Blaming Dealers Is Wrong

Pinning the blame or the cost of sagging new-car sales on dealers is just wrong. I understand how tough it must be for manufacturers to look in the mirror and see the failure of so many of their products as self imposed. I also understand they did not single handedly cause the price of oil to rise or the stock market to fall. But, neither did their dealers, and neither a fancier showroom nor deeper

Pinning the blame or the cost of sagging new-car sales on dealers is just wrong.

I understand how tough it must be for manufacturers to look in the mirror and see the failure of so many of their products as self imposed. I also understand they did not single handedly cause the price of oil to rise or the stock market to fall.

But, neither did their dealers, and neither a fancier showroom nor deeper capital reserves will get us out of today's slump. It will take time, a deep commitment to our existing customers and faith that we're going to weather this storm together.

Sadly, as I talk to other dealers these days I hear a lot about closing down, going out of business and bleeding money. Even dealers with great brands are selling cars below cost on the long-shot that later service sales will be profitable. There is just no real faith out there.

The newest coffin nail comes courtesy of Wall Street which entered the picture with elevated “risk-ratings” for lenders and manufacturers whose portfolios are backed by unstable inventories. Risk-rating is banker-speak signaling penalties for something they don't trust. Simply stated, Wall Street has struck a bright line around anyone whose money is tied to floor-plan financing or retail paper (especially leases). The Street has connected the dots between unprofitable sales of vehicles on dealer's lots and deterioration of manufacturers and lenders connected to that dealer. For some stupid reason everyone had been operating as if sagging profits indicated weak or too many dealers, not insensitive or indifferent lenders or manufacturers.

Slow to fully embrace their own part, manufacturers have been showing a “not so subtle” interest in dealers' capital reserves demanding that dealers replace lost capital or risk losing their lines. Just as callously, they have eliminated lease products on difficult to sell models and some (Chrysler Financial leading the pack) have told their dealers that slow moving vehicles must be paid down or paid off.

Of course, on a fast look this might just seem a Darwinian economic thing. Money is scarce so well-healed dealers will survive and the rest will die out. Problem solved. But it doesn't make sense that the tipping point on this issue will be based on a dealer's bank balance.

Forcing a dealer to pay off a sluggish vehicle is, at best, a short term fix and that's assuming that dealers have the resources. It does not cure why the vehicle wouldn't sell. Moreover, it kicks a dealer for helping out in the first place. Forcing dealers to pay for the foolishness of taking slow moving vehicles not only pronounces a death sentence on the franchise; it drives a coffin nail into the value of the manufacturer who would hide behind that dealer.

Besides, if you think Wall Street dislikes the “potential” for inventory losses, how do you suppose they're going to react to actual losses forced by ineffective strategic and transitional plans or the public outcry from the sales tactics that such desperate measures will surely inspire?

Unfortunately, the historic answer to overproduction — “fleet sales” (where vehicle discounts too drastic to show the public, or dealers, are hidden in fleet subsidies), is also in the cross hairs of industry analysts. Wall Street may have been slow to decipher our industry dynamics, but now that they have, they've become very good at discounting all the tangents however subtle or derivative.

A more enlightened path would release the water in current inventories over time. Vehicles should be taken to market for what the market will bear. But, we need to share the responsibility until market conditions come together. This may take a single sale or several and should leverage the new and used car skills that dealers possess. This would also reward manufacturers with large dealer bases.

Selling bad inventory at a loss does not create loss, it merely quantifies it. The loss that exists in a product is there while it sits unsold on a lot waiting for someone to accept the facts. Market forces create this and it cannot be solved by dealers who only meet the market. In time we will have more popular, well priced, and fuel-efficient products, but, that will take years. In the meantime, it is senseless to continue the shell game of in whose statement to hide the loss of vehicles rolling out of factories. We need a partnership of lenders, manufacturers, dealers and government to guard against carpetbaggers who might architect a selfish deal for themselves.

The curious thing is not Wall Street connecting selling price, sales pace, and credit facilities. It is the notion that a sustaining solution can be a dealer thing. Dealer resources are not deep enough to fill the hole and the time it will take for the weak to die off is woefully insufficient for manufacturers to design new products for which the public won't mind paying full price.

Decades of easy credit, marketing schemes and no-fear warranties fueled today's issues. Turning all that around by starving dealers is not an answer.

If we are to rid ourselves of financial trickery and climb onto a solid foundation of real value, honest service, and product integrity, we need to start by sharing the medicine of selling current stock for what it's worth.

Questions or comments about this column? Send us an e-mail at [email protected].

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