Ask Dr. Z: Chrysler's Sales Bank

Historically 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?