Toyota: Incentives to Wind Down Soon

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Toyota logo

Faced earlier this year with plummeting sales following two massive and very public safety recalls, Toyota Motor (TM) sought to counter the slump by offering generous incentives to spur traffic into dealer showrooms. Consumers responded enthusiastically, gobbling up zero-interest financing and cheap leases that pushed sales up by 40% in March, compared to prior-year levels.

But those robust sales increases may be a thing of the past, should Toyota go ahead with plans to retire the programs by year's end, if not sooner. Speaking Tuesday in Tokyo, a Toyota official said the company doesn't expect to continue the current level of incentives. "By fall or the end of this year, we're planning to get incentive levels to historical levels," Senior Managing Director Takahiko Ijichi told analysts and reporters during a conference call.

The current batch of incentives runs through June 1 and many analysts expect they will continue through the summer. But the effect of the programs may already be waning. Though Toyota's April sales rose 24% over last year, they fell 16% compared to March. Moreover, Ford Motor (F) outsold Toyota for the month, maneuvering the Dearborn, Mich., automaker back into the No. 2 sales spot in the U.S.

"Incentives really do run their course quickly," says Chris Hopson, market analyst at IHS Global Insight. Consumers eager for bargains are among the first to respond to incentives, Hopson says, as March sales figures showed. That was the first month that Toyota began its offers, and other automakers, including General Motors, Ford and Honda Motor (HMC) soon followed suit. The result was the highest rate of sales since the federal government's "cash-for-clunkers" program last summer.

Toyota has also been helped by its longstanding image for quality and safety, which while having taken some hits in recent months, is largely still intact -- especially among baby boomers, Hopson says.

Other analysts are not quite so sanguine, arguing that the recalls of 8 million Toyota vehicles for faulty gas pedals, as well as brake problems in 2010 Prius and Camry models, have tarnished the Japanese automaker's image for reliability. "There's permanent damage there," said James Bell, an analyst with Kelley Blue Book. Though not fatal, the recalls require that "Toyota compete in a way they haven't in 25 years."

Should Toyota proceed with its plan to draw down incentives, whether other automakers will follow suit remains to be seen. Though Toyota spent an average of $2,498 on incentives for each vehicle sold in April, according to car-buying guide, that's less than Toyota's Detroit rivals. So while Toyota owes much of its recent sales success to incentives, it's also clear that GM, Ford and even struggling Chrysler are also buying their way into Americans' garages.