By on December 1, 2006

dr-z222.jpgHistorically speaking, Chrysler’s desire to keep pace with Ford and GM has kept the company perched on the brink of disaster. In his magnificent Motown expose “The Reckoning,” author David Halberstam devotes a couple of chapters to the "Crisis Corporation's" perennial woes. Halberstam describes the corrosive effects of the automaker’s sales bank, where vehicles were built, registered as sold and held in vast lots– until reality caught up with book-keeping. The practice was eventually abandoned. As you’ve just read, it’s baaaaack.

The idea of the “sales bank” is logical– in theory. Instead of constantly slowing and speeding production to meet varying demand, factories work at full capacity year-round. Any unsold cars are “banked” in storage lots until demand picks up. This supposedly eliminates carmakers two largest headaches: the need to run near full capacity (to maintain low unit costs) and the cyclical market. What made the bank deadly in practice: overstated sales projections. “Banking” just made things worse.

The problem with “holding” the cars– beyond the storage cost and resulting deterioration– was the way the practice warped Chrysler’s relations with its dealers. With a huge pool of cars to choose from, there was little incentive for dealers to place ordinary orders from the factory. Instead, they’d simply pick up their sales inventory when the manufacturer’s lots got too full– at fire sale prices. Unfortunately, selling worn vehicles did little to increase demand for cars, which led to more “banking.”

Lee Iaccoca killed the Chrysler’s sales bank shortly after he assumed power, helping shape Chrysler’s comeback. The new sales bank has been going on for about a year, under the not-so-watchful eye of Chrysler Group Prez and CEO Dieter Zetsche. While both Ford and GM have bitten the bullet– making major production cuts and jettisoning workers to [try to] match production to the reduced demand– Chrysler has continued running their factories and “banking” the excess.

There is a reason for Chrysler’s sales bank “renaissance.” Under present contracts, United Auto Workers (UAW) members are paid virtually the same whether they are working or not. Back in the ‘70’, they would have simply collected unemployment. What hasn’t changed: all the reasons the bank was a bad idea. In fact, the problem's gotten worse.

This time, Chrysler dealers aren’t cherry-picking for bargains. Current dealer inventories for The Big Two Point Five have been stuck at almost 100 days for months– when half that amount is seen as dangerously excessive. DCX has been stuffing “money in the trunk” on old and new vehicles, and the dealers aren’t even sniffing the bait. There are now TWO bloated inventories that need reducing: Chrysler’s AND its dealers’.

Demand for these vehicles is unlikely to increase anytime soon. The natural market cap for the 300/Magnum/Charger seems to have been reached (the initial rush is over). The Sebring etc. are being replaced (as soon as they can get the dealers to take some). Minivans and trucks have been DCX’s profit centers for decades, but the minivans have been feeling new pressure from Hyundai/Kia in the economy market (Toyota and Honda have already skimmed most of the cream).

As for the trucks and SUVs, the future isn’t rosy. The Durango gets Suburban-level mileage with sub-Tahoe utility, and it just got a posh sibling that made an Aspen of itself. Being number three (and oldest) in the pickup market is like wearing a bulls-eye to a shootout. In short, DCX is likely to continue to lose market share in the near future.

If the sales bank is such a huge mistake– all the problems of fleet sales without any of the revenue– why does Chrysler persist? One theory making the rounds: Chrysler’s German masters are loathe to admit that their hand-picked team can out-screw-up the Americans– at least until the evidence becomes impossible to ignore (instead of merely visible from low Earth orbit). Another theory: the current regime believes their own hype. The sun will come out tomorrow, the sales bank will dry up, new products will erase the memory of the old, and all will be well. 

The third and most intruiging suggestion is that the jobs bank is a not-so-secret stash of vehicles which allows Chrysler to play hardball with the United Auto Workers (UAW) in the run-up to '07 contract talks. This theory posits that when the UAW refused to grant the automaker the same [meager] health care givebacks it blessed upon Generous Motors– "pattern bargaining" up but not down– Chrysler began churning out product in preparation for a UAW strike.

If true, if The Dark Lords of DCX tell Big Ron's bluster boys to go sing, Chrysler would have half a year’s worth of product to keep dealers happy. Problem is, that’s not enough. Besides, when something looks like either a cunning conspiracy or simple stupidity, it’s usually stupidity. But wouldn't it be funny if a combination of stupidity and luck ended-up saving Chrysler's bacon?

