Breaking the Law: Automaking's Supply and Demand Dilemma
http://www.thetruthaboutcars.com:80/?p=3186

By Frank Williams
February 21st, 2007 1,251 Views
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 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.

--
"If they pull a knife, you pull a gun. If they put one of yours in the
hospital, you put one of theirs in the morgue."
Sean Connery, "The Untouchables"