By on June 5, 2008

black_hole.jpgMay’s new car sales numbers are in and things are looking bleak for The Big 2.8. Their corporate Spinmeisters can blame a down economy and sky-high gas prices all they like, but sales drops well into the double digits are never good news. Market share declines aren’t exactly glad tidings, either. That said, truth be told, Black Tuesday is actually a good sign. It shows that the domestic automakers have finally “accepted” the market. Whether they’re too late is another question entirely.

I repeat: the domestics’ massive sales drops are a good sign, not a good thing. The car market has been “overheated” for at least the last six years. Chrysler, Ford and GM have all been pushing easy credit, “Toe Tag Sales,”  “employee pricing” and the like all year, every year. Compounding this "stack 'em high and sell 'em cheap" mentality, they dumped umpteen million extra vehicles onto fleets. “Move the metal” was their immutable mantra.

All this discounting “pulled forward” hundreds of thousands, even millions of sales. People used to buying a new car every five years were “trading up” after three. “Ten year” customers were buying in after five. Metal was moved but little or no profits were banked (all those discounts) and a lot of potential buyers were left completely “upside down” (all those fleet sales cratering resale value).

If The Big 2.8 were ever going to sell anything other than light trucks at a profit, they had to let the market “come up for air.” At the same time, they need time to re-tool to build more of the cars– yes, cars– people were bound– yes, bound– to want. And there’s another important reason why they had to ease off the throttle: financing.

Back when the U.S. auto industry was riding high, the domestics’ pet finance companies booked massive profits. Part of this was down to simple structure; a financing unit is little more than a bunch of computers, a phone center or two and a [relatively] small work force, most of whom make a lot less than assembly workers. With that kind of overhead, even fairly small margins can add up quickly. Given the sort of volume The 2.8 can move, those margins multiplied into the stratosphere. 

Sinking sales means fewer loans. So The Big 2.8 bled the finance unit (easy terms and low rates) to prop-up manufacturing. It was an excellent strategy– for going broke twice as fast. Now that credit has been tightened (dodgy loans coming home to roost and all that), the finance arms can finally get on a firmer footing. In fact, sales and profits should return if not rise when the “fire-sale” customers’ cars wear out. This could take a couple of years and would seem to hurt the dealers– but not as much as you might think.

Dealers are conflicted. On one hand, they’re selling fewer cars. Generally speaking, they still make SOME profit, no matter what the discount. So volume is important. On the other hand, they are three to four months (minimum) behind the manufacturers curve on product lines. That’s a fancy way of saying they have a shit load of trucks and SUVs on their lots. Dealers need time to clear space and change their mix. But more importantly, they need to decide whether they want to stick it out at the reduced sales volumes.

For the manufacturers, toughing-out dealers is a major problem. Not because the dealers want to stay in business at any cost. Because they want the best pay-off to get out. The Big 2.8’s dealer deadwood are like holdout tenants in an apartment going condo (or UAW workers looking for a buyout). The longer they wait, they nastier it gets. But the longer they wait, the more they’ll get for leaving.

Bottom line: these sales drops are more of a symptom than a cause. The Big 2.8’s collective collapse is not causing them to finally face reality. The drop is the result of them finally facing reality and giving-up most of their number inflators. 

Fifty years ago, GM had over 50 percent of the entire US market. As of May, the collective 2.8 don’t even hold that much. While that's still a huge slice of pie to bake (about 7.5m cars a year), it’s far below their production capacity. Until Detroit– and by that I mean their ops in Canada, Mexico, Australia, Belgium as well– get their production and model mix in line with the REAL market is (not where they’d like it to be), profits will be… elusive. Meanwhile, there's only one possible way for Detroit to recover market lost share: if and when one of them goes belly-up.

There is an oft-quoted British proverb: “if you find yourself in a hole, stop digging.” We can’t be sure if this is the bottom. As bad as it looks, at least the boys from Detroit have stopped digging– about two years late. 

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27 Comments on “Fixing A Hole...”


  • avatar
    CliffG

    I have worse news for those waiting for the credit “crunch” to ease. We don’t have a true credit crunch…yet. At some point the Fed is going to have to do something about the American Peso. We know from the ’70s and early ’80s there is a solution, strangle the money supply and move interest rates up. Our next President is going to, um, defecate building supplies(?) when that happens early on his watch, but there will be no choice. With your finance arms either gone or still underwater, how do promote low interest loans? You can’t. In other words, you better have something really fascinating on your lot to drag them in. How about that `2009 lineup? Luckily, by then it will the Big 1.74, but other than that… ( Note: I follow the Seattle Mariners in parts of my other life, golly am I having fun.)

