Breaking the Law: Automaking's Supply and Demand Dilemma

Frank Williams
by Frank Williams
breaking the law automaking s supply and demand dilemma

A recent post questioned the relative power of engineers and MBA’s in the automotive industry. A quick scan of corporate rosters reveals that the biz brains control most companies. The hierarchy makes sense; automaking is a business. Yes, but– whether their MBA's came from Harvard, Yale, or Vinny’s School of Business and Mortuary Services in Hoboken, the “suits” should know that too much unsold inventory is a bad thing. As a corollary, continuing production as unsold inventory piles up is a very bad thing. As in fatal.

Last year, Tommy LaSorda’s mob over at Chrysler put the theory to the test. At one time, the guys stuffed Chrysler’s “sales bank” with 100K excess vehicles. And there they sat, waiting for the dealers to catch up and cough up. After drastic production cutbacks and “if you’re breathing you’re approved” financing offers, dealers managed to whittle that number down to something a little less, um, dangerous.

The holiday break certainly helped; the two week shut down cut off the unwanted flow at the knees. As the sun rose on the New Year, Chrysler’s supply was closer to the industry’s Maginot Line: 60 days. The carmaker claimed a 51-day supply of 300's, a 68-day supply of Jeep Libertys and a not entirely horrendous 110-day supply of gas-guzzling Dodge Rams.

When production started again, inventory levels rose with tidal inevitability. In January, Chrysler averaged 14 sales per dealer. Dodge dealers dealt 28 sales apiece, and Jeep dealers averaged 13 sales per store.

The Chrysler Group then added an estimated 152K new cars to their inventory. And so, by the first of February, Chrysler/Dodge dealers sheltered a 78-day supply of 300’s, a 98-day supply of Libertys and a 111-day supply of Rams.

Meanwhile, GM dealers are also choking on product. As of February first, GM’s “Like Always” brand (a.k.a. Saturn) had a 230-day supply of Ions (which is only 29K units, but there you go). GMC dealers were sitting on 20K or 211 day’s worth of Yukon XL’s, a 98% increase from January’s 113-day supply.

And the hits just keep on not happening. In January, Buick dealers averaged just four new car sales per store. No wonder they have a 170-day supply of LaCrosses and a 116-day supply of Lucernes.

Ford can’t afford to laugh at their cross-town rivals. Mercury dealers only managed to move six cars apiece in January, staring down the barrel of 7K unsold Montegos (enough to last 147 days). Ford stores averaged just 35 sales each last month (mostly trucks), with 24K post-pre-Taurus Five Hundreds (a 169-day supply) going nowhere slowly.

In a declining market with hundreds of available models, Toyota is the only transplant that seems immune to the temper of the times; they’ve got low supplies of, well, everything and an industry leading 126 sales per dealer.

Meanwhile, Honda holds a three-month supply of Elements and Ridgelines. Nissan can’t shift enough quirky Quests (144 days), Frontiers (122 days) and Maximas (113 days).

Even so, thanks to hot-selling Fits (25-day supply) and CR-Vs (19-day supply), Honda stores are cranking out 87 sales per dealer. While Nissan thanks its lucky Altima (51 days) and Versa (52 days) for helping dealers achieve 68 sales per month.

Mitsubishi? Not so good. The automaker started February with 3400 Eclipse Spyders (a 275-day supply). Relatively speaking, the Dodge-built Raider pickup is a hit. At the end of December, Mitsu had a 165-day supply. By the start of February, inventory had dwindled to 149 days. Of course, that’s still more than double the industry benchmark…

While manufacturers are quick to blame excess winter inventory on seasonal fluctuations, here’s the bottom line: unions.

Common sense says that when sales drop, you cut production. Unfortunately, the automakers’ contracts with the United Auto Workers (UAW) mandate that they must continue to pay their employees full whack even if The Big 2.5 cut back or stop production.

They’re caught in a classic Catch-22. Should they pay workers to do (and produce) nothing, or keep the lines running in hopes they might sell a few more vehicles? Either way they’re screwed.

Rather than force a showdown with the UAW, automakers are going hey diddle diddle, straight up the middle. They’re paying the workers a big pile of cash up front to go away forever. Market share may be lost forever, but hey, they're gonna hit something and that’s the way it goes.

Even with the buyouts, supply continues to outstrip demand, leading to drastic deals. Buyers looking for bargains wait for the desperation sales and the cars’ reputations suffer accordingly. Brands become synonymous with “cheap”– regardless of product quality. Sales fall further as most consumers turn to undiscounted brands, figuring they must have higher quality. (There’s your perception gap.) And the production lines keep moving.

One way or another, it’s a death spiral that has to end.

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  • Glenn A. Glenn A. on Feb 27, 2007

    1950's GM cars had many "issues" it wasn't just Chrysler stuff, or Ford stuff. In fact, even Packard's fine engineering reputation took a major nose-dive in 1955 with the (foolish) simultaneous new assembly plant (too cramped), new V8, new Torison Level, new Twin-Ultramatic (too weak for the V8) and restyle. GM automatic transmissions took a major quality nose-dive in the 1950's, despite GM being (supposedly) the first to introduce same (in fact, that's even a lie - Reo introduced a "self-shifter" in 1933, a full 5 years ahead of the other Lansing car manufacturer, GM's Oldsmobile). The Chevrolet Turboglide (1957-1961) was an absolute POS, the "slim jim" 3 speed Roto-Hydramatics of the same era were even worse (if that were possible), even the supposedly bullet-proof original four speed Hydramatics had a lot of issues (the 2-3 or 3-2 shifts had two sets of planetary sets and bands, one upshifting and the other downshifting simultaneously - it never worked properly when slightly worn out, even though GM persisted from 1938-1964). As for all late 1950's cars, quality was an oxymoron. They could nearly be "heard" rusting in the garage, in northern climates (with salted roads) or near the sea (salty air). As for current dealers that cannot even be bothered to put decent chairs in their waiting areas or treat people like absolute morons, well..... Some dealers are as moronic as can be and one has to wonder why the car manufacturers persist in allowing them to keep franchises.

  • Geeber Geeber on Feb 27, 2007

    GlennA: I didn't say that GM cars of that time were without fault...but they were still head and shoulders above what Chrysler and Ford were offering, not to mention the imports. Vehicles must be viewed in the context of their era. Here are two indications of how the public viewed GM's cars from that time, as compared to the competition: By 1961, the wholesale value of a 1957 Chevrolet was TWICE that of a comparable 1957 Plymouth. And 1958 Cadillacs did a much better job of holding on to their value when compared to their competitors from Lincoln and Chrysler (Imperial).

  • ToolGuy Here is an interesting graphic, if you're into that sort of thing.
  • ToolGuy Nice website you got there (even the glitches have glitches)
  • Namesakeone Actually, per the IIHS ratings, "Acceptable" is second best, not second worst. The ratings are "Good," "Acceptable," "Marginal" and "Poor."
  • Inside Looking Out "And safety was enhanced generally via new reversing lamps and turn signals fitted as standard equipment."Did not get it, turn signals were optional in 1954?
  • Lorenzo As long as Grenadier is just a name, and it doesn't actually grenade like Chrysler UltraDrive transmissions. Still, how big is the market for grossly overpriced vehicles? A name like INEOS doesn't have the snobbobile cachet yet. The bulk of the auto market is people who need a reliable, economical car to get to work, and they're not going to pay these prices.