Incentives Could Hurt Auto Industry Recovery

When one automaker offers incentives to get customers, competitors generally follow suit, which could 'significantly undermine' industry's recovery, report says.

TORONTO (CP) -- The growing use of incentives as a weapon in the fierce battle between automakers for market share could "significantly undermine" the industry's recovery, according to a report by the DBRS rating service.

When one automaker offers incentives such as zero per cent financing or cash rebates to get customers into its showrooms, its competitors generally have little choice but to follow suit.

This is especially true right now, as last year's bankruptcies at General Motors and Chrysler and ongoing difficulties at Toyota mean a big chunk of the North American market is "up for grabs," DBRS said.

Toyota has been offering incentives such as low lease rates, zero per cent financing and rebates on several models to win back customers after it was forced to recall more than eight million vehicles worldwide due to problems with accelerator pedals and inconsistent brake feel.

"Toyota has historically been quite reluctant to provide such incentives; however, its recent use of significant vehicle incentives effectively forced many other (automakers) to follow suit," wrote Kam Hon, auto industry analyst with DBRS.

Incentive wars can lead to lower margins across the industry and the erosion of brand reputation.

Combined with "significant economic headwinds" in the United States -- including low consumer confidence and high unemployment -- this could hurt the industry's nascent recovery and lead to additional volatility in the vehicle market, the agency said.

DBRS said GM and Toyota would be the most likely to use incentives to "fiercely defend their previous dominant positions," while Nissan, Volkswagen and Hyundai may also use incentives to gain market share.

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