How GM can afford 0% financing. Pretty ingenious!
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From: The Golden State
How GM can afford 0% financing. Pretty ingenious!
An article appeared on Automotive News this week where Bob Lutz pointed out how 0% is fueling even bigger SUV sales. I dug around, and here's how GM can afford 0%.
Trucks and SUVs cost less to develop because of less severe safety and emission standards. Also, development cost are shared with Trucks that currently have astronomical production numbers.
Because of them being cheaper to produce and manufacture, Trucks & SUVs have huge profit margins, far and away bigger than cars.
As Mr Lutz pointed out this week, people going into showrooms to buy $25,000 Impalas, when faced with financing & discounts bringing Impalas down to $21,000, are going for SUVs at the $25,000 they intended to spend anyway (with no small help from your friendly, on commision salesman) that have also been discounted from say, 30 grand.
What this means simply put is that for that 25 grand, GM is clearing far more money then they would if it went towards a car, therefore, GM is actually making more money at 0% then they were without it!
On the upside, GM is making enough money to spend more on cars, which is good for us. On the downside, GM is basically encouraging people to buy more SUVs, and you will have armies of GM reps (RP among them) who will tout the flawed fact that this is what people want, and they are just giving people what they want.
What do you think about this?
Trucks and SUVs cost less to develop because of less severe safety and emission standards. Also, development cost are shared with Trucks that currently have astronomical production numbers.
Because of them being cheaper to produce and manufacture, Trucks & SUVs have huge profit margins, far and away bigger than cars.
As Mr Lutz pointed out this week, people going into showrooms to buy $25,000 Impalas, when faced with financing & discounts bringing Impalas down to $21,000, are going for SUVs at the $25,000 they intended to spend anyway (with no small help from your friendly, on commision salesman) that have also been discounted from say, 30 grand.
What this means simply put is that for that 25 grand, GM is clearing far more money then they would if it went towards a car, therefore, GM is actually making more money at 0% then they were without it!
On the upside, GM is making enough money to spend more on cars, which is good for us. On the downside, GM is basically encouraging people to buy more SUVs, and you will have armies of GM reps (RP among them) who will tout the flawed fact that this is what people want, and they are just giving people what they want.
What do you think about this?
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Re: How GM can afford 0% financing. Pretty ingenious!
Originally posted by guionM
As Mr Lutz pointed out this week, people going into showrooms to buy $25,000 Impalas, when faced with financing & discounts bringing Impalas down to $21,000, are going for SUVs at the $25,000 they intended to spend anyway (with no small help from your friendly, on commision salesman) that have also been discounted from say, 30 grand.
As Mr Lutz pointed out this week, people going into showrooms to buy $25,000 Impalas, when faced with financing & discounts bringing Impalas down to $21,000, are going for SUVs at the $25,000 they intended to spend anyway (with no small help from your friendly, on commision salesman) that have also been discounted from say, 30 grand.
Last edited by Pentatonic; Jan 25, 2003 at 03:28 PM.
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Joined: Nov 2000
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From: Chicagoland IL
I think 0% financing has several effects.
It helps increase market share, especially when consumers aren't excited about your products. It also helps keep your expensive to operate plants from sitting idle.
On the down side......
0% financing , according to some estimates, is costing GM over $3,000 per car. Maybe no big deal on a profit rich truck, but less palatable on a car.
Also, it gets prospective buyers into a new car approximately 1 year sooner than there normal buying cycle. Good for GM today....but who will buy next year.
If the whole purpose of heavy incentives is to sell vehicles now and gain market share now....because new GM vehicles are on the way soon, that people actually WANT to buy, regardless of heavy incentives....then it is a stroke of genious!
If it is the way GM plans on doing business from now on....then it is disasterous.
It helps increase market share, especially when consumers aren't excited about your products. It also helps keep your expensive to operate plants from sitting idle.
On the down side......
0% financing , according to some estimates, is costing GM over $3,000 per car. Maybe no big deal on a profit rich truck, but less palatable on a car.
Also, it gets prospective buyers into a new car approximately 1 year sooner than there normal buying cycle. Good for GM today....but who will buy next year.
If the whole purpose of heavy incentives is to sell vehicles now and gain market share now....because new GM vehicles are on the way soon, that people actually WANT to buy, regardless of heavy incentives....then it is a stroke of genious!
If it is the way GM plans on doing business from now on....then it is disasterous.
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Joined: Nov 2000
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From: Ontario
Originally posted by Z284ever
If the whole purpose of heavy incentives is to sell vehicles now and gain market share now....because new GM vehicles are on the way soon, that people actually WANT to buy, regardless of heavy incentives....then it is a stroke of genious!
