers of November and December, a claim other automakers and some analysts dispute.

``Demand is continuing strong, dealers are selling cars,'' said GM Vice Chairman Bob Lutz in a speech on Tuesday to Wall Street analysts. ``There's increasing optimism out there.''

But unlike the original zero percent deals, GM's competitors are not rushing to follow its lead. Schroer told Reuters on Monday that Chrysler would go back to its pre-Sept. 11 practice of offering deals that combine rebates and loans varying by model.

He also said while the deals would cost close to what Chrysler spent in the fourth quarter, they would not match GM's generosity.

``You can say 'Match GM, match the deal and let the chips fall where they may,' but that level of spending is not sustainable from a shareholder value point of view,'' he said. ''It's not maximizing profits, it's maximizing discounts to show the highest possible short-term sales.''

Ford executives have said they're still mulling what direction the company should take once its zero percent offers expire next week. Richard Beattie, head of sales for Ford's Lincoln-Mercury division, said his division would have to ``be competitive, but in a slightly less draconian way.''

'PUTTING MONEY ON SALE'

Auto executives are not only puzzled about what should replace their zero percent offer, they're not quite sure why interest-free loans worked as well as they did or how they might impact sales this year.

The deals ``brought people into showrooms ... but a lot of people drawn to zero didn't get the deal,'' said Jeff Schuster, director of forecasting for industry research firm J.D. Power and Associates.

Analysts estimate that only a small percentage of U.S. car buyers over the past three months -- likely less than 10 percent -- actually took such a loan. When customers learned the limits of the deals, many of which were good only for three years and available to customers with the best credit, they went ahead with their purchase.

Schuster estimates that the deals pulled in 600,000 buyers who would have otherwise bought over the next six to nine months, an anticipated purchase that will drag sales down over the next few months. Other analysts say the pull was smaller, and that the deals actually brought in buyers who would have otherwise not been shopping for a new car or truck.

A greater concern for executives like Beattie and Schroer is what happens when consumers get accustomed to shopping based solely on who has the best deal.

``Then your quality image and your brand aspiration suffer, then the only time you can sell anything is when you have a better deal than the other guy,'' Schroer said. ``And how do you make money doing that? I don't know how to do that.''

The moves also require massive cash flows to sustain; last year U.S. automakers spent some $10 billion on customer incentives, money that might have otherwise been spent on developing future vehicles. And discounts on new vehicles push down the prices of used vehicles, creating problems for automakers counting on leased vehicles holding a certain value over time.

``I like to run my business by putting money on sale before putting cars on sale,'' Beattie said.

But no one expects any automaker to unilaterally disarm and decide that preserving profits will take precedence over keeping volume up, even as U.S. sales are expected to decline by as much as 10 percent this year.

``I would logically assume that with everybody driving to maintain some level of rational production, I would expect margins to get even worse,'' Lutz said.