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Chrysler's Dealership Problem: The Saga Continues

Part of Chrysler's dealership problem is a large number of dealerships with an excessive inventory of unsold vehicles sitting on their lots as 90 and 120 credit contracts become due. This only creates a serious cash flow and credit problem for Chrysler and is a prime factor in Chrysler's decision to close hundreds of underproductive or credit drag dealerships.

Chrysler unfortunately has huge supplies of some vehicles sitting on dealer lots such as the Crossfire, a 300 day supply, the Sebring and Avenger, 242 day supplies, and some Jeep models such as Patriot, with a 200 day supply as of May 15, 2009 reports. This creates a serious credit drag when dealers cannot pay for this inventory in 90 or 120 days because the product remains unsold. By contrast, although all brands of automobiles are suffering some sales losses, Toyota, Hyundai, Subaru and BMW dealers are in far healthier condition with average 60 day inventories of vehicles, and more likely to be off 90 or 120 day credit contracts to their suppliers in that time span compared to some troubled Chrysler dealers that Chrysler is hoping to ax. chrysler crossfire.jpg

Chrysler does have some models in short supply such as the Challenger, and nearly sold-out models such as the Magnum, or the Wrangler or Journey. But many dealers failed to sense the high demand for these particular models and instead purchased excessive numbers of underperforming units. Further, the cost of shipping vehicles across the country might run hundreds of dollars in some cases, so the problem of excessive dealer inventories is not always that easy to solve.

Problem dealers present an interesting dilemma for a manufacturer. On one level they are an outlet for their products, however at some point they can become a credit drag as well if they have an excessive amount of product on hand, and cannot pay for upcoming due credit contracts.

Back in the 1980's when I ran a smaller TV business, there was a far larger TV and appliance business that operated across the street. My business was run on a tightly managed cash only basis, while the larger business across the street took out the equivalent of several football fields full of TVs and appliances from the manufacturer, GE, on credit, but had trouble paying for the product when credit became due, yet only continued to purchase more product on credit. Eventually GE and other creditors had to force the company into liquidation.

The problem is with so much product and inventory on hand, underperforming dealers tend to sell the stock to pay rent, lights, salaries or other expenses, and with the stock sold, the manufacturer has no remaining equity left. Chrysler has little choice but to eliminate problem dealers like this.

One popular misstatement that the government continues to make is the assertion that Chrysler has too many trucks. However Chrysler's supply of trucks is in the 109 day range, which is not quite as bad as their average 132 day inventory of cars. Trucks will often be purchased by business for business purposes and often have a better built-in market than some car models. However, Chrysler products simply haven't developed the keener marketing skills of some brands such as Toyota, Hyundai or Subaru, which manage to more closely control supply and dealer inventory. Chrysler has allowed management issues to get out of hand, where excessive credit to dealers a well as huge supplies of poorly selling models has brought the company nearly to the point of extinction.


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Comments (24)

Chad:

And now the average number of days that the supply of those cars is will get longer as fewer and fewer people buy cars that are built by a company that they can no longer trust to be solvent 6 months from now. The UAW and poor management ran GM and Chrysler into the ground, now they're giving them to the UAW to manage? Doesn't inspire a lot of confidence. I know, not everybody thinks the UAW is at fault here, but if you look at what the average person's perception of it, the UAW is tied in with the reasons these companies have failed. We'll agree to disagree on the utilities and evils of unions, Paul, if that's alright with you, but the average person (from those I've talked with) sees the UAW as involved with the reasons the companies have gone bust. Now those dealers can't sell their inventory as new after the cutoff date, how are they going to get out from under the debt? How are they supposed to sell the parts they have on hand for warranty work when they won't be allowed to do it anymore? Basically, the management of the company just screwed over all the franchise owners that they are "letting go". There goes that whole "good faith" part of their business. I guess at that point I'd have to try to get a nissan or toyota dealership going, maybe the margin would be enough to keep you from defaulting on the dodge and chrysler cars you can't sell as new anymore.