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33 Comments on “Ask Dr. Z: Chrysler’s Sales Bank...”


  • avatar
    mdanda

    Some amongst them say the sales bank is part of Chrysler’s cunning plan to play hardball with the United Auto Workers (UAW) in the run-up to the ’07 contract negotiations.

    This is a scenario in which I would like to explore further. Look at the environment and it seems plausible. Combine DCX frustration and desperation with a heaping cup of management boldness, and suddenly this seems legitimate. It’s the kind of strategy that makes legends.

  • avatar
    Steve_S

    It would be funny if the apparent stupidity turns out to be genius. With the money they are putting on the hood of most vehicles it’s probably stupidity. Too bad there isn’t a DCX, GM or Ford car I’d want, damn good time to save some serious cash. I think I saw Chrysler ads with $7,500 cash on some models.

  • avatar
    miked

    I thought the same thing when the sales bank was mentioned in the suicide watch earlier this morning. If you have to pay the UAW to not make cars, why not just pay them to make cars and then after you have lots of cars stored up, tell them it’s time to renegotiate their contract. If they strike, just sell the cars you already have. Now if it’s true that they’re building cars with dumb options packages, that will come around to hurt them. But this could actually be a very smart move. All it takes is for one part of the UAW to crumble and then F and GM can take advantage of the new contracts. This could save Detroit.

  • avatar

    The only problem with assuming the sales bank is being used to pile up cars to be sold should UAW not cooperate is that the sales bank is made up of strangely optioned vehicles that the dealers can’t sell. That’s one of the reasons they’re balking at taking extra cars. No need taking them if you can’t sell them!

  • avatar
    Joe Chiaramonte

    Prep for a strike also occurred to me when I read the DCX Suicide Watch column. I’m beginning to believe all of the 2.5 could just be working together to create a perfect storm to ply against the UAW in 2007…

    the sales bank is made up of strangely optioned vehicles that the dealers can’t sell

    …but, couldn’t some of the “right” options be dealer-installed or aftermarket installed, thus creating some valuable headroom for dealers while the UAW strike is in full steam?

  • avatar
    Zarba

    Occam’s Razor.

    DCX built the cars for the benefit of the stock market, so they could tell the analysts, “Look, our factories are running at capacity, our cars are moving, we’re just FINE!”

    Now, if it turns out that they can use this to bargain against the UAW, all the better. BUT, if these are strangely optioned cars that dealers can’t sell, then they’re toast. Having almost a year’s worth of production sittting around is a recipe for disaster. Remember, that “half a year’s worth of product” assumes that sales stay where they are. If sales tank, then that could easily be 9 months or more.

    Think about it. They could shut down right now and keep the doors closed until June or July. In other words, until next year’s models come out.

    Exactly how much does it cost to write off a year’s worth of product?

  • avatar
    MMillar

    Current dealer inventories for The Big Two Point Five have been stuck at almost 100 days for months– when half that amount is seen as dangerously excessive.

    Wards is reporting that for November the industry has an average 71 days supply of inventory with the big 3 at 78 days of supply. The industry considers a 60 day supply to be “normal”.

    78 may be a high number but its not “near 100″ nor “dangerously excessive”.

    More facts less hyperbole would be nice.

  • avatar
    CliffG

    One of the most important mental traits to cultivate is to pay attention to the obvious. Conspiracies usually aren’t, complex tricky rationales don’t hold water, etc. They built too many cars because upper management screwed up their projections and did not want to admit it. Think about it more in terms of the old 5 year plans in the Soviet Union where everybody lied about everything, that way you stayed alive to lie again next year.

    Think about this: UAW goes on strike, DCX says to all its’ potential customers: “Hey we have all these 2006 models we would like to sell you in late 2007.” Yeah, that’s really going to fly as long as that $27,000 sticker Durango is going out the door at $14,500. And that is a way to stay in business?

    The old motto of the USSR was “They pretend to pay us, we pretend to work”. Hell of a theme song for the UAW these days.

  • avatar

    The 100 day inventory figure excludes rental and fleet sales. More accounting shenanigans…

  • avatar
    Dave M.

    but the minivans have been feeling new pressure from Hyundai/Kia in the economy market (Toyota and Honda have already skimmed most of the cream).

  • avatar
    oboylepr

    Strangely optioned vehicles! How strange would they need to be to render them difficult to sell?

