Why New Car Deals Are Harder to Find
Thinking of buying a new car? This time of year is typically a great time to do it: The period from mid-October through December is when automakers start to roll out the next year's models, and that means discounts -- sometimes big discounts -- on the last of this year's cars and trucks.
That's how it usually works. But this year is shaping up to be an exception. Sure, there are some great deals out there, and there are still some good ways to save big on your next new car. But for several different reasons, automakers are being much more selective about where and when they offer those big discounts this year.
That means you might end up paying more than you'd like for your new ride -- unless you can turn things to your advantage.
Why automakers hate giving you those deals
It's true that fall and early winter are usually the season for big incentives, as those "cash back" or "zero percent financing" deals are called in the auto industry. From Toyota's (NYS: TM) lavishly advertised "Annual Sales Events" to the big cash-back deals traditionally offered by General Motors (NYS: GM) and Ford (NYS: F) , incentives have long been a key consideration for savvy car shoppers.
But they've long been a big problem for the automakers. Brutal global competition means that margins in the auto business are pretty thin in the best of times -- some types of vehicles are more profitable than others, but an overall average of something like 5% or 6% is typical. And that's in good times. In tougher times, or when an automaker's products are not quite competitive with the class leaders, the need to use incentives to keep sales going can eat up most of that margin very quickly.
The Detroit automakers have long had the highest incentives in the industry, but they've all been under immense pressure to reduce incentives spending following a difficult period of restructuring. And they have each made great progress, in large part because their cars and trucks keep getting better -- and more able to compete head-on with the best imports.
According to industry analysts at Edmunds, Ford's incentives were 13% lower in October than they were a year ago -- and a year ago, they had already fallen considerably from the levels that were normal a few years back. GM and Chrysler have also managed to roll back their incentives somewhat, following a similar pattern. That's likely to continue in coming years -- there will still be deals here and there, but they'll be more limited, like the discount offer GM announced on Thursday for those who buy certain Chevy or GMC trucks and SUVs through Costco. The big across-the-board sales blowouts seen in years past will be less and less common.
But what makes this year unusual is that the import brands are cutting their incentives, too.
Deals are especially hard to come by right now...
The pattern of U.S. car sales this year has been mostly shaped by the major production disruptions that hit Toyota and Honda (NYS: HMC) in the wake of the March tsunami in Japan, and the more recent disruptions caused by flooding in Thailand -- a hub of suppliers to the Japanese automakers. Shortages of key components produced in the ravaged areas have led to very tight inventories of popular fuel-efficient models like the Toyota Corolla and Honda Fit.
That's had three big effects that are relevant to car shoppers. First, while production is finally coming back up to speed, you aren't going to see the automakers offer incentives on Corollas or the other affected models anytime soon, because there's not much excess inventory to clear out. Toyota and Honda have traditionally had much lower levels of incentives spending than the Detroit automakers, but this year it's been lower still -- Toyota's incentives were down over 20% in October versus year-ago totals, according to Edmunds.
Second, it means that competitors' offerings like the Ford Focus and Hyundai (OTC: HYMTF) Elantra -- which are much, much better cars than they were a few years ago -- have been in high demand as longtime Toyota and Honda buyers have looked elsewhere and liked what they found. That in turn means that Ford, Hyundai, and other makers of popular alternatives -- including GM and Nissan (OTC: NSANY) -- aren't looking at lots of excess inventory either. In fact, Ford has been reporting that its average transaction prices have been up significantly, partly because of lower incentives, and partly because its very competitive model lineup has been able to command premium prices.
Put those two together, and it's clear that it's a tough time for new-car shoppers hoping for a great deal. But there's some good news in all this -- that third effect is one that you might be able to use to your advantage.
...unless you use this to your advantage
The third effect of the tsunami is that used-car prices have continued to rise. This is particularly true of Toyotas and Hondas, because of the shortages of popular new models, but it's also true to some extent across the board. 2009's Cash for Clunkers program took a lot of used cars out of circulation, and more frugal-feeling consumers have been looking to save money by buying used -- reducing supply and driving up prices.
The upshot, if you're interested in buying a new car, is that your trade-in might be worth more than you think -- maybe even enough to offset the lower incentives being offered right now. That, plus continued low interest rates mean that this might be a good time to buy a new car after all.
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At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Costco and Ford. Motley Fool newsletter services have recommended buying shares of Ford, General Motors, and Costco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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