Lee Ward:

Chad is no doubt one of those "Great Americans" who will now buy a Toyota in order to make American car makers fail, putting more decent hard-working Americans out of work.

ke_future:

lee, did you even bother to read and try to understand what chad was saying?

Lee Ward:

I don't see you or Chad disputing my prediction, ke.

Don't tell me - you're a "Great American" too?

I find anti-American behavior disgusting.

ke_future:

lee, i would never claim to be a great american, myself. to much hubris.

i doubt you really find anti-american behavior disgusting. you're probably trying to be clever since conservatives are against the moves by obama in regards to the auto industries and they are generally considered to be the "patriotic" party.

and yet again, you confuse outcomes with intentions. you do this over and over again, and it's the sign of weak logic. i may or may not buy an american made vehicle. and that american made vehicle may or may not be a ford, or a toyota, or a kia, or any of the other cars which are actually manufactured in the US. but i doubt i would buy a chrysler, because they don't look to be offering the things that i look for in a vehicle.

oh wait, did i say toyotas made in the US? why, yes i did. that's because they are made in the us, just like chryslers are also made in other countries.

but in any case, the intention would be to purchase a car that i like, not to put american workers out of work.

Mike:

Heck I won't dispute that,in fact I'd support anyone's decision to buy foreign over American be it for the reason of saving gas, better quality, or styling- take your pick. Even better most foreign companies have their plants here in the US and employ just as many people as actual American companies. Lee, you enjoy yourself in your American gas guzzler while the rest of us save money on fuel and look better doing it.

http://www.usnews.com/blogs/flowchart/2009/04/01/5-reasons-to-shun-american-cars.html

http://www.dailyfueleconomytip.com/fuel-efficient-vehicles/american-vs-japanese-gas-mileage-comparison/

http://www.usnews.com/listings/ten-cars-detroit-should-copy/1-honda-fit - a fun slide show showing why foreign cars definitely look better

Doubting Thomas:

We went to shop for a car recently to replace an aging minivan. Went to a Chrysler dealership - knew what we wanted, knew what the wholesale price was, knew what the dealer price was, figured we could haggle down about midway between the two.

They had several of the model we were looking for - and not only wouldn't haggle, they didn't act like they really wanted to be bothered to sell cars in the first place. It was near the end of the month, too - you'd think they'd want to make quota. But hey, if they don't want the money nothing says I've got to force it on them.

Went to a non-GM dealership - and the salesmen were EAGER to make a sale. Got something that was was much closer to what we wanted, too, for a bit less money - with a higher level of luxury.

So - when the salesmen can't be bothered to make a sale, the customer will go elsewhere. Funny how that happens, isn't it?

Eric:
Chad is no doubt one of those "Great Americans" who will now buy a Toyota in order to make American car makers fail, putting more decent hard-working Americans out of work.
I find anti-American behavior disgusting.

So by Lee's logic all of those people who buy Toyota Priuses (Prii?) are Anti-American, especially since ALL Priuses (Prii?) are manufactured in Japan.

I'm curious Lee what do you drive? Can you please name ALL of the cars that you've ever owned?

Lee Ward:

I drive a Buick. My previous car was a Pontiac and the one before that was a Chevrolet.

If I were buying a car while our nation is in a recession I'd do everything I could to make that an American car. I certainly wouldn't try to convince people to not buy American, as Chad and many others have.

I consider that un-American.

Eric:

Lee I think you completely misread Chad's comment. I didn't read him to say that he would buy Toyota or Nissan to punish Chrysler. I read him to mean that if he were one of the dealerships that was let go by Chrysler he would have little option but to convert into a Toyota or Nissan dealership to survive.

Chad said

I guess at that point I'd have to try to get a nissan or toyota dealership going, maybe the margin would be enough to keep you from defaulting on the dodge and chrysler cars you can't sell as new anymore.

It's hard to follow because his pronouns shift all over the place. But I think he is referring to dealerships having to switch to Toyota or Nissan, not consumers, because they are being cut by Chrysler.

Why? Because, the dealerships being cut by Chrysler are now holding the bag on all of the inventory (cars and parts) that they had already purchased from Chrysler. Now those dealerships need to either convert to another brand or go under.