  • avatar
    seoultrain

    I’m confused on who exactly this article is talking about. It seems as though the subject here is GM, as they have the most dealer inventory backup, as well as too many plants operating at too little capacity. While it’s easy to lop all the Detroit automakers together because of their location and their synchronized sales drops, I think each of them is pretty unique in their situations.

    Ford is the closest to the light at the end of the tunnel (volcano?). They’ve been restructuring far longer than the other 2 automakers, and is closest to their home-run small car (Fiesta vs unnamed non-Cobalt replacement from GM vs nothing [?] from Chrysler). Hell, Ford’s worldwide operations even posted a profit in the 2nd quarter!

    GM has, until very recently, been obsessed with keeping the #1 automaker title at all costs. This selling out for the title in 2007 is taking its toll in 2008. Their ridiculous sales drop has given them no choice but to restructure and downsize for profitability, but as the author here says, it’s “about two years late,” which is why I associate this article with GM. Maybe this should be part of the GM Death Watch series?

    I would write about Chrysler, but it’s hard to find a place to start. Chrysler is on life support, and its condition is rapidly deteriorating. I’m struggling to think of a single move made by Cerberus to try and jump start this company. No small cars on the horizon. Oh, but they will have a couple half-assed hybrids. Yay. We all know how great they do.

    In short,
    Ford has pretty good product and a coherent plan for reconstruction, and even the ability to execute said plan.
    GM has better new products than Ford (Malibu, CTS, G8), but has no clear plan. Cutting SUV overproduction is a good start, but that’s pretty much a given, and doesn’t inspire any confidence towards rebuilding the company.
    Chrysler has neither good products nor a plan. God help them.

  • avatar

    So does this mean now is the best time ever to buy American?

    Because my car of the day today is American-ish, well, at least it is under the GM umbrella.

    http://www.caroftheday.org/2008/06/04/saab-turbo-x-1-of-600/

  • avatar
    Rday

    Well I guess the magic number is 2010. When that rolls around we should have a better idea if these make or break products that are supposed to come out, will come out or not. And if they do come out, will they be real winners or just objects to be talked about. I can’t see detroit reacting that fast to the rapidly changing automotive horizon. Wonder if Reckless Rick Wagoner will still be around to introduce all the new models. I have been wrong before so he may still be in charge of the once-largest automotive company in the world. He has an incredible ability make up excuses for his poor performance and keep his job. Pretty amazing.

  • avatar
    Patrick

    Cliff, big 1.74 is optimistic. There will be one survivor, at most, of the Detroit three. Chrysler’s essentially gone, leaving Ford or GM.

    There is room for one domestic manufacturer with about 10% of the market for pickup buyers, government fleets, and traditionalists, even with noncompetitive products.

  • avatar
    Martin B

    I repeat: the domestics’ massive sales drops are a good sign, not a good thing.

    Huh? Maybe I’m dense, but I don’t understand what you’re trying to say.

    You seem to be saying slower sales are a good thing because dealers will be able to clear their overstocked position.

    You seem to be saying the finance companies can recover from making bad loans by making fewer loans in a worse market.

    You seem to be saying that Americans will buy more vehicles if they have only two companies’ products to choose from rather than three.

    If I’ve understood this article, I don’t agree with it. If I’ve misunderstood it, I apologise.

  • avatar
    Paul Niedermeyer

    Andrew: So The Big 2.8 bled the finance unit (easy terms and low rates) to prop-up manufacturing.

    Actually, the finance units have been the biggest and most reliable source of income for the 2.8 (except of course, those that got into real-estate loans). They consistently make money on car loans. If the manufacturer offers low/zero interest financing, that comes out of the manufacturer’s marketing budget (like rebates), as a subsidy to the finance unit. The was a reason Cerberus wanted into GMAC; they just didn’t anticipate the real-estate loan melt-down.

