US car sales are climbing slowly, but transaction prices surge

ERJ staff report (AN)

Washington DC -- US sales are still sputtering along at about two-thirds of pre-recession levels. And unemployment is pain-fully high at about 10 percent.

So that means customers are paying less for vehicles, right? Wrong.

The average transaction price is up about $1,800 from a year ago, taking the sting out of a stubbornly slow new-vehicle sales recovery for automakers and dealers.

But analysts say the benefit to automakers of higher prices could be undermined if a fresh incentive war breaks out. Toyota, troubled by its recall crises, launched 0 percent financing last week.

US dealers sold 780,463 light vehicles last month. That's up a solid 13 percent from February 2009, the worst month of the slump.

Two trends, one good and one bad, account for the higher transaction prices.

First, even though many customers are moving to smaller vehicles, they still want goodies such as leather seats. But transaction prices also are up because many financially stressed and unemployed customers are on the sidelines.

Cash for clunkers "greatly reduced inventory levels. Content is up. The model mix is better, and what credit is available is for people with higher credit scores and income," said Jeff Schuster, executive director of forecasting at J.D. Power and Associates. "It is a healthier environment than last year."

The transaction price is the amount negotiated between customers and dealers who report to the Power Information Network. It does not reflect incentives, which have dropped significantly in the past year. So transaction prices are rising even though customers are receiving fewer spiffs.

The average transaction price of $30,002 in January was $1,788, or 6 percent, higher than a year earlier, according to the Power Information Network.

Transaction prices rose even more for the Detroit 3, which desperately need higher revenues and profits. Detroit's average jumped $2,829, or 11 percent, to $29,425 in January, compared with 5 percent for Asian brands and 3 percent for European brands, Schuster said.

Driven by six new models and company efforts to cut incentives, February transaction prices soared more than $4,000 a vehicle at General Motors Co., said Susan Docherty, head of marketing.

Ford Motor Co. sales boss Ken Czubay said Ford has commanded substantially higher transaction prices since September after cash for clunkers slashed inventories and cleared out most 2009 models.

"Our prices are driven up by customers ordering more equipment, higher trim levels, and we have a more favorable model mix," he said.

Ford had to boost feature installation rates and add higher trim levels to its 2010 production schedule to adjust to unanticipated demand, Czubay previously has said.

Customers buying smaller vehicles during the recession aren't sacrificing convenience and technology features, said George Pipas, Ford's chief sales analyst.

"Even those coming out of an Eddie Bauer Explorer still want leather seats," he said.

Another reason margins are higher is automaker discipline in cutting incentives, Schuster said.

But early signs of an incentive war appeared last week, threatening the benefit of higher transaction prices.

Rivals are directly seeking the customers of recall-ravaged Toyota Motor Sales U.S.A. as its February sales fell 9 percent. And Ford Motor outsold GM in February for the first time since 1998.

Toyota responded last week by launching 60-month 0 percent loans. GM matched that immediately.

But per-vehicle costs for 60-month 0 percent incentives are far greater than existing incentive spending, Barclays Capital analysts Brian Johnson and Emmanuel Rosner said in a report to investors Thursday, March 4.

Offering a 60-month 0 percent loan on a typical car would cost a manufacturer $4,657, Barclays calculates, compared with incentives of $3,346 for GM and $1,800 for Toyota last month.

From Tire Business (A Crain publication)