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SANTA BARBARA, Calif. — Toyota's boosted incentive spending is not expected to affect the automaker's residual values in the long run.

However, if these heightened incentives remain for more than three to six months, which is quite possible, there is likely to be some significant downward impact, according to the latest analysis from ALG, which examined the far-reaching impacts of Toyota's recall.

ALG analyzed how the recalls will affect Toyota in a wide variety of areas, including resale values.

As most know, Toyota's recent incentive package, which was rolled out March 3, includes zero-percent APR financing up to 60 months on eight of the brand's best sellers.

Incentives are projected to climb by roughly $1,000 per unit during the next three months, according to ALG. They are expected to slowly subside back to pre-recall levels by the second quarter of next year, analysts noted.

Current Market Values of used Toyotas are expected to be "immediately" pushed down by 2 to 4 percent, ALG explained.

"Increases in incentive spending are anticipated to be a temporary phenomenon and will not impact residual value forecasts over the long term," officials noted. "Should current incentive programs implemented in March 2009 persist beyond the short term (three to six months), used values will decline an additional 5 percent over the long term (or approximately 2.5 percentage points in 36 month residual forecast)."

ALG officials added: "Due to pre-recall trends, ALG expects elevated incentive levels to persist for Camry, Corolla and Yaris. As a result ALG has reduced current residual value forecast on these models 3.5-6 percent (approximately 2.5 to 3 percentage points in 36-month residual forecast)."

Continuing on, ALG examined other impacts on Toyota resale values, including used-vehicle supply. Analysts noted that persistently soft sales could result in a used supply dearth in two to four years, which would push up on resale values.

However, "to date, there is insufficient evidence that this effect will be significant," according to analysts.

Next up, ALG looked at Perceived Quality Scores and how these can impact resale values. Specifically, analysts pointed out that in ALG's 2010 Automotive Consumer Attitudes Study, Toyota's PQS was 67.6, marking a 20-percent drop from its score of 84 in the fall 2009 survey.

This pushed Toyota from No. 1 among mainstream brands down to sixth place.

"ALG expects Toyota PQS to experience no further declines, however, unless Toyota maintains heavy incentive spending strategies beyond three to six months," officials noted.

Lexus, meanwhile, dropped to No. 3 among luxury brands with a score of 81.5, after placing first in the fall and earning a PQS of 87. Its 6-percent drop in PQS was the steepest among luxury makes.

ALG noted that Toyota's decline in PQS has helped lead to a drop of 1.9 percent (or roughly 0.9 percentage points) in the company's 36-month residual value forecast.

"High Perceived Quality Scores are a key component of used-vehicle demand. ALG expects that PQS declines will add another 2 to 4 percent in deflationary pressure on used-vehicle prices over the next three to six months," officials pointed out.

"Following this, we expect slight upward pressure as the brand's perceived quality recovers, thus mitigating the negative effects over the long term," they continued.

Officials added that in light of the negative impact incentive spending has on PQS, if Toyota continues its incentive spending through the long term, the automaker "faces risk of slower recovery to historical rankings or further declines."

Short-Term Effects on Used Market

Continuing on, ALG looked at the impact of the recalls on the used-vehicle market, and found that auction prices for Toyota units have been relatively steady and not outside the norm of overall wholesale trends.

"Despite heavy mainstream media coverage and congressional hearings, wholesale (and to a lesser extent, retail) market values of Toyota vehicles at auction have remained stable and largely consistent with industry trends," officials pointed out. 

"When adjusted for mileage and the associated normal depreciation, wholesale prices for 2007 and 2008 model-year Camry and Corolla vehicles were essentially flat between Dec. 2009 and Feb. 2010," they added. "However, data does support declines in demand have occurred." 

ALG compared the performances of model-year 2005-2008 Camry, Corolla, Rav4, Prius and Tacoma units to their individual segment's performances. 

To develop the findings, the company:

—ALG first determined the average condition, mileage adjusted and wholesale price through time of each model and did the same for each of their respective segments. ALG also calculated the depreciation curve for both, as well. 

—Then, ALG figured out the percentage difference for each model and segment through time. Analysts also calculated the long-term depreciation curve. 

—After that, officials compared each model's percentage different to the average of its segment. 

"This process filters out the segment level volatility and seasonal pattern in the marketplace, and clearly isolates any movement above or below the segment average prices for each Toyota model," they noted. 

ALG said the results illustrate three "interesting" effects: 

—Toyota prices were down an average of 2 to 4 percent in February compared to their respective segments. (This takes into account roughly a 2 percent change "that could be considered normal volatility.") 

—Younger models saw "more significant" effects from the recalls that "began sooner."

—Showing the poorest performance of the Toyota models were the Camry and Corolla. Specifically, the performance of the 2008 model-year Camry was off roughly 8 percent compared to its segment by February 2010. 

"Similar relative price declines were observed in the retail market as well. When looking at a mix of model years the Corolla and Camry retail price performance relative to their respective segments declined (approximately) 6 percent since the first recall announcement, again accounting for normal volatility," officials shared. 

"Toyota, in general, fell (approximately) 4 percent by this measure," they added. "During the recall period as a whole, Toyota model wholesale volumes did not fall significantly more or less than their respective segments. 

"However, in February, Toyota volumes declined more than 10 percent relative to the respective segments, indicating that demand declined 2 to 4 percent further than prices in February," officials noted. 

New-Vehicle Market

On the new-vehicle side, Toyota's market share dwindled to 13 percent in February — compared to 18 percent in December — and its sales strategy was largely "disciplined." In fact, the automaker's incentive spending on most of its lineup after the initial recall announcement was either stable or fell. 

The "exception" to this trend, according to ALG, citing Autodata Corp. statistics, were the Camry (roughly $600 per vehicle), Corolla (approximately $300) and Venza and Avalon (approximately $1,300). 

However, incentives on these units were not strong enough to offset the demand slump. Thus, Toyota's inventory started to grow. 

But with the "aggressive" campaign Toyota rolled out in March — which  included zero-percent financing, customer cash and lease deals, and a two-year maintenance package for Toyota owners returning to buy or lease a new model from the automaker — sales have begun to improve. 

Through the first eight days of March, sales are up 31 percent and market share has climbed back up to 16.8 percent.  Moreover, ALG said the daily sales rate is up 71 percent compared to the previous month. 

"Persistent decline in Toyota demand will result in the permanent decline in either sales or prices. The latter would likely occur through increased incentive spending rather than a straight reduction in MSRPs," analysts pointed out. 

Typically, they noted, Toyota will let it sales decline as retail demand would dictate, while using a little incentives as possible, and "supporting strong resale values over time." 

"Should sales decline, a reduction in used market supply will help counteract demand declines and support prices," ALG shared. 

"Should Toyota counteract depressed demand by increasing incentives over the long term this will put downward pressure on the current market value of used vehicles at auction," analysts added. 

"Likewise, if dealers sacrifice margin to increase the rate of sales, auction values will suffer as dealers seek to regain profits in their used-car sales. Furthermore, if incentive sales strategies continue over the long term, brand value and perception of quality will decline for the Toyota brand," they concluded.