Akkam’s Razor

After the atrocious sales figures for the month of November with sales are at their lowest point in 26-years with per capita sales at their lowest levels since the 1950s, its fairly easy to forecast what comes next – widespread dealer liquidations.

The Big 2.5’s bailouts and contingent plans, linked and discussed elsewhere, as presented to Congress (see discussion of Ford’s here and Chrysler’s here) are going to require much bloodshed, both for the manufacturers themselves and the other business before and after them in the supply chain, from suppliers to transporters to dealers, not even considering labor and the communities where these businesses operate. There are clearly unanswered questions. How will warranties be executed? How will owners get their vehicles serviced and repaired? How will shade-tree mechanics get parts?

All of this pales in comparison to the dealership problem. It’s been oft-stated that the domestics have several times more dealers than their competitors (typically 7000 for GM versus 1500 for Toyota). These dealers, although independent franchises, still are dependent on manufacturer support and subsidies to remain in business, subsidies that are no longer available nor fiscally responsible.

My assumption is that many dealers will close up shop at the end of the year, having extinguished their capital reserves and not having sufficient cash flow to continue operating. Since the dealer’s floorplans (the financing which allows them to float their inventories) are usually held by captive financiers (Cerberus’ GMAC and Chrysler Financial, as well as Ford Motor Credit), will need to clear this inventory. Its important to note that the manufacturers already ‘made’ their money when the vehicles were ’sold’ to the dealers. They can’t continue manufacturing with unsold inventory. Based on this, I see a need for them to retail out of the inventory, either at closing dealerships or by moving inventory around. Since Pennsylvania has near the most auto dealers-per-capita of the states, I expect the problem to be especially severe here.

Dumping the (new) vehicles at auction would be horrible, netting pennies-on-the-dollar. I’d suggest running the used at the auction, and taking the hit. As to new vehicles, I think retailing-out of them is the only choice. I also think it’ s something the manufacturer’s need to be looking at – they need to incentivize buyers more than anything else, and at this point it’s going to require discounts of better than 30% and available consumer financing to make it happen. I’d further expect that someone – from manufacturer to dealer to lender – is going to be eating 50% of MSRP in costs and lost revenue. Inside the finance organizations (FoMoCo, GMAC, Chrysler Finance, etc.), I think their (captive finance) lease re-marketers would be best suited to the job, provided they didn’t let them all go when they got out of the lease business.

The remaining question is how do you stimulate sales? Do the manufacturers provide subsidies to financially sound dealers, or directly to buyers? Does the Federal government provide some sort of tax stimulus to buyers, say for buying low-emissions or ethanol-capable cars (which covers virtually the entire market)? Do states need to provide sales tax holidays, given that they will either lose the sales tax revenue OR lose the sales tax and payroll taxes from said retailers? Do those retailers and/or manufacturers need to discount for cash transactions versus time-sales contracts?

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