Over the past four years, automakers and their dealers had so few cars to sell–and demand was so high–that they could afford to ask for higher prices. Those days are over, and the deep discounting is back.
Auto production slowed during the coronavirus pandemic, first because of factory shutdowns and then because of a global shortage of computer chips and other parts that lasted for years.
With few vehicles in showrooms, automakers and dealers were able to eliminate most sales incentives, forcing consumers to pay full price. Some dealers added thousands of dollars to the manufacturer's suggested retail price, and people began buying and selling in-demand cars for a profit.
But with chip supplies back to healthy levels, auto production has rebounded and inventory at dealers is rising. At the same time, high interest rates have dampened demand for vehicles. As a result, many automakers are struggling to keep sales afloat.
Wes Lutz, owner of Extreme Dodge in Jackson, Michigan, said he has several Dodge Challengers and Chargers that are eligible for up to $11,000 rebates from Stellantis, the maker of Dodge, Chrysler, Jeep and Ram models. The automaker is also offering up to $3,600 off some versions of the Dodge Durango sport utility vehicle.
“It looks like we're headed back to incentives and overproduction,” Mr. Lutz said. “It hasn't gotten to that point yet, but it's getting close.”
Shrugging, he said, “It may not be good for me or the manufacturer, but it's certainly good for the consumer.”
Cash-back offers, subsidized loans and other incentives are important tools for selling cars. They allow automakers and dealers to offer monthly payments that are more affordable for consumers and reduce the impact of higher interest rates.
Over the past few years, vehicle shortages and consumers' preference for larger vehicles have pushed the average purchase price of new vehicles to just under $47,000, and the average monthly payment to $735, according to market researcher Edmunds. Average Interest Rate on Used Car Loans The rate was 11.6 percent in April, according to Edmunds.
At this stage, many consumers will not be able to purchase a car without substantial incentives.
But when taken to extremes, incentives can eat away at automakers' profits and create a sales boom that inevitably leads to a painful decline. Repeated waves of discounts lead consumers to buy cars only when they're offered a deal.
Two decades ago, the industry spent too much money on incentives. General Motors for a while sold cars at deeply discounted prices, previously offered only to its employees. Excessive discounts weakened GM and Chrysler before they declared bankruptcy during the financial crisis in 2009.
For now, the industry has avoided this trap. At the end of May, automakers had about 2.9 million cars and light trucks in stock, up by about a million from the same time last year, according to Cox Automotive, a market researcher. About 7 percent of those vehicles were 2023 models. By comparison, there were 4.1 million vehicles in stock in 2019, according to Automotive News.
Toyota, Honda, Subaru, and GM's Chevrolet and Cadillac brands have kept a tight rein on their stocks, and in general have not yet raised incentives significantly.
But Ford, Lincoln, Dodge, Chrysler, Nissan, Volvo and many other brands have excess stock — enough to last more than 100 days at the current rate of sales. They're offering some big incentives, but most are targeted at specific models and sometimes specific versions of certain models.
For example, Ford is offering $5,500 off its Escape SUV, but only on those 2023 models left in dealer stock. Stellantis is offering $4,000 cash back on Ram pickups, but it's limited to the 1500 Classic Edition. Volkswagen is offering interest-free financing on the 2024 Taos small SUV, but not on its other models.
“So far we're not seeing the kind of widespread incentives that we've seen in the past,” said Charles Chesbrough, senior economist at Cox Automotive.
A growing number of incentives on new vehicles have helped drive down the prices of used cars and trucks. Used car prices fell nearly 7 percent in April, according to the Bureau of Labor Statistics.
The most discounted models at the moment include electric vehicles, sales of which have slowed in recent months. Consumer enthusiasm for these models has waned, mainly due to concerns about the high prices of electric vehicles and the challenges of keeping them charged, especially on road trips.
Now automakers are offering generous incentives to entice consumers. Volkswagen is offering up to $18,750 off leases on the 2023 ID.4, which is still readily available in some places. This includes a $7,500 federal tax credit that can be included in leasing deals under the Inflation Reduction Act.
Other notable deals are available on the Chevrolet Blazer electric vehicle, Cadillac Lyriq, Kia EV6, Volvo XC40 Recharge hybrid and Ford F-150 Lightning electric pickup. Tesla, which regularly raised prices during the pandemic, has cut prices over the past year and a half. Recently, the company has been offering 0.99 percent loans on its Model Y SUV
Incentives come in addition to other benefits Trends helping to reduce the cost of electric vehiclesThis includes falling manufacturing costs and increased competition.
The increased discounts are helping to lure what are known in the industry as “desired buyers” — consumers who don't need a new car but are attracted to new technology, design or features.
“You have a 'needy buyer,' whose car broke down or needs a very expensive repair, and they need to buy a new vehicle,” said Adam Silverleib, owner of a Honda and Volkswagen dealership outside Boston. “But a lot of those 'needy buyers' left when interest rates went up, and now the incentives are bringing some of them back.”
One of them was Brian Pawlowski, a digital marketing executive in Chelsea, Michigan. He was driving a 2017 Chevrolet Volt plug-in hybrid with just 55,000 miles on the odometer. But he was desperate to get a fully electric model.
“I'm an environmentalist,” he said. “I could have kept the Volt, but I wanted to upgrade to newer technology.”
He started looking for deals on electric cars and found a two-year lease on a Hyundai Ioniq 5 SUV. The deal included a $13,000 rebate and other terms that allowed him to make monthly payments of $369 for a vehicle with a sticker price of $52,000.
“When the salesman explained it all, it was hard to ignore,” Mr. Pawlowski said.