Fed rate hikes squeezing even the hottest automaker in the US

[MICHIGAN] The Federal Reserve's interest rate hikes are making it costlier for even the hottest automaker in the US to sell cars.

Subaru Corp, the only carmaker to boost US sales every year in the last decade, is continuing to offer cheap financing on models including the Outback crossover and Legacy sedan even as rates rise. While those deals look about the same to customers, they're becoming more expensive for the company, pinching margins in a plateauing US market.

"Our basic incentive programs haven't really changed - what's changed is the fact that interest rates have increased so much," Tom Doll, president of Subaru of America, said in an interview last week at the Chicago Auto Show.

With the Fed hiking rates three times last year and forecasting three more in 2018, carmakers are coming under pressure. So far, they've been wary about backing away from cheap financing offers, which could cost them market share as US auto sales stop growing. At some point, the cost of dangling those deals to consumers will sacrifice too much profit, according to Mr Doll.

"Somebody's going to have to blink," he said. "Somebody's going to have to be willing to say 'No mas - we're not going to do zero-per cent financing anymore for 60 months or 72 months.'" Subaru spent about US$1,047 per vehicle on incentives last year, up about US$214 from a year earlier, according to Autodata Corp. The Japanese carmaker still spent the least on marketing promotions among all manufacturers tracked by the researcher. The industry's average incentive spending - including rebates, discounted financing and dealer promotions - rose almost 10 per cent to US$3,672 per vehicle.

US auto sales shrank 1.8 per cent last year to 17.2 million, the first annual decline for the industry since 2009. Subaru's Doll said he expects carmakers will sell more than 17 million vehicles again this year, though other companies have been less bullish: Toyota Motor Corp. has predicted industry deliveries will be in the high-16 million range.

Still, there will be opportunities for automakers to at least partially offset the impact of rising interest rates, said Hinrich Woebcken, chief executive officer of Volkswagen AG's US unit.

"There were former times where interest rates were higher and the industry also did well," Mr Woebcken said at the Chicago show. "It's a matter of adjusting."

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