Unsold cars rile mega-dealer
AutoNation: Glut worse than makers say, requires bigger cuts

October 27, 2006

The nation's largest dealer of new cars and trucks said Thursday it is struggling to sell many more domestic vehicles than industry reports about swelling inventories would suggest -- and the problem must be dealt with soon.

"The challenge that we have is even greater than people are talking about," Mike Jackson, chief executive officer of Florida-based AutoNation Inc., told the Free Press in an interview. "It's weighing on every retailer."

AutoNation is a crucial cog in the U.S. auto industry, with 80 General Motors Corp., 48 Ford Motor Co. and 58 Chrysler Group dealerships nationwide, in addition to 147 other auto franchises. Jackson's remarks came after AutoNation reported that its profits sank 37% in the past three months, to $81.8 million -- giving a glimpse into how Detroit automakers' falling sales are affecting dealers.

Jackson said GM, Ford and Chrysler need an aggressive combination of incentives and production cuts soon to deal with the inventory glut. Otherwise, he said he feared dealerships across the country would be selling 2006 vehicles well into 2007.

All three automakers noted that they already are taking steps to cut production.

Ford said it would cut its production of new cars and trucks during the last three months of the year by 168,000 vehicles -- its deepest production cut in more than two decades. GM is cutting 150,000 from its production. Chrysler, meanwhile, has said it would build about 135,000 fewer vehicles during the second half of this year.

Paul Ballew, executive director of market and industry analysis at GM, and George Pipas, Ford's top sales analyst, emphasized that AutoNation orders its vehicles, so it has some control over its inventory levels.

But Jackson insisted the automakers are not being aggressive enough in managing their supply of vehicles.

Dealers take out hefty loans to pay for the big inventories they keep on their lots, an expense that can become painful when inventories swell or interest rates rise. The Federal Reserve raised interest rates 17 straight times before August to keep inflation in check. That means the candle has been burning at both ends for domestic auto dealers.

How inventory is measured

Jackson expressed concern the automakers are not taking the problem seriously enough because they are relying on an outdated industry measurement called "days supply."

That is the number of vehicles in inventory divided by the selling rate of vehicles in the prior month. Historically, a 60-day supply of vehicles is considered adequate to meet consumer demand. Anything more than that has been viewed as excess inventory, leading to discounts or production cuts.

"They're sitting there saying, 'Well, we have 75 days. That's not too far from 60. What's the problem?' " Jackson said.

"I look at my storage lots, and there are vehicles as far as the eye can see. There's no way that's 75 days. And as you dig into it, you see there's massive distortion."

The problem, according to Jackson, is that automakers don't separate retail sales to consumers and fleet sales to rental car companies, governments and businesses. So fleet numbers distort how many days of supply of inventory are really crowding dealership lots across the country.

Ron Pinelli, president of Autodata Corp., an independent auto research firm in Woodcliff Lake, N.J., said firms such as his rely on data automakers provide publicly, and that the way days of supply is calculated hasn't changed in decades. But he agreed Jackson has a valid concern about the way fleet sales distort the picture.

Chrysler spokesman Kevin McCormick said the company was comfortable with the current method of reporting and calculating supply. "It reflects sales to all of our customers," he said. "It's a recognized industry way of reporting."

But Jackson gave his own calculation as to how many days of supply Detroit's automakers are carrying at retail, to show that the automakers have many more months' worth of vehicles than needed.

"Nationally, GM retail inventory is 94 days, not 76," he said. "Nationally, Ford retail inventory is 105 days, not 75 days. And finally, national Chrysler retail inventory is 126 days, not 82 days."

More than anything else, Jackson's assertion may show that the old automotive standard of "60 days supply" may be going out the window.