For most of the past four years, automakers and their dealers had so few cars to sell — and demand was so strong — that they could charge high prices. Those days are over and deep discounts are making a comeback.
During the coronavirus pandemic, auto production was slowed first by factory shutdowns and then by a global shortage of computer chips and other parts that lasted for years.
With few vehicles in showrooms, automakers and dealers have been able to remove most sales incentives, leaving consumers to pay full price. Some dealers added thousands of dollars to the manufacturer’s suggested retail price, and people began buying and reselling in-demand cars for a profit.
But with chip supplies returning to healthy levels, auto production has rebounded and dealer inventories are increasing. At the same time, rising interest rates have dampened demand for vehicles. As a result, many automakers are scrambling to maintain sales.
Wes Lutz, owner of Extreme Dodge in Jackson, Michigan, said he owns several Dodge Challengers and Chargers eligible for $11,000 rebates from Stellantis, the maker of Dodge, Chrysler, Jeep and Ram models. The automaker is also offering rebates of up to $3,600 on select versions of the Dodge Durango sport utility vehicle.
“It looks like we may return to incentives and overproduction,” Mr. Lutz said. “It’s not there yet, but it’s getting close.”
With a shrug, he added: “It may not be good for me or the manufacturer, but it’s certainly good for the consumer.”
Cash back offers, soft loans and other incentives are important tools for selling cars. They allow automakers and dealers to offer more affordable monthly payments for consumers and soften the impact of high interest rates.
In recent years, shortages and consumer preference for larger vehicles have pushed the average purchase price of new vehicles to just under $47,000 and the average monthly payment to $735, according to Edmunds, a researcher working. The average interest rate on used car loans was 11.6 percent in April, according to Edmunds.
At these levels, many consumers can no longer afford a car without substantial incentives.
But when taken to the extreme, incentives can erode automakers’ profits and create a surge in sales that inevitably gives rise to a painful decline. Repeated waves of discounts also condition consumers to buy cars only when offered a deal.
Twenty years ago, the industry went on an incentive frenzy. General Motors has for a time sold cars at deeply discounted prices that it previously offered only to its employees. Extreme discounting helped weaken GM and Chrysler before they declared bankruptcy in 2009, during the financial crisis.
For now, the industry has avoided this trap. At the end of May, automakers had nearly 2.9 million cars and light trucks in inventory, about a million more than the same period last year, according to Cox Automotive, a market researcher. Nearly 7% of those vehicles were 2023 models. For comparison, there were 4.1 million vehicles in inventory in 2019, according to Automotive News.
Toyota, Honda, Subaru, and GM’s Chevrolet and Cadillac brands have kept their inventories under control and, in general, have yet to increase their incentives significantly.
But Ford, Lincoln, Dodge, Chrysler, Nissan, Volvo and several other brands have higher inventories, enough to last more than 100 days at current sales rates. They offer significant incentives, but mostly targeted to specific models, and sometimes specific versions of certain models.
Ford, for example, is offering $5,500 off its Escape SUV, but only on 2023 models that remain in stock at dealerships. Stellantis is offering $4,000 cash back on the Ram pickup, but it’s limited to the 1,500 Classic trim. Volkswagen offers interest-free financing on the 2024 Taos small SUV, but not on its other models.
“So far, we’re not seeing the broad-based incentives that we’ve had in the past,” said Charles Chesbrough, senior economist at Cox Automotive.
The growing number of incentives on new vehicles has helped drive down prices on used cars and trucks. In April, used car prices fell nearly 7 percent, according to the Bureau of Labor Statistics.
Among the best-selling models at the moment are electric vehicles, sales of which have slowed in recent months. Consumer enthusiasm for these models has waned, mainly due to concerns about the higher prices of electric vehicles and the challenges of charging them, especially while traveling by car.
Automakers are now offering generous incentives to attract consumers. Volkswagen is offering discounts of up to $18,750 on leases of the 2023 ID.4, which is still readily available in select locations. This includes the $7,500 federal tax credit, which can be incorporated into leases under the Inflation Reduction Act.
Other great deals are available on the Chevrolet Blazer electric vehicle, Cadillac Lyriq, Kia EV6, Volvo XC40 Recharge hybrid and Ford F-150 Lightning electric pickup. Tesla, which steadily raised its prices during the pandemic, spent a year and a half cutting them. Recently, the company offered 0.99% loans on its Model Y SUV.
These incentives join other trends that are helping to drive down the price of electric vehicles, including falling manufacturing costs and increasing competition.
Increasing rebates helps attract what the industry calls “sought-after buyers”—consumers who don’t need a new car but are attracted to new technologies, design or features.
“You have your ‘wanted buyer,’ whose car has broken down or needs a lot of expensive repairs, and they need to get a new vehicle,” said Adam Silverleib, owner of a Honda and Volkswagen dealership outside from Boston. “But many of these ‘sought-after buyers’ disappeared when interest rates rose, and now the incentives are bringing some of them back.”
Among them is Brian Pawlowski, a digital marketing manager in Chelsea, Michigan. He was driving a 2017 Chevrolet Volt plug-in hybrid that had only 55,000 miles on the odometer. But he was eager to get a fully electric model.
“I’m a person who loves the environment,” he said. “I could have kept the Volt, but I wanted to upgrade to newer technology.”
He started looking for deals on electric cars and found a two-year lease on a Hyundai Ioniq 5 SUV. The deal came with a $13,000 discount and other terms that left him with a monthly payment of $369 for a vehicle whose sticker price was $52,000.
“When the salesman explained everything,” Mr. Pawlowski said, “it was pretty hard to pass up.”