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Auto sales are up, driven by incentives

Deals offered by a beleaguered Toyota have helped retail sales, but analysts warn of an incentive war and the risk of long-term harm.

March 19, 2010|By Jerry Hirsch
  • Dana Chen shops for a car for her brother at a Toyota dealership in El Monte.
Dana Chen shops for a car for her brother at a Toyota dealership in El Monte. (Christina House / For The…)

March is turning out to be a torrid month for auto sales.

Several projections place the annual sales rate at 12 million to 13 million, which would be 20% to 30% above the pace of the first two months of the year.

Retail sales have taken off, in part because of the steep sales incentives Toyota Motor Corp. is using to regain market share that it lost over its recent large recalls and the subsequent drop in people's perceptions of its vehicles' quality.

Better credit availability and improved weather this month also are helping sales, analysts said. Automakers are also starting to log big gains in fleet sales as corporations look for more fuel-efficient vehicles for their sales staff and the rental-car market starts to rebound.

This isn't all good news.

"There is some risk that the incentives offered by Toyota could spark an incentive war among several automakers," said Jeff Schuster, executive director of global forecasting at J.D. Power & Associates, the Westlake Village auto market research company. "While this may lead to a temporary increase in sales momentum, it could also potentially slow the pace of long-term recovery."

Analysts at Edmunds.com, the Santa Monica auto information company, also are watching the sales surge with a touch of trepidation.

"We shouldn't view this as a sign that the economy is recovering; this sales bounce is driven by incentives. Take away the incentives, and the sales will slow dramatically," said Jeremy Anwyl, chief executive of Edmunds.com.

Toyota, Ford Motor Co. and Hyundai Motor America have among the most robust sales gains so far this month, said David Cutting, a J.D. Power analyst.

Chrysler Group, in part because of a dearth of new models, may be the only automaker that doesn't experience a bounce this month, he said.

Though the incentives have pulled average vehicle prices below what dealers were getting in February, the typical transaction is still about 6% above 2009 on a year-to-year basis, he said.

So with the exception of Toyota, a March incentive war should not cut too deeply into automakers' profits, Cutting said.

"It is going to hurt Toyota because they don't usually do this," he said.

The round of incentives is set to run through the first week of April.

The industry is expected to sell about 11.5 million vehicles this year. Although that's up about 10% from 2009, it is still well below the 16 million to 17 million a year that the automakers posted for much of the last decade.

Total industry sales reached 780,265 in February, up 13% from the recession-plagued 688,945 of February 2009. Sales are up about 10% through the first two months of the year.

There is still a huge oversupply of auto factories in the United States, and more plants will have to be closed barring some unexpected huge jump in sales.

"Since 2006, more than 1.2 million units of excess capacity has been cut from North American production levels," Schuster said. "Capacity is now at 17.9 million units, which is still well above current and near-term production levels of 10.6 million units, suggesting that additional production cuts may be necessary as a new, leaner industry takes shape."

jerry.hirsch@latimes.com

twitter.com/latimesjerry

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