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Highway Bribery

Toyota Joins The Discount Fray

Tom Van Riper, 10.03.08, 3:32 PM ET Forbes.com

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You know the outlook is bleak for the auto industry when Toyota jumps into the inventory clearance game that Detroit has monopolized for the past couple of years.

Just a short time ago, industry powerhouse Toyota was gobbling up market share by charging close to full price while truck-heavy General Motors, Chrysler, and Ford were stuck bribing buyers with heavy discounts. Industry analysts harped on the reputations of Toyota and, to a lesser degree, its Japanese counterparts Honda and Nissan, for reliability and fuel efficiency. Consumers didn't need big incentives to visit their showrooms and drive out with a car.

But with the economy slowing down, consumer confidence dropping and credit for auto loans tight, suddenly everyone needs to give away cars.

Toyota announced Friday that it will begin offering 0% financing for 11 models this month, some for up to 60 months. And it's not just on the company's big trucks and SUVs like the 4Runner, Tacoma and Tundra. The popular and fuel-efficient Camry and Corolla are being cleared out on the cheap, too.

"Sales coming in at the September rate would have been worse than stimulating them," says Burnham Securities auto analyst David Healey. Toyota suffered a 32% drop in vehicle sales last month from September 2007, similar to the declines at Chrysler, Ford and Nissan. Honda, with a 24% drop, fared just a little better. GM managed to limit its sales decline to 16%, though it needed an average incentive of almost $4,000 per vehicle to do it.

Unlike the domestic Big Three, Toyota at least has the balance sheet to absorb a clearance sale with little trouble. The company made $17 billion during its latest fiscal year, which ended March 30, and sits on over $17 billion in cash.

Still, it's a landmark move for Toyota, which hasn't offered these kinds of incentives since a limited flirtation with 0% financing shortly after the Sept. 11, 2001, terrorist attacks, according to Edmunds.com analyst Jessica Caldwell.

"Toyota, for the first time, will have to deal with the economic environment," she says.

Not that the Japanese automakers are at Detroit incentive levels just yet. Toyota spent an average of $1,481 per vehicle on them during September, while Honda averaged just over $1,000, according to Edmunds.com data. That compares to $3,696 in per-vehicle incentive spending at Ford, $3,972 at GM and a whopping $4,705 at Chrysler.

But the gap is narrowing: Toyota's incentive costs are up 78% from the $830 per vehicle it spent in September 2007. And the new 0% plan will push it up even more.

Even as auto industry execs pushed Washington to pass the financial bailout (which it did on Friday afternoon), hoping to get car loans flowing again, they know there's no quick fix. Ford CEO Alan Mulally recently told a Paris trade show audience that he doesn't foresee an industry recovery until 2010.

Caldwell thinks the possible spike in consumer confidence that the bailout could bring will do as much to get customers back to showrooms as a thawing in the credit markets will. But she agrees with Mulally that things will get tougher before they get better. Right now, people are thinking more about their jobs and savings than about buying cars.

"Showrooms are empty; no one is even looking right now," she says.

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I know quite a few people who were turned down for loans for one reason or another.

6 months ago-80 percent of these people would have new cars.

So even if you might want one-you may not be able to afford it....

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