More Rebates Coming?

Courtesy Thestreet.com 06/08/2002

As the saying goes, the best things come to those who wait. New car buyers will find that this year may be no exception.

This week, General Motors increased rebates and other incentives on 2002 model pickup trucks, sport-utility vehicles, minivans and mid-sized cars. But while these deals seem enticing, savvy consumers shouldn't rush to the dealer lot to snap up a new vehicle. By the end of the summer, carmaker incentives could be even greater.

"When the 2003 models come out in September, the automakers will offer higher rebates to get rid of the 2002s," says Jesse Torpak, new-car pricing manager at Edmunds.com, an online source for automobile shoppers. "The manufacturers will also offer more cars to dealers and those rebates get sizable towards the end of the year."

Rebates are already sizable because of the heated battle for market share between Ford , DaimlerChrysler unit Chrysler and GM.

After Sept. 11, automakers kept sales robust by offering 0% financing for qualified buyers and other incentives, like cash rebates and longer warranties. In the nine months since, automakers have ended their interest-free financing programs, relying heavily on cash rebates to spur sales.

Supply and Demand On Monday, GM announced a 12.4% year-over-year drop in May car sales and took aggressive steps to entice car buyers. The company raised its rebate on Trailblazers by $500 to $1,500 and offered a $2,500 rebate on Silverado pickup trucks, up from $2,000. On Thursday, GM followed this move by raising rebates on midsize cars by $500 to $2,500, which covers the Pontiac Grand Prix, Chevrolet Malibu, Chevrolet Impala and Buick Century.

"GM had a big decline in May sales and they weren't going to wait any longer to offer new incentives," says John Honiotes, vice president of automotive operations for Autobytel, an automotive marketing services company. "The market is so competitive right now that all of these manufacturers that have stayed out of the fray have thrown themselves into it because they want to keep up their sales numbers."

For the year, automobile sales are down 2.7%. But May car sales were worse, coming in at a seasonally adjusted pace of 15.7 million vehicles, down 6% from the same month in 2001 and the slowest sales pace since November 1998, according to industry-tracker Autodata. Despite the fact that GM and Ford raised their earnings estimates for the year, the May weakness in sales raised warning flags for some analysts.

Lots of Options You might save more if you can wait a couple of months

In a research report to investors this week, Goldman Sachs analyst David Lapidus wrote, "A price war is breaking out in the U.S. auto industry. It's pedal to the metal at Ford plants, with new management ready to spend whatever it takes to maintain share and volume. GM is digging in the trenches, adding shift capacity and warning of higher incentive spending. All of this is in the face of an apparent softening in demand."

However, predictions of sliding car sales have been proven wrong before, especially after automakers moved away from their 0% financing programs. And a one-month slump doesn't necessarily indicate a trend.

Despite the May sales decline, automakers' production levels remain high. For the second quarter, Ford will produce 1.18 million vehicles in North America, an increase of 4% from the year-ago period. Third-quarter production will be up 16%, with the company producing 940,000 vehicles. "Simply put, it's cheaper to give a discount while the plant is running than it is to shut down the plant and boost production later," says Honiotes.

If sales should stay soft and production stays high, when it comes time to introduce those new 2003 models in September, dealers may have to offer bigger incentives on 2002 models to make room. "Carmakers have been increasing production schedules all year," says Michael Bruynesteyn, automotive analyst for Prudential Securities. "I wouldn't call it a glut. But there could be an excess."

How to Play It As a result of all this, shoppers might want to wait to see how June car sales stack up before purchasing a 2002 model. "The consumer is not going to get hurt by waiting 30 days," Bruynesteyn says. "Just watch those sales. Just like GM did this week, if they get hit again, automakers will react immediately. They won't wait 60 or 90 days to offer incentives."

Of course not everyone should wait. Shoppers who have their hearts set on a specific model with certain features should do their shopping now to ensure they'll get what they want. "You're only limited to what's on a dealer's lot," points out Sophia Lee, marketing operations manager for Dealix, an online automobile marketing firm. "And towards July and August inventories dwindle, especially on popular cars."

Shoppers may qualify for bigger rebates, especially if they're a first-time buyer, a college student or they live in a region where certain cars aren't selling well. "Let's say I'm from Chicago and four-wheel drive SUVs are selling well, but two-wheel drive SUVs aren't," says Honiotes. "Chicago dealers will be aggressive to get rid of that inventory. Demand for cars varies regionally. Consumers should ask dealers if they qualify for additional rebates."

The bottom line: Smart shoppers will wait to see if more discounts are offered down the road. "Right now is an incredible time to buy a vehicle," says Honiotes. "But as the market shifts, waiting 30 to 60 days is not a bad thing at all