Are Car Dealers Returning to Old, Bad Habits?
|   Saturday, September 06, 2014
As car sales have become more challenging now that the pent-up new-car and late-model used car demand has begun to dry up, it seems that more dealers are returning to the practices of the "bad old days" of 2008-2009.

During 2008-2009, the bottom fell out of the car market, inventories piled up as car carrier after car carrier delivered cars to dealerships that weren't moving as many cars as they had in 2007. Sales dropped precipitously to the 12- to 13-million-car-per-year range and many dealers went under.

After the heady days of 2002-2007, manufacturers, anticipating continued success, built excess capacity that went idle. Many employees lost their jobs through furloughs or outright layoffs due to the downturn. To weather the storm, the automakers not only employed the standard means just outlined, but they also used extraordinary means such as shedding divisions; Olds and Pontiac were no more at GM and Ford cut Jaguar and Volvo adrift.

Ultimately even these measures failed to stanch to red-ink flowing out of Detroit's balance sheets, so it was time to ask the government for help. President Obama and the Congress stepped in and offered the auto industry a life preserver in the form of bankruptcy protection, where the manufacturer could keep operating, but under the supervision of a special board made up of manufacturer's representatives, labor representatives and government representatives.

General Motors and Chrysler took advantage of this protection, while Ford retrenched to the point that the automaker was virtually standing still with no major introductions or facelifts planned. They pulled in all they could and cut all they could so the automaker was able to weather the storm without using loans or government protection. It also left them able to take advantage of the upturn more quickly and to bring new models to market in its core business.

Meantime, General Motors, after a time in bankruptcy protection, pulled itself back together, while Chrysler realized going it alone was no longer viable, so it pulled the trigger on an anticipated merger with Fiat that was consummated fairly quickly.

Today, as sales are slowing, people are worrying the industry is turning its back on the lessons learned in 2008 and 2009. Factories are mistakenly adding capacity (Ford just made major additions to Flat Rock, MI and Toyota has added capacity to its Louisiana facility), while dealers are increasing their car discounting and incentives to bring customers through the doors.

Those customers, in turn, were facing higher prices because the factories continued doing business as usual and raised prices a little every year. Even those raises considered tiny by the auto industry were major to many buyers and they have effectively put new cars beyond the reach of many. So, dealers have increased the use of leasing, where an unrealistically low price can be negotiated up front that will be the payment for three years. After that time, the customer either walks away from the vehicle or buys the lease out. This is where leasing becomes a double-edged sword.

On one hand, buyers can get into the cars of their dreams for fairly comfortable prices, but, after the term of the lease, the customer has only two choices, walk away from the car, dropping the keys on the dealer's desk; or if the customer wants to keep it, he or she will find it costs a king's ransom to keep. The entire cost works out to roughly 2.1 times the manufacturer's suggested retail of $12,995 (at the time of purchase). In this example, we are using a subcompact American vehicle. It turns out that using these factors makes the total price $25,990.

In addition, observers note that:

Dealer discounts have increased 5.5 percent over last year
Dealers are writing 72- and 84-month loans, a sign that car pricing is too high and people are having trouble affording payments
Dealers are easing credit to poorer credit risks and writing more subprime loans to keep sales moving

Not every dealer or manufacturer supports a return to the habits of the past, even it if might help now as sales soften. For example, Honda has been feeling the pain, as have others but is refusing to look back. "We have no desire to go there," Honda sales head John Mendel told the AP. He also rapped the industry for giving in to the easy way out. Honda hasn't and its sales have dipped 1.3 percent from last year.

Some analysts believe the tactics of the last dip will return poor dividends if they are used today.

"It could be a disaster later on," was how Adam Jonas, an analyst at Morgan Stanley, described the impact he believed longer-term notes and eased credit use would have. "We're clearly robbing Peter to pay Paul," Jonas emphasized. He predicted sales would climb 18 million cars a year by 2017 and then would fall to 14 million cars a year in 2018.

No one believes the next downturn will be like 2008-09 because dealers have retrenched, as have the factories, so the industry is in better shape to handle a potential sales downturn. However, people within the auto industry have looked at the creep of past habits into current sales thinking and are upset about it. "It just seems like 2007 all over again," Earl Stewart, a longtime Toyota dealer in Fla., told the AP. "The eased credit with which people are financing is as liberal and loose as it ever has been."
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