The past several years have seen a lot of success for the auto industry. Last year marked the seventh consecutive year of sales increases, as automakers continue to use incentives like cash back rebates, lease deals, and dealer bonuses to gain market share. Discounts have risen almost 14 percent this year through November to $3,303 on average, according to Autodata Corp.—but average transaction prices have also risen, allowing automakers to remain extremely profitable.1 These incentives gave customers nice perks like discounts and competitive interest rates without eating into the dealership’s profit margin—creating a win-win for auto sales.
Even with past success, though, analysts are now forecasting a downturn in 2017 auto sales, with sales declining for the first time in eight years.2 According to Tim Fleming, an analyst at Kelley Blue Book. “An increasing supply of used cars, especially off-lease units, is already putting pressure on residual values, which could impact the sustainability of today’s high levels of leasing.3
Analysts from the National Automotive Dealers Association believe automakers will continue to use incentives to win market share. When spending is low, incentives can offset losses and offer more control over manufacturing capacity.4
To keep auto sales steady, automakers must keep an eye on their use of incentives. To help, we’ve gathered some incentive trends that we expect to be big in 2017.
The Race is on for Plug-in Electrified Vehicle Incentives
Recently, the auto industry has started to see increased consumer interest in electric vehicles (EV).5 In particular, younger consumers tend to lean more towards EV technologies that improve road efficiency and automation and reduce overall carbon emissions. In addition, technology has improved to better meet customer needs driving interest as well.
A common consumer motto for electric vehicles has been “Wait until they’re under $40,000 AND can cover 200 miles on a single charge.” Two upcoming cars meet these demands—the Tesla Model 3 and the Chevrolet 2017 Bolt EV. It means big possibilities for the EV industry.
The Bolt EV and the Model 3 are being pitched as super practical. Not only do consumers save long-term on fuel costs, but they save immediately with a consumer federal tax credit of up to $7,500. This federal tax credit is important for consumers interested in both cars, allowing car buyers to consider them alongside non-electric, lower price point cars. However, the electric market needs to keep in mind that the government is phasing out these EV tax credits, which means some immediate uncertainty for a market that is just finding its footing.
Surges in Incentives Spending May Lead to Long-Term Production Risks
Automakers use incentives as motivation to move slower-selling stock, protecting them from overproduction and financial loss. Unfortunately, incentives mean a loss in future resale values, so customers have a harder time trading in their car for newer models. It boils down to this:
- Incentives are boosted to move cars.
- Incentives then cause a drop in trade in value and new cars sold.
- So, incentives are boosted to move cars.
- Rinse. Repeat.
Despite this long-term issue, forecasts show a 9.4% increase in incentive spending per automobile for 2017.6
For some automakers, the potential disruption of future sales is troubling as changes in production schedules and incentive packages may lead to massive losses. To solve this problem, J.D. Power recommends automakers moderate car production levels and incentive spending by working closely with dealers to ensure steady sales.7 It’s not a sexy solution, but it’s steady.
In the face of warnings of waning future sales, incentives are projected to increase through 2017. With competition and markets growing tighter in 2017, automakers and dealers need strong partnerships. Focus must be set on long-term growth and management, and we’ll continue to keep an eye on what incentives mean for sales in 2017 and beyond.
Automakers can help align dealerships with the latest incentive policies and sales strategies through CoEFFICIENT®. Learn more about how CoEFFICIENT can help automakers streamline communications with dealerships by downloading our Infiniti Case Study.
1. Jamie B. “Record or not in 2016, auto sales growth seen drawing to end”. Automotive News. http://www.autonews.com/article/20161230/RETAIL01/161239995/record-or-not-in-2016-auto-sales-growth-seen-drawing-to-end ↩
3. David P. “U.S. industry sets new high behind solid GM, Nissan, Honda gains.” Automotive News. http://www.autonews.com/article/20170104/RETAIL01/170109972/u-s-industry-sets-new-high-behind-solid-gm-nissan-honda-gains?cciid=email-autonews-blast ↩
4. Ariena S. “Forecasters see U.S. sales up this year, but softer 2017”. Automotive News. http://www.autonews.com/article/20160110/RETAIL01/160119990?↩
5. Consumer Federation of America. “New Data Shows Consumer Interest in Electric Vehicles Is Growing.” http://consumerfed.org/press_release/new-data-shows-consumer-interest-electric-vehicles-growing/ ↩
6. Ibid. ↩
7. “J.D. Power Evaluates the Health of U.S. Auto Market”. PR Newswire. http://www.prnewswire.com/news-releases/jd-power-evaluates-the-health-of-us-auto-market-300244214.html ↩