"Good for GM, Good for U.S" : But Can 0% Deals Last?

Guest Commentary from Michael Ellis of Reuters

DETROIT, Sept 9 - "What's good for General Motors is good for the country."

That well-known misquote of former General Motors Corp. President Charles Wilson from 1953 nevertheless sums up the impact of the automaker's zero percent financing incentives which helped sustain the modest U.S. economic recovery since the Sept. 11 attacks.

GM initially thought the zero percent loans would last 45 days, and then the automaker would move to another incentive program. However, they have proven to be so attractive to consumers that GM, Ford Motor Co. and the Chrysler arm of DaimlerChrysler AG announced this week that they would offer the free financing on their new 2003 models for three-year loans through the end of October.

While the incentives have sent auto sales to record levels, they have also been expensive to support, forcing automakers to slash costs elsewhere. Some Wall Street analysts question how long automakers can finance the cash war.

Interest-free loans sent U.S. vehicle sales in August to the highest levels since the record results last October, the first full month of zero percent financing. GM's U.S. sales shot up 18.2 percent in August, and the automaker has gained nearly a full point of U.S. market share over the past 12 months.

The incentives kept many U.S. vehicle assembly plants running overtime this year to meet sales demand. The alternative approach to the post-Sept. 11 economic slowdown could have been to cut production and retrench, putting more people on unemployment lines.

A year after GM first rolled out interest-free financing to spur a stunned nation to return to auto dealership the deals show no signs of ending.

"If you pull back too much (on incentives), the rubberband snaps back a lot," GM Chief Executive Officer Rick Wagoner told reporters this week. "As one needs to be careful with too much incentives, one needs to be careful with how one eases off them as well."

Before zero percent financing arrived, about 70 percent of U.S. consumers did not know about sales incentives offered on their vehicle until after they signed the sales papers, said Paul Ballew, GM chief sales analyst. He admitted that some of GM's past sales incentives were often so complicated, and varied from different regions of the country, that he also needed a long time to understand them.

With zero percent financing, GM offered one simple and consistent message across the country. That clear message seems to have gotten through: about 70 percent of car buyers were aware of the incentive when they walked into a dealership last fall, GM said.

The incentives, combined with resilient income levels for average American consumers, have led to higher-than-expected sales over the past year. Comerica chief economist David Littmann said that in August, the average family spent about five months of its income on a new vehicle -- the lowest amount since 1978.

But Wall Street analysts and economists question whether the high incentives will simply steal sales from later this year and next, spurring consumers to trade in their cars or trucks a few months earlier than planned.

"It means strength today, weakness tomorrow," said Diane Swonk, chief economist with Bank One Corp. in Chicago. "You are borrowing from the future. The bottom line is at some point in time, you have some give-back to this."

Swonk said the automakers' interest-free loans coincided perfectly with record low interest rates and a boom in home mortgage refinancing. That allowed consumers simply to switch monthly payments from their house to their garage with the purchase of a new vehicle.

But as mortgage refinancing levels subside, so too will the effectiveness of the zero percent incentives, she said.

After four years of record U.S. vehicle sales, the bubble is about to burst, said Gary Lapidus, an analyst with Goldman Sachs. American's debts burdens are near an all-time high and pay hikes are slowing, which should cause consumer spending to to slow next year, he said.

Lapidus cut his 2003 U.S. vehicle sales forecast to 15.9 million light vehicles, down from his previous forecast of 16.6 million. That could make 2003 the weakest year for auto sales since 1998.

"Like a balloon that's harder to blow up as it builds pressure, luring new car buyers is becoming increasingly expensive as America's driveways fill up with ever-more late-model vehicles," Lapidus said in a research report on Thursday.

And what did GM's Wilson actually say? The much-quoted "What's good for General Motors is good for the country" suggests that GM comes first and the country second. But the real quote is different. After being nominated as U.S. secretary of defense, Wilson was asked if he could make a decision if it were adverse to the interests of GM. His actual reply was; "I cannot conceive of one because for years I thought that what was good for our country was good for General Motors, and vice versa."