Note I’ve just joined the forum so what follows may be redundant … I’ve not searched for what others have said on the topic. Yet. The following was posted as a comment to Marcie Belles, and I’m reposting here.
Anyway, I’m working with my university’s communications people right now to try to put together an audio portion, a news release and then work on op-eds and the like. Once I know a web link (later today!), I’ll put it here. I’ve also exchanged many emails with a forum member, David Ruggles, but have not posted them anywhere. If there’s demand… So for a first post, let me paint a scenario that could certainly kick off a bit of discussion.
But basically, once I started putting together numbers yesterday, things are much worse than I thought. GM really is facing demise if the status quo continues, and because suppliers are interlinked and GM is a necessary customer, that would lead to the entire NAFTA industry closing down on the manufacturing end. Dealerships would obviously have a hard time staying in business (not that it’s easy right now). Add all the employment numbers together, add in the indirect jobs at local stores and trucking companies and so on, and the macroeconomic impact would be very large — we’d be at double-digit unemployment at the national level, and of course much worse in some regions.
But the current loan package is only a band-aid, not a fix to a trauma patient who is not only bleeding but has internal injuries. If too many dealerships close their doors, covering the liquidity of assemblers won’t do the trick. If a big supplier goes belly up, it would need access to immediate bankruptcy financing — and while in normal times that might be possible, I suspect that’s not true right now.
Finally, we aren’t going to return to 16.9 mil average sales (10.9 mil in the latest data), and for the industry to be profitable we need capacity to be shut up and down the value chain. Toyota’s Texas truck plant … won’t their temptation be to take a deep pocket approach, you close yours? Dealerships — can GM and others close down 3,000 or more in quick order, to restore others to profitability, given 50 states each with their own franchise law? Supplier consolidation — how do you take over half a plant, when the other half is no longer needed and the parent company is on life support and failing rapidly?
Putting together a sensible package can’t happen in this Congress, under Bush Administration leadership. That option has been TARPed over. We have to hope that things hold together into February and the new Congress and Administration.
Sorry to be the quintessential purveyor of analysis from the dismal science.
Well, off to prep for my class this afternoon on the Chinese economy. They’re facing recession, too, a 4+ percentage point drop in growth, to a mere 8%. Not much profit to be had there, either, certainly not enough to paper over losses elsewhere.
But I’m a practitioner of the dismal science, and try to live up to my name. Hopefully I’m inappropriately pessimistic about the magnitude of problems the industry faces.
PS I was in a brief interview portion on a local public radio station today (WVTF in Blacksburg VA). The full thing (22 minutes) will be on their web site at some point, but isn’t up yet.
New query: how are dealerships structured? At BuyAmerica Cars BMW Chevrolet Chrysler Dodge Ford Infiniti Lexus … are the operations separate subsidiaries with their own bank lines? Or is finance centralized? My underlying question is whether the failure of the GM portion, big floor plan but worthless inventory, would sink the whole shebang or whether the BMW Infiniti Lexus portion could continue?
Over the years I have been through a lot of auto industry ups and downs. At one point, I was a partner in a Chrysler/Ply/Dodge/GMC truck store in a small river town in IA. This was 1978 – 1980. We floor planned all inventory through a local bank but financed most deals through GMAC, even the Chryslers. GM was buying deals hot and heavy and we had a real advantage over competitors who only had local banks or Chrysler Credit for financing options. The Chrysler Credit financing was “limited repurchase” as opposed to “WOR” (without recourse) which meant the dealer had to stand good for repossessions and losses to a large degree. Limited repurchase is a lengthy explanation. They also had to have an entry on their books called “Allowance for Doubtful Accounts.” Then one day GMAC issues in edict that they will no longer finance new vehicle deals that are non GM products. It had a devastating impact on our business. We were still profitable through it all but with a possible impending Chrysler bankruptcy we had an opportunity to sell the store and took it.
In today’s auto world, this dealer could floor plan his BMWs through BMW Credit and some of his other inventory through a local banks or through another manufacturer’s captive. Capital loans are a different story. Most of the capital loans are through local banks, but the captives have been engaged in that business as well. Keep in mind that new vehicle floor plans floor plans are based on a manufacturer buy back guarantee that is included in the franchise agreement. If a dealer terminates his franchise, or is terminated by the manufacturer, OR goes bust, the manufacturer agrees to buy back all new inventory that is current year AND unmodified and under a stipulated odometer mileage. Capital loans are for the entire business. Multi franchise stores will typically have one capital loan through a bank, whereas a single point dealer might have a cap loan through the OEM captive.
The answer to the question; I have a friend who has multiple franchises under many roofs. Under one roof, his original flagship store, he has Chrysler/Jeep/Dodge/BMW. If Chrysler disappears he has no “buy back” option for his Chrysler inventory which now must be sold for a song. Who knows what the market might be on new but unwarrantiable vehicles? On the flip side, the BK manufacturer can’t arbitrarily come in and demand that he pay off his inventory. If the dealer had cash, he COULD pay off the inventory, but why do it? He would hope they came and “repossessed” the new vehicle inventory OR any late model pre-owned inventory. (Captives will sometimes floorplan late model inventory as an inducement for the dealer to buy off daily rental and lease units.) As a practical matter, the dealer might sell of inventory and refuse to pay the floor plan source for the vehicle if the floor planning entity is the manufacturer’s captive. Trying that with your local bank would get you shut down. Local banks would want to be instantly paid off for new inventory that is no longer covered by a manufacturer buy back guarantee, or at least have those vehicles curtailed as used vehicles.
In the meantime the upheaval from all of this would be catastrophic. The loss of business, the fact that the manufacturer wouldn’t be paying monies owed to the dealer (holdback, warranty reimbursement, carry over allowance, rebates, etc.) might put the dealer’s operation and balance sheet so out of whack that it might throw his other financing out of compliance with his other underlying lending agreements. The flip side of this is the dealer probably wouldn’t pay his parts account statement to the manufacturer. As a practical matter, a multi franchise dealer would be left with the challenge of angry customers who would expect the dealer to do warranty work without reimbursment from the factory on the BK lines. He would try to sustain his overhead through pre-owned sales, fixed ops, and his remaining viable lines. So its a mixed bag, depending on the dealer, and a huge mess. Its very difficult to quantify.
Thanks, David. Snow here in northern Michigan visiting parents; Las Vegas is warm & sunny?
Working on additional stuff, will try to figure out how to most effectively post on this site.