  • avatar
    mel23

    I don’t think anybody has a clue where we are financially. A Bloomberg report today said that .99% of loans are in foreclosure; actually the words were “New foreclosures rose to a seasonally adjusted 0.99 percent of all U.S. home loans”, but I’m putting the best face on it. But, to me, the more startling fact is that 6.35% of loans were one or more payment in arrears. So given that the mortgage holders have figured out by this time that foreclosure is not a good thing for them, how many of the 6.35%-.99% ‘should’ be in foreclosure but aren’t. I guess we could call it a kind of pent up demand for foreclosure.

  • avatar

    When I read the title of article I thought it was about a handyman who was a real jerk.

  • avatar
    John Horner

    A nit: GM’s 1950s market share was in the high 40s, not over 50%.

    http://www.carofthecentury.com/answer_to_gm's_market_share_plunge.htm

    It seems that the premise of the article is that sales for the 2.8 have gotten so bad that they can no longer finesse the thing with gimmick sales and ill-considered loans. Thus they are forced to take their medicine. A provocative point-of-view, but one I do not share.

    What would have been good would have been for management to get it’s act together starting years ago. It was not handed down on a stone tablet that the 2.8 would hand market share over to Toyota and Honda. That did not have to happen. It happened because of bad decisions.

  • avatar
    Steven Lang

    “a financing unit is little more than a bunch of computers, a phone center or two and a [relatively] small work force, most of whom make a lot less than assembly workers.”

    Andrew, I like a lot of what you wrote but this is not a well researched statement.

    Most medium to large finance companies have thousands of employees doing everything from generating and managing relationships with car dealers (which is much harder than you imagine), to developing software programs and models to decipher a good risk over a bad risk ( which is incredibly complex), to those who trade information and loans to find new clients and new opportunities. You also have the originators, the remarketing department, the collections department (huge), the bankruptcy department, auto finance marketing department, internal IT, the finance department, the marketing of these debt obligations… I think you may be getting the idea.

    The auto finance business is by no means a high profit and low risk venture. In fact, even before the subprime crisis hit there were literally dozens of firms that had already gone belly up…. and that was during the ‘good’ times.

    You may want to chop this portion off. It makes for good automotive sci-fi but it’s not how the industry is structured.

  • avatar
    Ashkan

    Hey Andrew “Fixing a Hole” is such an underrated Beatles song, isn’t it? I love it. Especially the ending with Paul’s voice fading into the abyss.
    I have no comment on the actual article. I am depressed and ashamed of Detroit…except the Red Wings.

  • avatar
    motownr

    One of the interesting consequences of the years of virtually giving away loans to even the worst of the worst credit criminals is that the market is essentially ‘fished out’ for new customers.

    Of the few people on the lots these days, many of them are so far beyond being qualified for any kind of financing that it’s almost funny.

    Basically, the Big 3 pulled ahead so much demand via artificial credit and pricing standards that the current drought is going to be far more severe than it might be otherwise.

  • avatar
    AndrewDederer

    Steven Lang:

    I have a pretty good idea what it takes to keep a financial institution going, I’ve worked at more than a couple (one of which shared some space with BMW’s financing arm). The point (which gets smoothed out at 800 words), is that a finance arm’s overhead is nothing compared to auto manufacturing. No suppliers to deal with, not much R&D, no comodity issues, etc. So while it can look like the finance arm is so much more profitable, it’s partially because of lower overhead and partly a result of accounting practices.

    Also, while actuaries etc. aren’t cheap, they don’t make that much more than the basic line workers. And finance doesn’t require anywhere near the people manufacturing does (one factory’s worth, two max).

    So, when GM and GMAC were both making billions, GMAC looked much more efficient. But that was mostly book keeping and structure. GMAC depends on GM feeding it business.

  • avatar
    NickR

    I think I knew the lending side of the equation was screwed from an episode of Judge Judy. Some girl dragged her deadbeat ex-boyfriend into court for literally a few hundred dollars to fix damage he did to the car when he borrowed it. Judge Judt asked where the car was now, and the girl said she got it back as he had ‘got a new Hemi pickup’. He was borrowing a shitbox, couldn’t afford $200 in repairs, but was qualified for a loan for a Hemi Ram? Oy.

