A rare display of discipline among auto makers to cut consumer incentives is in danger of being blown apart by Toyota Motor Corp.'s bid to woo Americans back to its showrooms.
In response to the recall crisis that helped send its U.S. sales down 9 per cent last month, Toyota has introduced what it calls the "most far-reaching sales program in its history," a program of interest-free loans on several vehicles that has already sparked similar actions from General Motors Co. and Chrysler Group LLC.
"These expensive programs should represent a material step up in cost of incentives, leading us to anticipate a breakdown in the industry's recent pricing discipline," Brian Johnson, auto industry analyst at Barclays Capital, said in a research report.
If that discipline breaks down, Mr. Johnson noted, profits for all high-volume auto makers could be affected.
That's trouble enough for Chrysler and GM, which are still struggling to return to profitability after tumbling into Chapter 11 bankruptcy protection last year. But an all-out price war could have more serious ramifications, potentially delaying initial public offerings of the two companies that are supposed to lead to repayment of tens of billions of dollars in taxpayer loans.
Himanshu Patel, who follows the industry for JPMorgan Chase & Co., added that industry pricing will worsen during the next few months as Toyota attempts to "claw back market share." Its share fell to 12.8 per cent of the U.S. market last month from 15.9 per cent a year earlier and 18.9 per cent in December, 2009.
Subsidizing a five-year, interest-free loan for consumers costs about $4,500 (U.S.), Mr. Johnson noted, more than $1,000 higher than incentives that were estimated to be $3,346 for GM in February and $1,800 for Toyota.
The crisis of 2009 and lengthy assembly plant shutdowns by Chrysler and GM helped foster a semblance of pricing discipline among those two auto makers. Ford Motor Co., which stayed out of bankruptcy protection and received no government money, had already been trying - before the crisis hit - to reduce its sales incentives by closing plants and scrapping unprofitable models.
At times during the incentive-heavy years before the crisis hit in the fall of 2008, the Detroit Three were offering customers incentives of several thousand dollars to move vehicles out of dealers' lots.
Incentives are generous in Canada, but are not at historic highs and have been stable in recent months, said industry analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc.
Toyota Canada Inc., however, may have raised the stakes by introducing what it describes as its "best ever" Red Tag sales event. Although the auto maker posted a 25-per-cent sales jump in February in line with the overall Canadian market, it is offering interest-free loans of various terms on the Yaris subcompact, Corolla compact and five-year interest-free loans on the mid-sized Camry.
Mazda Canada Inc. has begun offering five-year interest-free loans on all its vehicles, an upgrade to customers from a previous program that offered those loans for four years or five years depending on the vehicle.
It's an effort to kick-start the spring selling season that begins this month, Mazda Canada spokesman Greg Young said.
General Motors of Canada Ltd., has taken a different tack by offering a maintenance card worth $750 (Canadian) to buyers of Chevrolet, Buick and GM vehicles.