If the whole purpose of heavy incentives is to sell vehicles now and gain market share now....because new GM vehicles are on the way soon, that people actually WANT to buy, regardless of heavy incentives....then it is a stroke of genious!
Incentives destroy residual values and brand equity. However the consumer has been conditioned to expect them now. GM is going to have to learn to bite the bullet when their their new cars are introduced and sell them will no (or fewer) incentives. Buyers will probably hold off for a bit waiting for the deal that always comes, until they realize that it won't come this time, and then GM can get back to a more normal marketing strategy.
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From: Ohio
Originally posted by R377
The problem is, GM didn't follow through on the second half of that plan. The CTS, one of the new "gotta have" models, actually was in very high demand in 2002, yet GM still decided to put tons of incentives on it. WTF? In the consumer's eye, that putting it in the same category as the I'll-drive-it-if-it's-cheap Malibu.
The problem is, GM didn't follow through on the second half of that plan. The CTS, one of the new "gotta have" models, actually was in very high demand in 2002, yet GM still decided to put tons of incentives on it. WTF? In the consumer's eye, that putting it in the same category as the I'll-drive-it-if-it's-cheap Malibu.
CTS did not start receiving ANY incentives for quite a while.
When I bought my Monte Carlo SS (Aug 2002), it was down to the Monte and a CTS as far as what I was going to buy... I REALLY wanted the CTS, but the $10,000 extra sticker, coupled with the fact that there were NO incentives AT ALL on CTS, and Monte Carlo was offering $2500 or 60 months 0%, made the difference....
I followed CTS's incentives for a long time, and it's only within the last 2 months or so that GM has offered anything on CTS.
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Joined: Mar 2000
Posts: 2,298
From: Detroit, MI USA
uhhhhhhhhhmmmmmmmmmm, no.
(and the following can be verified in a lengthy article in the wall street journal......)
Remember September 11? (as if anyone could forget?) Remember what happened to wall street?
President Bush contacted our chairman a few days later -- to talk about what could possibly be done in order to save the economy from crashing...........
The result? GM announced -- across the board -- (including Corvette which needed no incentive) 0% financing.
The problem with incentives is this: once on them, how do you get off them?
Did GM really want to spend all that money on Zero financing? No, not really -- but I think you will all agree that there was a lot at stake (just as there is today....) Fact: GM has to raise money on the open market to fuel GMAC..............it isn't sitting in a vault at GM Headquarters.....
Now...I suppose we could take the incentives off the SUVs...but what do you think will happen? (other than a whole bunch of people are going to see pink slips..and that isn't just those in the assembly plants....it's tens of thousands of other workers who supply GM plants........) I guarantee you GM sales will fall.......
You REALLY want to stop the sales of SUVs? (and this is NOT a GM opinion...it is a personal one.....) Raise the price of gasoline to $3 a gallon.....that'll stop the sales of SUVs...but I shudder to think of what will happen to further deteriorate the economy..
(and the following can be verified in a lengthy article in the wall street journal......)
Remember September 11? (as if anyone could forget?) Remember what happened to wall street?
President Bush contacted our chairman a few days later -- to talk about what could possibly be done in order to save the economy from crashing...........
The result? GM announced -- across the board -- (including Corvette which needed no incentive) 0% financing.
The problem with incentives is this: once on them, how do you get off them?
Did GM really want to spend all that money on Zero financing? No, not really -- but I think you will all agree that there was a lot at stake (just as there is today....) Fact: GM has to raise money on the open market to fuel GMAC..............it isn't sitting in a vault at GM Headquarters.....
Now...I suppose we could take the incentives off the SUVs...but what do you think will happen? (other than a whole bunch of people are going to see pink slips..and that isn't just those in the assembly plants....it's tens of thousands of other workers who supply GM plants........) I guarantee you GM sales will fall.......
You REALLY want to stop the sales of SUVs? (and this is NOT a GM opinion...it is a personal one.....) Raise the price of gasoline to $3 a gallon.....that'll stop the sales of SUVs...but I shudder to think of what will happen to further deteriorate the economy..
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From: The Golden State
Intresting point, but do you think it's healthy to put so many eggs in one basket?
SUVs seem to be under assult, and as has happened in the past, when one vehicle decreases in popularity, and another increases, production shifts.
You seem to be painting a dooms day senario that the world may end if SUV sales collaspsed, wouldn't you say?
(Yes, I am speaking from a biased, anti SUV position..... though I still like the H2.... who'd have known.