  • avatar
    Dave M.

    Follow up to my post: Remember when the Chrysler minivans came out in ’83, and it took everyone else 2 or 3 generations to catch up? The little oddball “skinnyvans” from Toyota, Nissan, Mitsubishi? The lame attempts at first by the Ford Aerostar and Chevy Lumina? The first Honda Odyssey (although I thought it was a great vehicle)?

    Wow. Talk about choking up a niche you owned….

  • avatar
    tms1999

    - Design cars that people want to buy. Pay attention to details. Let the enginerrs and designers do their job, keep the bean counters at a safe distance.

    – Build flexible factories where most of your vehicles can be built on most of your lines.

    – Hire workers who know that they only get paid when they show up for work. You have a set hourly rate, and that’s what you are making. It is after all, the daily reality of the rest of us.

    – Ditch the dealer network altogether. No stock at the dealer, only a few select models to test drive/loan for the day.

    – Do keep the service department. Charge for the actual time it takes to do the job. Drop the extra over inflated close to rape fee for work blue book of outrageous prices.

    – Build cars to orders to the exact specification of the buyer. Trim, cloth, color, engine, transmission, equipment, upgrade, everyting. Let the customer chose.

    – let people configure and buy cars on the net. If carsdirect.com can do it, everyone can do it.

    This way, you don’t have the overhead of building before you have a buyer. You don’t have odd combination of options to push down people’s throats. You don’t sit on an inventory that costed you to build and you can’t sell. You give the customers exactly what they want. You don’t have to pay workers for doing nothing. You won’t have a glut of flashy pink cars nobody will buy.

    Wait. Or you can do the exact opposite! Super!

  • avatar
    Sajeev Mehta

    Sales bank vs. UAW? Hmm, that’s a very interesting notion.

    I still see this as management arrogance: times are tough and someone thought going to a push system (as opposed to pull system, where the market determines production) would help Chrysler make it through this storm.

  • avatar
    Luther

    United Auto Workers (UAW) members are paid virtually the same whether they are working or not

    Any wonder why 2.5 are ditching UAW for robots and contracted temp workers? Any wonder why 2.5 are moving their production operations offshore to places with less parasitic labor “laws”?

    Like Communisum destroyed Communism, the UAW is destroying the UAW.

  • avatar
    Johnson

    MMillar, even if a 60 day supply is considered “normal”, it’s still excessive. Why? Well when you compare to Toyota, where estimates range that it’s supply is about 30 days, then 60 then seems to certainly be excessive.

    Norms change, and they are relative.

    And I disagree with the theory that a sales bank seems “logical” in theory. Even in theory, it doesn’t. In theory, it seems like a waste of money. In reality, it’s much worse than that.

    What is a good idea in theory and practice is flexible manufacturing lines, and flexible platforms. Toyota and Honda at each one of their plants can build a number of different vehicles. They rely on a “build to order” system where vehicles are only built *if* they have been ordered by dealers/customers. If demand drops on a certain vehicle, they can easily compensate by increasing the production of another model at the same plant. That is how Toyota’s plants are running at over 100% capacity.

  • avatar

    oboylepr: Strangely optioned vehicles! How strange would they need to be to render them difficult to sell? Some of the vehicles dealers are reporting they can't sell: Loaded Chrysler Aspen Limiteds with no navigation system. At that price level and (supposed) market class, buyers expect a nav system. Base-level Grand Cherokees with V-8 engine.  The V-6 sells much better in the base model; the V-8 sells better in upper line models. Base-level 2006 Grand Caravan SE's that costs more to lease than loaded 2007 SXT's. Dodge Ram 1500 ST's with a cloth interior, a split folding rear seat, an anti-spin differential and cruise control. ST's normally sell as "work trucks" with minimal options. The upscale 1500 SLT, costs only $2K more and comes with all the features of the ST plus upgraded interior, power everything, and alloy wheels. Both come with a $5500 rebate.

  • avatar
    windswords

    Two of Chyslers plants are flex that I know of: Belvedere, IL (Caliber, Compass, & Patriot) and Toledo OH (Jeep Wrangler 2 door, 4 door, and Liberty). There may be more. Jefferson North builds the Grand Cherokee and the Commander, so it may be flex too.

    I posted a question earlier, can Chyrco be spun off? What would prohibit Daimler from doing that? Only thing I can think of is they would have to wait for them to be profitable again. But then they could have an IPO and they could go independant.