  • avatar
    jurisb

    Bleeding like hell. The agonizing three headed dragon with Cerberus feasting at one neck, whipsawing with tail communities into rustbelts and itself into oblivion. The last fulcrums of patriotism hammerred out by immigration waves and skyrocketing sap prices. the mighty roar of labour union assembly line workers wrongly misinterpreted as victory flag . Blood pressure dropping in body and raising in head, before it magically pops releasing dozens of dandelions unfolding their magic parachutes laserguided to million dollar chateaus. Masterminded teeth of dragonlike competiveness with vomited smoke and regurgitated transplant rebadges. Strategies and policies, primaries and Cirque du Soleil of flipflopping promises. the mighty claws of SUV hierarchy losing traction on japanese economy -class hill. What a battlefield. an organized foreign anthill repelling an attack of an oversized fossil, tightening the loop of marketshare smaller and smaller, until one day the beast defuncts being choken by higly organized quatropods and their unremmitting bites of quality, diversity and adaptation skills.

  • avatar
    Steven Lang

    Well, if we could throw the majority of our corporate money into one plant’s product… then of course there would be greater efficiency in that area.

    I just don’t interpret what you just said with what’s stated in the article. Although I think your recent statement is definitely accurate. Although I do have different experiences than you do. Auto finance companies do have to acquire the liquidity that enables them to supply the monies for the dealers (and this is getting to be very difficult). R&D is definitely nowhere near that of a manufacturing outfit. But you definitely have tons of new products and niches that are designed to serve different dealers and customers. Cap One for instance has used a ‘blank check’ product that allows superprime customers to buy whatever car they like up to a specific amount. Today this is starting to become more commonplace but five years ago it was truly a revolutionary idea.

    Money may be a commodity. But the varying levels of risk and reward for dealers and financial institutions is almost infinitely variable.

  • avatar
    BlueEr03

    Meanwhile, there’s only one possible way for Detroit to recover market lost share: if and when one of them goes belly-up.

    I have to disagree with this assessment. Chrysler is basically Chp. 11 now that, when they finally file, it won’t help either of the other 2. If anything, them actually filing for Chapter 11 should save them. But it won’t be until GM goes down that Ford can take off.

  • avatar
    jaje

    They are in survivor mentality at this stage. If two drowning swimmers are next to each other they often wind up holding each other so one survives longer than the other but in the end the fighting each other winds up drowning them much faster. Another analogy is the race between the mortally wounded from a predator – you don’t have to be the fastest runner – just faster than the slowest than your colleague.

  • avatar
    netrun

    Liked the article, good summary of Detroit’s position this five minutes (the only timeframe they are ever interested in).

    Didn’t GM have 54% of the market share in 1972? I can’t find a market share timeline to save my life right now, but a guy that I work with who was at GM at that time made that claim. That would make it closer to losing 1% market share out of a mostly growing market each year since then.

    And since when has a CEO making proclimations about how many months (weeks?) his company has to survive boosted morale? There’s less than 7 months left to the year, how is this good news for anybody?!!

  • avatar
    Mullholland

    jurisb:

    As usual, beautiful and brilliant! I’ve missed your voice. Good to see you back.

  • avatar
    Geotpf

    Chrysler will go out of business within three years. This I am now certain of. I don’t just mean bankrupt, I mean kaput. Eventually, somebody in India or China will start importing things with the words “Jeep”, “Dodge”, and “Chrysler” on the hood, but they will be made in India or China instead of Detroit or Mexico.

    Chrysler’s going away will help Ford and GM, but gas prices are rising so fast, it may not be enough. The fact that now even Toyota has extra capacity in the US means they can soak up a bit of the ex-Chrysler demand as well, which wasn’t the case until recently.

  • avatar
    Edward Niedermeyer

    jurisb:

    Thanks!

  • avatar
    jurisb

    Thank you guys too!

  • avatar
    blitz

    From a dealer standpoint this is part right. I just flew all night to Italy and I am not real sharp. I will take a day or two to put some thoughts together. I was a successful Chev. dealer in a large market that sold out before the***** hit the fan and I can assure from a dealer point of view it cant get much worse, my buddies are scrambling to scratch out any profit if you own domestic in most markets.If anybody has questions for the dealers , I can answer and also have contacts inside GM. will report back. happy and retired in Florida.

  • avatar
    Andy D

    garythepowers :
    June 5th, 2008 at 7:11 pm

    When I read the title of article I thought it was about a handyman who was a real jerk.

    Heh heh, Since the hard times hit me back in ’86, that’s been my survival strategy. Buy used or get free, repair, improvise, and make do. About the only thing I buy new is food.

  • avatar
    Skooter

    “the beast defuncts being choken by higly organized quatropods and their unremmitting bites of quality, diversity and adaptation skills.”

    That was beautiful, insightful.


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