Memorial Day Sales: Looks Like an Auto Price War, but It's Not

Judging by splashy ads running up to this Memorial Day weekend, it sure seems like automakers are back to their old, bad habit of pouring on the discounts and sacrificing profits to move the metal.

The real story is more complicated, even if the ads and deals look similar on the surface. Among many others, incentives include the Ford (F) Swap Your Ride promotion, the GM Spring Event, theToyota (TM) "National Sales Event" and the Nissan (NSANF.PK) Tent Event. All involve one form or another of zero-percent financing.

The cumulative effect is that of an old-fashioned price war. But according to the auto shopping and research web site Edmunds.com, the average industry incentive for April was down from March, and down from the year-ago month. At an average of $2,654, April incentives were down 5 percent from March, and down 13 percent from the year-ago month.

Despite all the current advertising, incentives probably will follow a similar pattern in May.

What's different in 2010 is that Chrysler, Ford and GM incentives are down from high year-ago levels. At the same time, incentives are up for Honda (HMC) and Toyota, and probably Nissan, too, judging by the Nissan Tent Event. Toyota doesn't want to let up on incentives because it's still fighting to defend its turf, despite the ongoing Toyota recall saga. And Honda and Nissan can't let up on discounts as long as Toyota keeps it up.

In the long run, discounts erode brand values and profitability, but they're irresistible because they work. Edmunds.com noted recently there was a noticeable uptick in online shopping heading into the end of May.

Zero-percent financing caused a frenzy and a record sales pace when General Motors introduced the concept in a program called Keep America Rolling, after the Sept. 11 attacks in 2001. GM made it sound like it was your patriotic duty to buy a car. The idea of quote-unquote "free" money was such a success, other carmakers were forced to follow suit.

The effect is less dramatic nowadays, but zero-percent loans still help generate traffic at dealerships. In addition to the effect of discounts, auto sales typically pick up towards the end of each month. "Memorial Day weekend is traditionally a great opportunity for discounts, and buyers have become conditioned to expect them," Edmunds.com said.

Through April, U.S auto sales year-to-date were about 3.5 million, according to AutoData. That was about 17 percent higher than the year-ago period, but 2009 sales were so poor, the industry is a long way from recovering to the level of sales before 2007.

If Memorial Day promotions help even a little, the auto industry isn't in any shape to turn down sales.

Photo: Nissan