  • avatar
    rudiger

    To expound a bit on the ‘strangely optioned vehicles’ aspect of the sales bank, the problem is that the manufacturer (DC) has a commitment to their parts suppliers for a specific number of parts. This means that they, in turn, are committed to using the parts for a given number of options that require these parts.

    In effect, not only does the sales bank keep the UAW workers on the job, it also clears out excess parts’ inventory for options not otherwise spoken for. That’s why the vehicles are being built with unmarketable option combinations and then wind up in the sales bank.

    BTW, the source for this info is Automotive News.

  • avatar
    jerry weber

    The sales bank came back when chrysler was unwilling to do the ford and gm thing, and say they were in trouble. They would need to buy out workers and close factories. Now they are in trouble (out in the open) and yes they will have to go through the same motions as gm and ford in downsizing. It is now apparent that no domestic mfg. can survive in their present form against the foreign brands. And yes chrysler will not be able to field a model in every segement in the future. I think you will hear no more about the imperial. They build too many types of jeeps and the commander is no macho competiror to the hummer. With fuel rising again in the u.s., I don’t think large suv’s and pickups will ever again be back to their former levels. Now to make money with cars, no one in Detroit seems to have the formula.

  • avatar
    ttilley

    A question: how can a “sales bank” be anything but SEC-bait?

  • avatar
    rtz

    Any pics of the sales banks?

  • avatar
    jthorner

    I spent many years in the semiconductor industry, and the sales recognition only happened when end customers purchased our products. Thus if a product was shipped to a distributor and held in inventory there, it wasn’t counted as sold. Only when an end customer bought the product did we count it as sold.

    I’m surprised that the automakers get away with counting deliveries to their dealers as “sold” inventory, and I’m really unclear how they account for these sales banked vehicles. It would be much cleaner if the manufacturer didn’t actually count something as sold until the end customer took delivery. This would greatly reduce the incentive for channel stuffing as DCX seems to be doing big time. Channel stuffing is when a manufacturer fills the product distribution pipeline much faster than it is being sold through to end users. The end game of channel stuffing is almost always the same … a massive hangover when the excess inventory is finally dealt with.

  • avatar
    macarose

    I hate to tell you this but the anti-UAW attitude within many of the bigwigs at Daimler is downright virulent.

    The Germans have already dealt with very strong union labor issues in Europe over the last several years. What they’re doing is simply creating leverage for the upcoming talks.

    Daimler-Benz is notorious for rigid long-range planning and walking away from situations when they become too challenging. I wouldn’t be surprised if the majority of Chrysler’s domestic plant capacity eventually gets replaced with overseas production over the course of time. If the UAW negotiations aren’t productive, then there are many suppliers and countries in this world that would be more than willing to put take up the slack.

    The intent is for Chrysler to become a global brand. Since Americans aren’t very nationalistic when it comes to car buying the opportunity to make Chrysler more cost competitive is absolutely critical for Daimler.

  • avatar
    rudiger

    jthorner:”I’m surprised that the automakers get away with counting deliveries to their dealers as “sold” inventory, and I’m really unclear how they account for these sales banked vehicles.”

    The reason the inventory on dealer lots is considered sold is that the manufacturers ‘do’ sell the cars to dealers. This is how dealerships get away with price gouging on a particularly hot-selling vehicle. The dealerships own the vehicles on their lots so they can resell them for whatever they like.

    This was the point made in the article about DC having two sets of unsold inventory – the inventory on the dealer lots (which, technically, isn’t owned by DC) and the sales bank inventory (which hasn’t been sold to anyone and is still owned by DC).

  • avatar
    jerry weber

    rudiger is right but the full explination is that it is the floor plan interest (plus storage space) that team up to prevent the dealers from buying any more excess cars from chrysler even though they are offered tremendous incentives. Also a dealer with too many 2006’s has no room or floor plan money to stock 2007’s. thus the cycle repeats itself for the next year when the “new” 2007 ‘s become the old 2007’s replacing the finally sold 2006’s. Now where to put the 2008s. It’s a merry go round that chrysler is in at least the third year of riding. The public sees only heavily discounted leftover stuff from chrysler and never wants to pay close to retail for any new stuff. Everyone loses, because the stuff sold at deep discounts keeps depreciating because who wants a one year old chrysler when the new left overs can be had for thousands off sticker? A healthy company will have virtually no leftovers after the end of the calendar year. Thus they have three quarters to devote to new models and one quarter for transition next year. As you stretch this sellout of the old longer, you shorten the selling season for the new. I guess it could be taught at business schools, but then when you are making several hunderd thousand a year you the car man exec should know thator should you go back to school?

