As Sen. Harry Reid (D-NV) stood in the U.S. Senate late Friday evening December 12 and declared congressional efforts to secure a bridge-loan for General Motors Corp. and Chrysler LLC had failed, the thought that the entire automotive industry could collapse igniting a second Great Depression suddenly seemed realistic.
The situation, was, and continues to be dire. GM and Chrysler executives somberly argued their case before Congress stating their cash would be below operating levels by the end of the year.
More than a few people asked the question of whether the automotive industry as we know it is over.
But then, within a few hours, the White House began issuing statements that it would not let the Detroit Three fail, and likely would provide some sort of bailout leading some to hope it would bring an end to the crisis.
Almost a week later the industry was waiting on what was supposed to be imminent word on what the White House planned to do with the distressed auto makers. It was a period in which the auto sector was an industry in limbo, with several companies, auto makers, dealers and suppliers doubting whether they can survive the first six months of 2009.
By the time you read this article, we should know what the federal government's strategy is. It could take the form of a short term bailout taken out of the Troubled Asset Relief Program, or it could be a pre-packaged bankruptcy or a plan requiring deep concessions from the United Auto Workers Union and dealers.
Although a financial aid package for GM and Chrysler should help alleviate some pressure — specifically the fear those companies might not exist in a few weeks, dangerous minefields remain for their dealers.
If the White House plan is short on details for jumpstarting lending to customers and dealers, it is likely the financial aid package will have little effect for dealers.
The most dangerous issue threatening dealers' viability is the tightening floor plan credit.
As of press time, rumors were swirling that Chrysler Financial would stop providing floor plan credit to dealers. According to Chrysler CEO Bob Nardelli's second testimony before Congress in December, more than 240 Chrysler dealers already had declared bankruptcy in 2008, while another 250 were considered critical.
Meanwhile, GMAC LLC also was on the brink in December threatening the existence of nearly 40% of GM's dealers.
December 26 was a critical date for the finance firm. The company wants to submit an application to secure bank status, allowing it to be eligible for TARP funds. Before it could submit the application, GMAC had to convince bondholders to agree to a debt swap of $38 billion for lesser debt.
The original deadline was Friday, December 12, but GMAC extended it two weeks because it fell nearly $17 billion short of its goal.
GM and Chrysler dealers, for the most part, tell Ward's they are unable to secure other sources of financing. In fact, several who floor plan their domestic franchises with import captive finance firms report being told they have to find other lending sources for those brands.
Analysts have been predicting a severe downturn in the number of dealers for several months now. But as of October, only 649 dealerships had closed in 2008, according to a study by Urban Science. That number probably swelled to nearly 1,000 by the end of the year.
Analysts predict hundreds of dealers will be unable to hang on through the first quarter of 2009. The real credit crunch is expected to hit early in the year as many dealers are left without means to secure operating capital. Several analysts and dealers believe as many as a third — almost 7,000 — dealers could be gone by the end of 2009.
Of course, if GM and Chrysler both survive, that number will be far less — between 3,000 — 4,000.
“If a dealer can't replace their floor plan lender, he is out of business,” says Richard Sox, an attorney with Myers & Fuller PA, a firm specializing in franchise dealer law. “The problem is, we're finding independent banks aren't stepping up to the plate.”
Import dealers also are getting caught up in the credit tsunami, according to Sox.
“They're not sitting pretty either right now,” he says.”When we start looking at the numbers, many of them are losing money.” The problem is many of them have built palatial dealerships in recent years to comply with manufacturer guidelines.
Those guidelines were based upon a growing market. Now, many dealers are not selling enough vehicles to keep up with the payments of their new facilities.
The facility issue might have a bizarre effect on Chrysler's dealer body, says Paul Melville, a partner with Grant Thornton LLP Corporate Advisory and Restructuring Services. The Chrysler dealers with the best chance of surviving might be the ones with older facilities,” he says. “They likely aren't over-leveraged with a lot of debt from new buildings. On the other hand, dealers with newer facilities might be in a lot of debt and not have a lot of operating capital on hand.”
So how can dealers make sure it's not over for them?
Experts say it is all about cash today. Whatever dealers can do to improve cash position, they need to implement those strategies immediately. One area GM dealers need to look at is their offset accounts with GMAC, Sox says. He advises dealers to pull out any money that is over and above their minimum payments in the offset accounts. If a dealer owes significant money in floor plan, a judge could rule the offset money be used to pay the debt down, so it's best to get it out now.
Sox also suggests dealers with multiple store locations consider consolidating brands under one roof. Although, manufacturer approval is necessary, dealers may be able to press the issue today, especially if the brands are experiencing significant downturns in sales.
For dealers who have not made money in a while, it might be time to consider a voluntary termination, says Sox. That way, they can be sure to get the voluntary termination benefit, something they may not get if their manufacturer declares bankruptcy. It's a case of get what you can now, because it might not be there later, he says.