A little sympathy for car dealers
If GM and Chrysler go belly up, they get hammered too.
(Fortune) -- Car dealers rank somewhere between journalists and aluminum-siding salesmen in public esteem, but it is time to cut them some slack. The vast majority of America's 20,000 domestic and imported car and truck dealers are smart, civic-minded businessmen who go to church on Sunday, support their local Little-League teams, and treat their customers gently.
Right now, they have their backs against a wall that could crumble at any minute.
Here's why: Auto sales have been so dismal that they are sitting on huge stocks of unsold cars and trucks. One dealer told me he has a 200-day supply of Chryslers on his lots. Sixty days is considered normal.
That's a big problem for several reasons. To start with, that dealer has financed all those cars with borrowed money, so the longer that car sits on his lot, the more it costs him. Worse, a new car depreciates all the time it sits around, a phenomenon known as "lot rot." So at a time when his revenue is tanking due to slow sales, a dealer's expenses are skyrocketing.
Now, GMAC, GM's (GM, Fortune 500) financing arm that provides those inventory loans to dealers, is in danger of collapse at any minute. If it is unable to provide financing, dealers will have to scramble to find alternative sources. That won't be easy in this credit-squeezed environment.
In the past, manufacturers helped dealers move their merchandise by offering them marketing incentives. But that practice has turned ugly. GM, for instance, has pushed out payments on incentives by two weeks to increase its float. Dealers have to wait longer to get their money.
It gets worse. The Chrysler dealer, who asked not to be identified for obvious reasons, said that Chrysler will only offer incentives on his current 200-day car supply if he orders an additional 100-days supply. That's like throwing good money after bad. Says the dealer: "For them to put programs like that in place is reviving a bad old Detroit practice. Instead of solving a problem - in this case excess inventory - they just kick the can down the road to the next guy."
So what happens in a bankruptcy? Another dealer told me that if GM or Chrysler goes belly-up, he will have to take an immediate write-down on his inventory. A car made by a bankrupt manufacturer is worth less than one from a solvent automaker, right?
At some big dealership groups, those write-downs could amount to tens of millions of dollars. That would put those groups in potential default of their loan covenants, which would make it impossible for them to continue in business.
Bankruptcy would bring some other baggage, too. Payments on those marketing incentives I mentioned a minute ago would cease, leaving dealers holding the bag. "We would be willing to litigate," says one dealer.
Payments for repair work on vehicles under warrantee would also stop, leaving dealers with unpleasant choices: stop doing the work and thus anger customers, or do the work and charge them, which wouldn't be very pleasant either.
Smart dealers have seen the decline of Detroit coming for years and have been quietly disposing of their domestic outlets. One dealer who owns multiple franchises told me he considers his Detroit store "real estate plays" - valuable for the ground they sit on and nothing more.
Even if GM and Chrysler somehow manage to stay afloat with government aid, dealers will be facing Armageddon if the recession deepens. With auto sales running at what one dealer calls "depression levels" of ten million cars and trucks a year, he predicts that "thousands of dealers are going to go broke in the next 12 months."
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