Tight inventories on car lots may be harsh for Big Three
By Eric Mayne
The Detroit News
DETROIT — In recent years, auto dealers have been perhaps the biggest winners as Detroit's Big Three lavished customers with record sales incentives on new cars and trucks.
But now some major auto dealers are balking at the automakers' determination to protect market share and keep factories humming at almost any cost.
AutoNation Inc., the largest holding company for U.S. auto dealerships, and other dealers have warned in recent weeks they will resist pressure to load up on poor-selling models.
"Retailers are going to push back on the inventory levels," Michael Jackson, chairman and CEO of AutoNation, said after releasing third-quarter earnings late last month.
The resistance from auto dealers could make it tougher for the Big Three next year.
If dealers reduce orders for new cars, automakers may be forced to cut production — which cuts revenues and profits.
While dealers have profited in recent years from high incentives — which are paid for by automakers — the rebates and cut-rate financing deals are losing their effectiveness.
The average discount on new cars and trucks has reached nearly $3,000 this year — up 13 percent from 2004, according to Autodata Corp. But industry sales have increased just 1.4 percent.
As a result, dealers were left with a surplus of 446,000 vehicles at the end of October.
With interest rates climbing — the Federal Reserve is expected to raise rates for the fifth time this year in December — some dealers say they can no longer afford the cost of carrying row upon row of unsold cars and trucks.
Dealers borrow money from banks and automakers' finance branches to purchase their inventory. So the longer a car or truck sits unsold, the more interest a dealer pays. Many dealers are taking more than 90 days to turn over their inventories this year, according to Edmunds.com, a car research Web site.
"One of the big reasons why these inventories were accepted by retailers was the extraordinary low interest rate environment," Jackson said. "That is over."
The issue stems from a fundamental business problem facing the Big Three.
GM, Ford and Chrysler need to keep their factories running to generate enough cash to pay for their huge pension and healthcare obligations. Toyota Motor Corp. and Honda Motor Co. can simply cut production when demand falls back rather than pile on profit-eating incentives.
"I do understand what the Big Three has to do, and we want to help," said Joe Serra, who owns 16 dealerships, including several in southeast Michigan. "But we may have to say no more than we did before. Instead of taking 20 cars, we might have to take three."
With some analysts expecting just a modest uptick in industry sales next year, the warning from AutoNation's Jackson and moves by other retailers to lower inventories have sent a chill through the industry. "His comments were sort of a mini wake-up call," said Matt Nemer, an analyst with Wall Street merchant bank Thomas Weisel.
The market can only absorb so many new vehicles in a given amount of time, Jackson and other U.S. dealers say.
"That excess inventory, sitting at retail, is what is putting so much stress and pressure on front-end growth," Jackson said. "And the (high inventory levels) simply aren't conducive to rational business."
With nearly 300 stores and annual sales of $19 billion, Jackson and AutoNation have significantly more clout than individuals at privately owned dealerships. "He can make rumblings where the smaller dealers can only squeak," said Jim Ziegler, a dealer consultant based in Atlanta.