)
SUVs seem to be under assult, and as has happened in the past, when one vehicle decreases in popularity, and another increases, production shifts.
You seem to be painting a dooms day senario that the world may end if SUV sales collaspsed, wouldn't you say?
(Yes, I am speaking from a biased, anti SUV position..... though I still like the H2.... who'd have known.
)
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From: Ontario
Sorry, Red, but that's a short term view. Yes incentives will spike sales, but it's only a temporary measure until consumers become accustomed to them. We're already seeing evidence in the marketplace of having reached the saturation point. As you say, if you now pull back on incentives your sales will tank. In my books, a marketing strategy that works for only 16 months is not a good strategy.
But the long term problem is the damage it does to your cars' image and resale value. First, when something is always 'on sale' the customer tends to believe it must be an inferior product. Obviously, the thinking goes, there is something intrinsically wrong with it. For some GM cars that's true, but for some it's not.
More importantly, by eroding resale values you are undoubtedly going to have a negative impact on future sales. For people who might lease, it makes their payments more expensive because of declining residuals unless you are willing to subsidize the back end. Higher payments = fewer people leasing. And for customers who finance cars, it makes them keep their current car longer because it takes longer to get 'right-side up'. No one likes to trade in a car when they have to fork over a few thou just to get even. When they go to trade in and realize how little their car is worth they could have two reactions: 1) keep the car longer until they can save more for a down payment (thus delaying more new car sales), or 2) vow never to buy a car again that depreciates so fast and instead buy a Toyota. Either way, you lose.
So let me modify my original statement: a marketing strategy that works for only 16 months and destroys future sales is not a good strategy.
Yes, I'm aware of the need to keep factories going. But many of your plants, especially truck plants, are running overtime, so I'm not buying that one.
I suspect the following are GM's real reasons for keeping the incentives going:
- for once they have a bit of momentum and don't want to lose it
- due to their lower variable cost structure than Ford or DCX, they can do real long-term damage to their domestic competitors (especially Ford) by forcing them to use future R&D money to fund current incentives
- they don't know how to stop.
Addressing the last point, how to stop the incentive game? If I knew what the silver bullet was, I'd be making a lot more money than I am right now. The problem is the consumer is accustomed to getting incentives and you cannot change that attitude overnight. I know GM tried cutting back a few times in 2002, and then panicked when the 10 day sales reports came in. Well, you can't change consumer attitudes in 10 days. While I don't think going cold turkey is the way to go, you need to start selectively reducing your incentives, especially on your popular vehicles. I'm sure you'll get support from Mr. Zetsche, and after Mr. Ford sticks it to you for a couple of weeks, he'll come in line too. It's going to take ***** to withstand the short term effects, but no one said running a car company was easy.
And finally, I wholeheartedly agree with raising gasoline taxes. While I'm as much a capitalist as the next guy, there are some things the "invisible hand" simply cannot properly price. Finite natural resources are one of them, especially when the end is decades off. To do it right, phase in the tax starting from 3-8 years out to give people plenty of time to choose their next purchase accordingly. (This is also a personal opinion, not a GM one)
But the long term problem is the damage it does to your cars' image and resale value. First, when something is always 'on sale' the customer tends to believe it must be an inferior product. Obviously, the thinking goes, there is something intrinsically wrong with it. For some GM cars that's true, but for some it's not.
More importantly, by eroding resale values you are undoubtedly going to have a negative impact on future sales. For people who might lease, it makes their payments more expensive because of declining residuals unless you are willing to subsidize the back end. Higher payments = fewer people leasing. And for customers who finance cars, it makes them keep their current car longer because it takes longer to get 'right-side up'. No one likes to trade in a car when they have to fork over a few thou just to get even. When they go to trade in and realize how little their car is worth they could have two reactions: 1) keep the car longer until they can save more for a down payment (thus delaying more new car sales), or 2) vow never to buy a car again that depreciates so fast and instead buy a Toyota. Either way, you lose.
So let me modify my original statement: a marketing strategy that works for only 16 months and destroys future sales is not a good strategy.
Yes, I'm aware of the need to keep factories going. But many of your plants, especially truck plants, are running overtime, so I'm not buying that one.
I suspect the following are GM's real reasons for keeping the incentives going:
- for once they have a bit of momentum and don't want to lose it
- due to their lower variable cost structure than Ford or DCX, they can do real long-term damage to their domestic competitors (especially Ford) by forcing them to use future R&D money to fund current incentives
- they don't know how to stop.