  • avatar
    rudiger

    Right, I forgot to mention that although the dealerships technically purchase and ‘own’ the cars that sit on their lots, they’re bought through the financing arm of the manufacturer. If the dealership isn’t selling any cars (making any money), it’s difficult to keep up those payments.

    It does sound quite a bit like a merry-go-round and goes a long way to explaining why the domestic auto business (not just DC) is, in general, a fouled-up mess.

  • avatar
    aa2

    Interesting insights macarose.

    I am curious does anyone know what the cost of labor is for the average vehicle. I read somewhere the average Ford and GM sells for 22k. So how much of that 22k is labor, say at a UAW plant?

    I read steel is 1500 per car..

    For example if Chrysler spends 30 billion on labor out of its 100 billion or so in sales.. Then it is worth it to risk several billion dollars(possible cost of excess production) to get a better position in labor negotiations.

  • avatar
    whitenose

    Macarose, the problem with the levarage is that it’s sitting there in the Chrysler-owned sales bank, depreciating (‘rusting away’). What is the value of a badly-optioned 2006 Chrysler in 2007?

    This is a bit like the conservative theory that Bush 43 is a genius because he’s forcing the government to become smaller by making it completely incompetent at providing basic services. Well, guess what: the people want basic services, so they’re going to want the politicians to fix the services. And people don’t want those cars at any price approaching profitable for DCX.

    In other words, it’s rationalization. We can’t see what they’re possibly thinking, and yet they’re paid more than most of us, so they must have some insight we don’t have. The simplest theory is always stupidity. The ‘sales bank’ is classic management stupidity/arrogance, doubly so because it was a major symptom of Chrysler’s first close call with bankruptcy, and it will inevitably bite DCX in the ass and start to drag down Mercedes with it.

  • avatar
    alfasuds

    l don’t have pictures, but Downsview airport in Toronto was full of 300/Chargers this past August.

  • avatar
    SuperAROD

    Eberhardt resigns. Sales up 3% in Nov. Things are looking up!!!

    http://www.freep.com/apps/pbcs.dll/article?AID=/20061205/NEWS99/61205024/1014/BUSINESS01

  • avatar
    sm92696

    most of the public dont know that the uaw job bank was
    started 30 years ago and is funded by its members.
    it worked like this when ever raises were given out in the
    new contracts a portion of that went into that fund for the job bank,it was called the nickel fund then and has since grown.for many years it was not used and hit its cap of 250mil
    a few year ago before the s– hit the fan.
    it works like this,if you get lets say 1.00hr raise 30cents goes into this fund from every hourly worker thats why it wont go and the uaw is going act like they fought hard to keep it to make them self look good,but its the workers own money anyways.as for over building i think they hoped it would pick up with there new adds but it didnt they wanted to keep shareholder from a panic by shutting down and telling of slow sales.

  • avatar

    qq i see the new jeep patriots are out and at what seem to be a mysteriously low low price. but as a purist of sorts i wouldnt want to buy one that wasn’t trail rated and
    i dont know how to negotiate with dealers given my profound bilateral sensoneural hearing loss greater than 95% in both ears and as if my ASL (american sign language)gives them a licence to railroad me into purchasing their bitterest of lemons (trust me on this one if you could shadow me for an entire day you’d see the truth behind the extent of the deceit, decadence, debauchery, depravity, and degeneration de de de ad nauseum makes me wonder if i might not be better served by simply driving down to the assembly plant in belvedere il a 50 minute hop jump and skip across the border
    from my location in walworth county wisconsin or is this potential achievement even remotely impossible to accomplish? i mean theres no love lost with daimler chrysler and the dealerships so why wouldnt they have the means motive incentive and/or determination to let me buy the vehicle right off the assembly line and save us 560.00 delivery charges and any other rebate or incentive they could offer??? I mean
    to buy me a trail rated patriot without any of the fancy amenities or options such as air conditioning and sound systems (I’m DEAF for crying out loud) and any other
    fool thing i can think of that can do without. Of course im gonna be wanting skid plates to protect the soft underbelly but that’s about it. pls advise. thanks. steve s.


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