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Carmakers Worry Buyers Stuck on Zero-Percent Interest

October 14, 2001

The zero percent interest financing deals presently enlivening car showrooms probably will vanish on Halloween -- but not before driving sales back up to what may be the best levels of 2001.

Estimates for October sales are running as high as 1.5 million. Sales were 1.3 million in September, and 1.45 million in August.

Good news considering the economic hand-wringing going on since the Sept. 11 terrorist attacks? Not everybody thinks so, according to a USA Today article by David Kiley.

"There's no way the market should be selling at these numbers," said auto consultant Michael Schmall of The Planning Edge. "... Getting out of this box will be tough." The concern is that consumers will become accustomed to the unprecedented, profit-eating deals.

Wall Street analysts are mostly stymied on how to figure this month's effect into fourth-quarter profits, according to Kiley's artic le. Even the manufacturers are only guessing at how the push to make up for plummeting consumer confidence will affect their long-term business.

"I don't think we will know if it was a trick or a treat until well into next month," said Ford Motor sales forecaster George Pipas. "But these sales are unsustainable past this month."

General Motors, which led the way into no-interest financing deals on Sept. 19, says showroom and Web site traffic are both up. Its Web site has had almost a half-million user sessions for the week after the financing offer went into effect, compared with 385,000 the week before Sept. 11.

J.D. Power and Associates says auto sales were 15 percent to 30 percent higher last week, depending on the exact day, vs. last year's figures -- and don't forget, 2000 was a record-setting year.

According to Art Spinella of CNW Marketing/Research, the Bandon-Ore.-based firm specializing in automotive industry analysis, sales were up 30 percent the first 10 days of October over a year ago.

Nevertheless, Chrysler Group CEO Dieter Zetsche wants to end the no-interest offer as soon as possible. "The trouble with these deals is no one wants to be first in pulling back," he said.

Ford will try to be first. According to Pipas, Ford will end the offer Oct. 31. Ford's cost of marketing is 45 percent higher than last year, according to Lehman Bros., at 16 percent of sales. Ford cut its dividend in half, saving it more than $1 billion to help pay the difference.

But reduced profits aren't the only reason for ending the offer. GM and Ford, especially, could run into inventory problems next month and into December if they extend zero percent financing. Automakers plan for about 60-day supplies of vehicles, but at current sales levels that could be down to 40 days by next month.

Still, GM, Ford and Chrysler all will idle plants next week that build slow-selling models.

Analysts and researchers also can't agree on the medium-term effect of the offers on the industry.

Art Spinella of CNW said his monthly surveys of car buyers show almost no "pull ahead" effect of the deals, meaning few people are making purchases now instead of after the holidays.

If true, this would be very good news for the automakers.

But Schmall disagrees, predicting the industry "will be sorry they did this in the long run."

Pipas says Ford knows it is borrowing some of next year's buyers, but doesn't yet know exactly how many.

Meanwhile, if you can't get the no-interest financing offer, you might get another deal.

Isuzu isn't offering zero-percent loans, so Denver-area dealer Osborne Automotive is giving customers a 2-for-1 deal.

Buyers of 2001 Isuzu Trooper or Rodeo sport-utility vehicles can get $7,000 cash — or a free used Kia Rio or Chevy Metro. According to general sales manager Tim Bottoms, half of buyers take a car.

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