Addressing the last point, how to stop the incentive game? If I knew what the silver bullet was, I'd be making a lot more money than I am right now. The problem is the consumer is accustomed to getting incentives and you cannot change that attitude overnight. I know GM tried cutting back a few times in 2002, and then panicked when the 10 day sales reports came in. Well, you can't change consumer attitudes in 10 days. While I don't think going cold turkey is the way to go, you need to start selectively reducing your incentives, especially on your popular vehicles. I'm sure you'll get support from Mr. Zetsche, and after Mr. Ford sticks it to you for a couple of weeks, he'll come in line too. It's going to take ***** to withstand the short term effects, but no one said running a car company was easy.
And finally, I wholeheartedly agree with raising gasoline taxes. While I'm as much a capitalist as the next guy, there are some things the "invisible hand" simply cannot properly price. Finite natural resources are one of them, especially when the end is decades off. To do it right, phase in the tax starting from 3-8 years out to give people plenty of time to choose their next purchase accordingly. (This is also a personal opinion, not a GM one
)
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From: Detroit, MI USA
I believe we are in agreement here......but I think you miss my point...the reason GM went with incentives and zero percent finance across the board was due to Sept. 11. (re-read that part)
How to stop? You may recall that Oldsmobile a few years back tried that tack.............didn't work.
If you had the guts and the bank account to do it over a 6 month period, you MAY see some companies get out of incentives...or reduce them. But the fact of the matter is this: The United States is the largest car/truck market in the world...and because we have 'free trade' -- if you are a manufacturer of passenger cars anywhere in the world...with any kind of capacity, the United States is on your radar screen..........and that means more people fighting for a smaller piece of the pie...no question that product is king...to most...but a very large portion of the market is looking at "how much a month???"
When GM had 58% of the market, I suspect GM could have influenced the market in terms of reducing incentives.....but at 29%, I don't see it happening. You can believe that everyone within GM and Ford and Chrysler is trying to figure a way out of the incentive mess.....the numbers of dollars are staggering!!!
As to SUVs....you may recall that it cost GM dearly by NOT converting over to trucks and SUVs as quickly as Ford............and like it or not, you have to remain competitive.
I DO believe that the SUV market will saturate....and people will flock to other types of vehicles....however, barring a substantial oil shortage or much higher gasoline prices, I don't see them going away anytime soon. (a good example is where the market was in 1975-1977.....one of the largest market segments was a mid-size personal luxury coupe......Monte Carlo, Thunderbird, Cutlass Supreme, -- anything with opera windows and opera lamps and wire wheel covers and landau roofs..........go find one today............)
On a related subject:
I personally find the "what would Jesus drive" campaign ridiculous....I want to say to those "evangelists" =="Well, as I recall, Jesus lived as a pauper, so how's about YOU giving away all your worldly possessions????" (betcha they wouldn't!)
Regardless of what others drive, I'm still all grins with RWD and a Chevy Small Block under the hood....with the Camaro name on it of course............................................ ..............
How to stop? You may recall that Oldsmobile a few years back tried that tack.............didn't work.
If you had the guts and the bank account to do it over a 6 month period, you MAY see some companies get out of incentives...or reduce them. But the fact of the matter is this: The United States is the largest car/truck market in the world...and because we have 'free trade' -- if you are a manufacturer of passenger cars anywhere in the world...with any kind of capacity, the United States is on your radar screen..........and that means more people fighting for a smaller piece of the pie...no question that product is king...to most...but a very large portion of the market is looking at "how much a month???"
When GM had 58% of the market, I suspect GM could have influenced the market in terms of reducing incentives.....but at 29%, I don't see it happening. You can believe that everyone within GM and Ford and Chrysler is trying to figure a way out of the incentive mess.....the numbers of dollars are staggering!!!
As to SUVs....you may recall that it cost GM dearly by NOT converting over to trucks and SUVs as quickly as Ford............and like it or not, you have to remain competitive.
I DO believe that the SUV market will saturate....and people will flock to other types of vehicles....however, barring a substantial oil shortage or much higher gasoline prices, I don't see them going away anytime soon. (a good example is where the market was in 1975-1977.....one of the largest market segments was a mid-size personal luxury coupe......Monte Carlo, Thunderbird, Cutlass Supreme, -- anything with opera windows and opera lamps and wire wheel covers and landau roofs..........go find one today............)
On a related subject:
I personally find the "what would Jesus drive" campaign ridiculous....I want to say to those "evangelists" =="Well, as I recall, Jesus lived as a pauper, so how's about YOU giving away all your worldly possessions????" (betcha they wouldn't!)