What do you suggest they do?

Mike:

So Lee you wouldn't buy foreign and support the continued operation of foreign car companies that operate plants here in America and employ the American populace? Gee, that sounds pretty un-American to me.

Paul Hooson:

Just for the heck of it, I'll volunteer a list of the cars, trucks and motorbikes I've owned in my nearly 54 years.

1973 AMC Gremlin X(258six), 1973 AMC Hornet X(232six), 1973 Pontiac Firebird Esprit(350v8), 1974 AMC Gremlin X(304v8, later hot rodded up with big tires, hood scoop, etc. neck breaking acceleration and gears) 1972 AMC Gremlin(232six), 1976 Subaru GL(pancake four), 1980 Chrysler LeBaron(six), 1977 Ford Pinto Wagon(4cylinder), 1981 Ford Escort(four), 1973 AMC Gremlin X( Crazy hot rod with v8, big tires on back, trick custom suspension, one fast little mother), 1996 Oldsmobile Ciera(six0, 1998 Jeep Cherokee Sport(six)

Motorbikes: 2005 Coolster motor scooter, 2007 CPI motor scooter, 2008 Benelli X50

You can see where my interests were, AMC cars, hot rods and motorbikes. The 1973 hot rod Gremlin I had was so wild that two movie companies wanted it to use in movies and I got two invitations. One was a Richard Dreyfus film, MR. HOLLAND'S OPUS and the other some unknown Zombie flick. It was a loud and crazy ride.

My brother's interest was far more centered in 1960's Thunderbirds and Mustangs. He had one of those crazy 1967 Chrysler New Yorkers with that huge 440 as well. That was a really big engine. He got it up to 130 on the freeway time. The aqua colored 1967 Mustang convertible was real nice as was the 1963 white Thunderbird. But those old Mustangs just don't handle quite as nice as they look though. The 1962 Corvair was interesting. Unfortunately he never got around to making the Model T body he owned into a hot rod as he wanted. And I couldn't persuade that guy with the 1951 Kaiser Henry J to sell me his car because he knew I wanted to build a hot rod out of it.

What can I say. Sometimes you feel like a sappy four cylinder econobox, sometimes you feel like a 8 mile per gallon hot rod.

Eric:

Damn Paul, you really like those Gremlins. While I admit to liking them too, I don't know why. However, the Pacer... YUK. I almost bought an AMX with the 390 engine, but settled on a new Mustang at the time.

I have two car buying regrets, I didn't buy that AMX and I had a chance to buy a 56 Corvette in mint condition for $3500.

Paul Hooson:

Hello Eric. Indeed those AMX cars with the 390 were awesome little machines. Someday I would still like to own one myself.

I not only like those 1968-1969 390 AMXs, but the 1970 ones with the 401 are real good too. 1970 might have been the best year of all. And I like that 1979-80 attempt to revive the AMX name by putting a V8 and custom bodywork on those little Spirit cars as well. Those are a rare, but often forgotten later attempt to bring back a new version of the AMX, although they are not at all comparable to those early generation AMX cars by any means. Also strangely, AMC attempted to make a form of AMX out of the Hornet in 1977, and a restyled model in 1978 that looked a little better. A rare 1978 Gremlin GT model also exists that borrowed many parts from the 1978 AMX.

I guess one thing I always liked about the Gremlin, is that it made a great hot rod body and could easily house a V8 engine. By comparison that Pacer was pure puke material. The Pacer was probably the biggest financial mistake of AMC, and put the company on the financial skids as it costs $140 million to develop, yet only sold well for about one year, and then sales collapsed down to a miserable level. Compared to the Hornet project(started in 1966 with the Cavalier showcar) which only cost just $40 million, the Hornet body allowed AMC to market cars based off this design from September of 1969 as 1970 cars until the 1987 model year as Eagle four wheel drive wagons. The Gremlin was a $6 million dollar project.

