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Zero-Interest Boosts Car Dealers’ Sales, but What’s Next?

Zero-Interest Boosts Car Dealers’ Sales, but What’s Next? Buying: In 2001, dealers had their second best year ever. By SHELLY GARCIA Senior Reporter Zero-interest financing programs have been so successful that some car dealerships have nearly doubled sales in the past three months, contributing to what is expected to be the second best year for car sales in history. Dealers report that the incentive programs, which can shave between $2,000 and $7,000 off the price of a new car, have in some cases attracted shoppers who had no intention of buying a new car at all. They have also encouraged other buyers to trade up to more expensive vehicles they otherwise would not have considered. Indeed, the hoopla over the incentives, advertised with much fanfare over the past several months, may even have spilled over to a wider group of consumers those who were not eligible for the zero-interest programs but, once in the showroom, found interest rates so low they bought cars anyway, dealers say. But with most of the zero-interest programs ending on Jan. 1 and the rest set to end by mid-January, many are now wondering what price dealers will pay for those deals in 2002. “Incentives are like a narcotic,” said Van Bussmann, senior vice president for global forecasting at J.D. Power and Associates, a consultancy that tracks and analyzes car sales data, “and there’s no methadone program. Unless the manufacturers want to see a drastic drop off in sales, they’re going to have to provide consumers with the kind of effective price reduction that zero-financing offered.” No-interest financing deals, which, like rebates, are essentially a way of reducing the purchase price of a car, began in the aftermath of the terrorist attacks of Sept. 11. Worried that the attacks, combined with the softening economy, would have a disastrous effect on sales, General Motors Corp. launched the program in mid-September and other makers soon followed. For car manufacturers locked into stringent union contracts, the cost of subsidizing the financing seemed a lesser evil than the cost of idle workers and factories. The programs, which vary by manufacturer and for different models, on average cut the price of a $20,000 car by $2,000 and shaved as much as $7,000 off the price of a $50,000 vehicle. J.D. Power estimates that nationally the no-interest incentives accounted for sales increases of 35 percent to 40 percent at both GM and Ford Motor Co. and 32 percent at Toyota Motor Sales USA Inc. in the month of October. Only DaimlerChrysler Corp. lagged behind with a 9-percent increase in sales of its Chrysler brand for the month. Locally, dealerships experienced similar gains. “It’s been huge for us,” said Howard Drake, co-owner of Casa de Cadillac and Saab of Sherman Oaks. “We were up about 40 percent in October and November. We saw a whole bunch of people that had no intention of buying a new car, but the deals were so good, they didn’t know what else to do but buy a new car.” Besides driving traffic, the incentives may also have helped to sell more expensive models, as buyers used the interest savings to trade up to cars they might otherwise have shunned. “The average person on some vehicles could save $60 or $70 a month,” said John McClure, vice president and general manager at Courtesy Chevrolet in Thousand Oaks. The dealership had a record month in October, selling 169 new cars, compared to 103 new cars in October 2000 and seeing similar increases in used cars and other models that were not part of the zero-percent program. “Basically, it brought people in droves into the store,” said McClure. “There was all the reason in the world to buy.” Even those who did not qualify for the zero-percent deals, offered only to consumers with the highest credit ratings, are believed to have bought cars during the last three months of the year after being lured to the dealership by the zero-percent advertising. “Let’s put it this way, it can’t be a bad thing,” said Bob Renko, general manager of The All New Superior Nissan of Mission Hills, which opened its doors a month ago and so had nothing to compare sales levels to. “Even at 3.9 percent or 4.9 percent, how can it not help?” But for those dealers who relied on zero-percent incentives to meet or exceed the record sales of 2000, the programs may also pose problems in the coming year. For one thing, the incentives may have hastened buying that would have otherwise taken place this year, raising the specter of a shortfall in 2002 sales. A larger question is how shoppers will react when the programs are discontinued. “It certainly promoted business,” said Chris Ashworth, general manager at Toyota of North Hollywood, “I think the story is what happens next.” Toyota of North Hollywood sold 800 new cars in December, besting its December sales last year by about 20 percent, but Ashworth believes the zero-percent financing program accounted for only about 5 percent of that increase. That’s because the free financing was only offered on three of Toyota’s models. Ashworth and others say the consequences may be more pronounced for those manufacturers that offered the incentives across the board. “Essentially, they lowered the price of the vehicles so consumers stormed into showrooms,” said Bussman. “If they suddenly raise the price, the opposite thing is going to happen.” New car models are less price-sensitive, and unlikely to be included in the discount packages, as are luxury models. Those cars generate enough traffic and interest by virtue of their style, features and newness. But having set the bar for older models or cars purchased based on price to a new level, most say manufacturers will not be able to turn back the clock. Already, GM, which wrapped its zero-financing campaign in a patriotic theme, has begun a new program of rebates to replace the no-interest incentives and other makers are likely to bow to pressure to compete with GM’s program. The good news, some say, is that manufacturers can dial the discounts up or down depending on what happens to the economy and consumer spending patterns in the coming year. “I don’t think we should think of these deals as a light switch,” said Jim Hossack, senior consultant with AutoPacific Inc. in Tustin. “It’s not something you turn on and off. It’s something that’s very much adjustable.”

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