Toyota's Zero-Percent Interest an "Interesting" Move

Toyota will probably get a lot of takers for its current zero-percent financing offer, even though the recent Employee Discount for Everyone from General Motors didn't set the market on its ear, like it did in 2005, or like zero-percent financing did, back in 2001.

That's because this will be the first such big, zero-percent incentive blowout for Toyota, and because Toyota probably means it, when it says the deals will expire on Nov. 5. The Detroit 3 have a tendency to extend their incentive offers, if they don't work well enough the first time. That encourages consumers to hold out for the next deal that comes along.

Toyota's U.S. sales fell 32.3 percent in September. That was the worst such drop since 1987, the company said. But in the long run, Toyota has been adding to its U.S. market share for years, so a discount could be just what Toyota needs to get shoppers off the sidelines in the short run.

I wouldn't be too surprised to see Honda break down and offer some limited-time deals, too. That would be even more unusual for Honda, but then again Honda's U.S. sales have rarely if ever fallen 24 percent, like they did in September.

On the other hand, I doubt that Toyota's move is the first shot in a more general price war, like GM touched off in 2001 and 2005.

That's because zero-percent financing has become just another tool in the bag of auto industry incentives. Consumers are used to hearing it. And it's often limited to 36-month loans, so even at zero percent, the monthly payment is still pretty stiff.

Different automakers are already offering zero percent on big trucks, but with high gas prices and changing tastes, trucks still are not exactly flying off the shelves.

All-the-rage discounts like GM's Keep America Rolling in 2001, and Employee Discounts in 2005 worked because they were unusual when they were first introduced; they had catchy names; they were easy to understand; they covered a wide range of products, so consumers didn't have to wonder whether their choice was included.

Last but not least, from the industry's perspective, for those products that already had a discount, such seemingly generous offers probably weren't much more expensive than existing discounts. Another factor in the industry's favor today is that the Detroit 3 aren't sitting on anywhere near as much unsold inventory as they were in 2001, and in 2005.

According to edmunds.com, GM's most recent Employee Discount for Everyone program did not inflate GM's incentive spending for the month of August. "In fact, because the program required dealers to participate and subsidize part of the offer, the result was a net decrease in GM's overall incentive costs," said Jesse Toprak, executive director of industry analysis for edmunds.com.

Where big incentive programs are really costly, is where they're applied across the board. Some years ago, I remember then-Ford CFO John Devine, who later retired as CFO of rival GM, killing Ford's "affinity" credit card, which allowed you to build up a discount on almost any Ford vehicle of your choice.

Devine said then it was the element of consumer choice that made it so expensive: the card was the worst of both worlds, because it put an even bigger discount on vehicles that already had a big discount, and put a discount on profitable vehicles that didn't need it.

All in all, Toyota's zero-percent discount will probably work fine, because it's for a desirable brand like Toyota, it's for a limited time, and because Toyota can afford it.

For almost anybody else, with the possible exception of Honda, a zero-percent offer would be either too expensive, or else so hedged and watered down, that it would be a yawner.