The Pacer just sucked too much cash from AMC, was too heavy and wide, and got too poor of mileage to be any good. It was a bad design for AMC that might have succeeded only if it was a smaller car with good fuel mileage. If it would have been scaled down to a Honda or GEO size, the car might have done well. But the Pacer was as wide as a full size Chevrolet and extremely hot inside and heavy due to all of the glass, acting like a magnifying glass. It was a fatal mistake for AMC.

A further problem for AMC's Pacer was that GM dropped their Wankel engine project intended to power the car, so the overly long 258 six had to used which intruded into the passenger cab. It was impossible to remove the rear spark plug without pulling the engine out of the car. The AMC 304 V8 was really need to power this very heavy car, however the late 304V8s suffered from serious horsepower losses due to pollution equipment as well as poor mileage. At just over 10 miles per gallon with a V8 engine, the Pacer certainly wasn't any economy car.

Eric:

Paul, I can't find a word to disagree with you about, in your last comment.

Chad:

Lee, do you have any clue what I was talking about? Obviously not, as I was talking about what the dealerships are going to have to do to stay afloat since Chrysler and Dodge are not going to allow them to sell the vehicles they have on the lot as "new" inventory. I'm talking about how you bolster your income to make up for getting the shaft. I own a cadillac (my brother had a car dealership at the time), and a pontiac. My next vehicle will likely be a ford. You have no idea who I am, or what I will or won't buy, but you come with the un-american talk all you want Lee. You've got nothing.

Lee Ward:

Glad to hear you say that, Chad. If that's the case then I was wrong about you going out and buying a foreign car, wasn't I?

Chad:

Yes, and I'd like an apology for the un-american crack. Apple pie, baseball, and red white and blue.

Lee Ward:

Hold your breath for a day or two and maybe you'll get an apology from me, Chad. Maybe not.

You'll never buy a car from a U.S. company if a union has a significant say in the management of that company, will you?

Chad:

I own a pontiac and a cadillac, where did you come up with that? I don't think that putting the UAW in charge of those companies inspires any confidence in their ability to recover when the unions are partially to blame (or mostly) for the financial difficulties the car companies are in. I just don't want to buy a car from a company that is ready to go down at any time. Ford is far more stable than Chrysler and GM. Besides, have you seen or driven the new mustangs? Gotta get a cobra.

ke_future:

given how the unions are partially to blame for the situation. and how they got a sweetheart deal from the obama administration. and how they don't seem to be making any effort to actually reform the things about the way they operate that are causing problems. yeah, i'd be hesitant to buy a car from a company where the union has a significant say in management. because until there are some fundamental changes in the way the companies and unions both are managed that company continues to be at risk of failure.

now, if the unions made some effort at reform. and if the companies actually change the way business decisions are made to a more reasonable method, then sure, i'd buy a car from them if the car was one i liked, and one that could fill my needs.

for me it's risk factor + car choice. nothing inheritly about the union per se.

Lee Ward:

The unions aren't to blame for anything.

The company agreed to every single perk the union got.

The unions took conxessions offered by the company.

In union negotiations, both sides agree. Management may have been stupid for agreeing to some of what they agreed to - but they agreed, and the stockholders supported the management, so the owners have zero bitch against the union.

Lee Ward:

Also - they didn't get a sweetheart deal. I agree with this

http://www.epi.org/quick_takes/entry/no_sweetheart_deal_for_uaw/

ke_future:

when the union got jumped ahead of secured bond holders in violation of the contracts. and when they got a high percentage of equity for the debt they held, they got a sweetheart deal.

the link you provided makes 2 claims: that the union has no guarantee of success. and that it is the "morally" correct decision because the company relies on the union workers. neither has any actual bearing on whether or not the union got a deal or not.

and yes, the company agreed to every single perk the union got. under threat of strike or work slowdowns. in my book, that's called extortion. i've looked at some of the details of the contracts. they are bad contracts overall for the companies.

and yes, the owners can bitch about the unions. when business is going down. and the economy is hurting. and the union refuses to discuss changes in their contract, you bet there is a bitch that can be lobbed.


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Publisher: Kevin Aylward

Editors: Lee Ward, Larkin, Paul S Hooson, and Steve Crickmore

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