For much of the past four years, automakers and their dealers had so few cars to sell — and demand was so high — that they could command high prices. Those days are over and heavy discounts are starting to make a comeback.
During the coronavirus pandemic, car production was slowed first by factory shutdowns and then by a global shortage of computer chips and other parts that lasted for years.
With few vehicles in showrooms, automakers and dealers were able to remove most sales incentives, leaving consumers to pay full price. Some dealers added thousands of dollars to the manufacturer’s suggested retail price and people started buying and flipping cars in demand for a profit.
But with chip supplies returning to healthy levels, auto production has rebounded and dealer inventories are rising. At the same time, higher interest rates have curbed demand for vehicles. As a result, many automakers are struggling to keep sales fluctuating.
Wes Lutz, owner of Extreme Dodge in Jackson, Mich., said he had several Dodge Challengers and Chargers that were eligible for $11,000 in rebates from Stellantis, the maker of Dodge, Chrysler, Jeep and Ram models. The automaker is also offering rebates of up to $3,600 on select versions of the Dodge Durango sport utility vehicle.
“It looks like we may be headed back toward incentives and overproduction,” Mr. Lutz said. “It’s not there yet, but it’s getting closer.”
Shrugging, he added, “It may not be good for me or the manufacturer, but it’s certainly good for the consumer.”
Cashback 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 high interest rates.
In recent years, shortages and consumer preferences for large 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. The average interest rate on used car loans was 11.6 percent in April, according to Edmunds.
At these levels, many consumers can no longer buy cars without substantial incentives.
But when pushed to the extreme, the incentives can erode automakers’ profits and create a sales wave that inevitably gives way to a painful slump. Repeated waves of sales also force consumers to buy cars only when they’re offered a deal.
Two decades ago, the industry went on a drive. General Motors for a time sold cars at the deeply discounted prices it previously offered only to its employees. Extreme discounting helped weaken GM and Chrysler before they filed for bankruptcy in 2009 during the financial crisis.
For now, the industry has avoided this pitfall. At the end of May, automakers had nearly 2.9 million cars and light trucks in inventory, about a million more than at the same time last year, according to market researcher Cox Automotive. Nearly 7 percent of those vehicles were 2023 models. By comparison, there were 4.1 million vehicles in inventory 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 generally have yet to raise incentives significantly.
But Ford, Lincoln, Dodge, Chrysler, Nissan, Volvo and many other brands have higher inventories — enough to last more than 100 days at the current sales rate. They offer some great incentives, but mostly target specific models and sometimes specific versions of certain models.
Ford, for example, is offering $5,500 off its Escape SUV, but only for 2023 models that remain in dealer inventory. Stellantis is offering $4,000 cash back on the Ram pickup, but it’s limited to the 1500 Classic trim. 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 general incentives that we’ve had in the past,” said Charles Chesbrough, senior economist at Cox Automotive.
The increasing number of new vehicle incentives has helped lower the prices of used cars and trucks. In April, used car prices fell nearly 7%, according to the Bureau of Labor Statistics.
Among the most heavily discounted models right now are electric vehicles, sales of which have slowed in recent months. Consumer enthusiasm for these models has waned, largely due to concerns about the higher 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 the $7,500 federal tax credit, which can be converted into leases under the Inflation Reduction Act.
Other great 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 spent the past year and a half reducing them. Recently, the company is offering 0.99 percent loans on its Model Y SUV
The incentives add to other trends helping to lower the price of electric vehicles, including falling manufacturing costs and increasing competition.
Increased discounts help tempt what are known in the industry as “wannabe buyers” – consumers who don’t need a new car but are attracted to new technologies, design or features.
“You have your ‘need buyer,’ whose car has died or needs a lot of expensive repairs, and they need to get a new vehicle,” said Adam Silverleib, owner of a Honda and Volkswagen dealership outside Boston. “But many of those ‘wannabe buyers’ left when interest rates rose, and now incentives are bringing some of them back.”
Among them is Brian Pawlowski, a digital marketing executive in Chelsea, Mich. He had been driving a 2017 Chevrolet Volt plug-in hybrid that had just 55,000 miles on the odometer. But he was itching to get his hands on an all-electric model.
“I’m a person who likes the environment,” he said. “I could have kept the Volt, but I wanted to upgrade to newer technology.”
He started looking for electric car deals and found a two-year lease on a Hyundai Ioniq 5 SUV.
“Once the salesperson explained everything,” Mr. Pawlowski said, “it was very hard to let go.”