Regardless of what others drive, I'm still all grins with RWD and a Chevy Small Block under the hood....with the Camaro name on it of course............................................ ..............
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Re: How GM can afford 0% financing. Pretty ingenious!
Originally posted by guionM
What this means simply put is that for that 25 grand, GM is clearing far more money then they would if it went towards a car, therefore, GM is actually making more money at 0% then they were without it!
What this means simply put is that for that 25 grand, GM is clearing far more money then they would if it went towards a car, therefore, GM is actually making more money at 0% then they were without it!
This throws yet more light on why GMs truck sales gained so well last year - especially against Ford and Dodge, huh? But are you really getting anywhere if you are gaining truck sales but losing car sales? (aside from profitability that is?) To me, this is being penny-wise, but dollar-foolish. Pushing all your car buyers into trucks will eventually KILL your particular car market, don't you think? And as was mentioned, if the "SUV-killers" and "truck-haters" get their way, it will be so cost prohibitive to own, insure, or put fuel into a truck - that nobody will want one... then where do you stand?
Another point, with this surge in new truck/SUV purchases over the last 16 months, look at what is happening to the market value of used vehicles... already. I myself just bought a used SUV 2 weeks ago - for a steal! I paid like 60% of what the blue book was for this thing - and bought it from a dealer too. Since I throw 60K miles a year on anything, the fact that the vehicle is used HELPS me, because I don't have to absorb most of the depriciation. I fall into a category that Z284ever eluded to... "who will buy next year?" Well, now it won't be me!
R377 - excellent post. When we are working people ovetime just to fuel a "feeding frenzy", somethings wrong. I too beleive that this "0% or cash-back" thing was started for meritous reasons, but has now availed itself as an opportunity to cause other effects besides "economic stimulation". It is well known that GM is aggressively seeking market share gains (who isn't?), and with their financial might and deep lungs, they are simply holding their wallet and breath longer than anybody to do so, IMO. Heck, I don't even blame them for doing anything wrong! But Honda, Toyata, and others aren't offering the same kind of rebates and financing, yet they keep selling cars. I also saw last week where Saturn is offering CASH REBATES for the first time ever - since their inception. Isn't this a sign? I'm just thinking that there will be a different price to pay for this gain later, maybe in the form of diminutive car offerings/sales or even lost "image" in the markets, like R377 mentioned. Whether justified or not, if nobody is buying the cars, and they are not seen on the streets, people will (maybe wrongfully) begin to think they "are not worth owning for some reason", and the sales will never recover without considerable investment.
I'd like to pipe-in my .02 on the gas prices, taxes, etc regarding fuels.
I am pi$$ed at 2 levels on this issue.
1) Outside of the power companies and pharmaceuticals, the oil companies are setting the most profitable margins EVER in the last few years. They have set record after record in sales and profitability. Back in '82, a 55-gal drum of crude was going for @ $25-28/barrel and pump prices were $.99/gal. TODAY, prices are still at @ $28/barrel but pump prices are averaging $1.55/gal!!! The refineries have made improvents in transit, processing, and aquisitions that have surely resulted in reduced manufacturing costs over the last 20 years, but where do those savings show up? PROFIT MARGINS, and BONUSES. I wholly refuse to support raised prices on this basis.
2) My state already has $.55/gal taxes on fuels, but our roads get sh1++1er every year. Our govermnent has created screwy ways to divert that tax money from roads/bridges/maintenance into areas of legislature, policing, and "general welfare". SCREW THAT!!! That's why I pay income and property taxes too, NOT why I pay a GAS TAX!!! I'm sick and tired of getting fleeced... especially under deceptive circumstances.
3) I drive an SUV almost daily - a 17-year-old one at that. I get 20-22 mpg with it... not great but not 12 either. It has a 2.9L V6, that has a little power, but nothing great at all. What peeves me to no end is how I can get in ANY 5.0 Mustang that I own, and get 27+ mpg - regardless of how I drive it! I get 30+ in my '91 SSP with a 5-spd! WHY can't the carmakers put a 30+mpg SUV/truck on the road for us? THEY CAN - but they won't.
Having said all that, it is my opinion that IF we see gas prices (or taxes) increase to $3/gal OR IF we see the "JESUS DRIVES A HONDA" ad hit a home run, OR IF the feds begin to regulate SUV/truck mileage and size... THEN we will see just how economical the carmakers can truely make these vehicles. But like RP, I don't think we will see them go away anytime soon. They offer too much utility, practicality, and status for too many people to give it up now. It will take a slow and steady migration to other vehicles to reduce this SUV/truck crazy population, and it will take time.