Can the Auto Industry Still Sell All Its Cars?

Despite production cuts and deep discounts, carmakers and dealers will be more challenged than ever to sell the vehicles in the pipeline

by Jim Henry

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Since Henry Ford's time, it has always been said of automakers that "they sell every one they build." No matter the make, the model, or the year, eventually every single car, van, or truck that came out of the factories found a buyer.

But as every new auto industry sales report seems worse than the previous month's, and once-popular—and profitable—vehicles like SUVs and pickup trucks become sales pariahs, will automakers still be able to sell every one? With the lethal combination of a slumping economy, tight credit, depressed homebuilding, and record high gas prices, Americans can't afford to buy as many new cars as they once did. And the models they want are smaller and more fuel-efficient. Even with deep discounts and heavy incentives, the rows of unsold Dodge Rams (BusinessWeek.com, 3/22/08) and Chevy TrailBlazers parked in front of dealerships across the country barely seem to thin.

So what happens?

"Unlike Wal-Mart, other big-box stores, or virtually any major retailer, [auto] manufacturers do not buy back the merchandise a retailer doesn't sell to a consumer. The misconception many people have about new-car sales is that the automaker is actually doing the selling to consumers. In reality, a manufacturer sells to a dealer, and it's up to the dealer to retail the inventory," said Art Spinella, president of CNW Marketing Research in Bandon, Ore.

Sluggish Turnover

Once U.S. dealers buy a new vehicle at wholesale from the factory, it's up to them to sell it, period. It may take longer than they'd like, and they may not get the price they want, but sooner or later, all new vehicles get sold. In 20 years of keeping statistics, Spinella said the average number of days for a complete turnover of new-car inventory at a U.S. dealership has been 64 days. Today, the average is 73 days, vs. an average of 77 days in 1990, the worst year on record, he said. Spinella said that late in the summer of 1991, dealers still had 200,000 leftover 1990 models.

The worst specific example he could recall was that it took Oldsmobile dealers 16 months to sell their leftovers after General Motors (GM) shut the marque down in 2004.

But 2008 is shaping up to be a bloody year as well. In response, automakers have already cut North American production by more than 900,000 units in the first half of this year, close to an entire month's worth of U.S. sales, mostly in trucks and almost entirely at the Detroit Big Three.

Morgan & Co. in West Olive, Mich., forecasts total 2008 North American production at about 13.7 million vehicles. That would be about 1.4 million, or 9%, below 2007, the company said. However, the Big Three announced additional third-quarter production cuts in late June and early July. Those cuts and updated estimates for the fourth quarter will be reflected in an updated forecast later this month.

Accordingly, GM said on July 1 it would cut the number of trucks produced in North America in the third quarter by 209,000 and increase the number of cars by about 89,000 vs. the year-ago period.

Steep Drops in Big Three Output

Overall, GM's North American third-quarter production, including plants in the U.S., Canada, and Mexico, will be down about 12%, to about 900,000. The vast majority of production in the NAFTA countries is aimed at the U.S. market.

On June 30, privately held Chrysler cut shifts at several factories and announced layoffs.

Ford Motor (F) cut already reduced third-quarter production plans by an additional 50,000 units on June 20, to 475,000. That's a reduction of 25% from the year-ago quarter.