Despite production cuts and deep discounts, carmakers and dealers will be more challenged than ever to sell the vehicles in the pipeline
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.
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.
Ford and its U.S. dealers had an unsold inventory of 215,000 F-Series pickups (BusinessWeek.com, 4/19/06) as of July 1, representing a 133-day supply at the current selling rate, according to the Automotive News Data Center. The industry benchmark is a 60-day supply.
Despite a "You Pay What We Pay" employee-pricing discount on the F-Series, sales of the full-size pickup fell 40.5% in June from the year-ago month. In response, Ford took the rare step of postponing the launch of its new-generation 2009 F-Series by at least two months until late summer, to give dealers more time to clear their lots of leftover 2008s.
Feeling for the Bottom
"It's clear the automotive consumer is under a lot of pressure and stress. How it's manifesting itself is uncertainty to big purchases," said Jim Farley, Ford's group vice-president, marketing and communications.
"We think this is going to persist for many months to come, possibly longer. It's difficult for us to say whether the economy has reached a low point, but we obviously don't expect significant improvement," he said in a July 1 conference call.
Even Toyota Motor (TM) is feeling the pinch. It announced on July 10 that it would suspend production of its full-size Tundra pickup (BusinessWeek.com, 1/30/07) and Sequoia SUV (BusinessWeek.com, 1/15/08) from Aug. 8 through early November, but with no layoffs. In the first half of 2008, U.S. Tundra sales were down 7.6% from the year-ago period, to 76,516. In June, Tundra sales were down 52.9%, to 10,238.
Starting in the spring of 2009, Toyota will stop building the Tundra in a plant in Indiana and will consolidate production in a Texas factory that's already building the Tundra. Starting in late 2010, the company also announced it would start building the hybrid Prius (BusinessWeek.com, 6/6/08) in the U.S., at a plant under construction in Mississippi.
Don't Keep On Truckin'
If there's a silver lining for the auto industry in the present downturn, it's that with notable exceptions, the automakers are cutting production rather than swamping dealers or rent-a-car companies with inventory. The latter was standard operating procedure in earlier downturns, even though the automakers shoot themselves in the foot when they swamp dealers with inventory. Too much supply drives down new-car prices, which hurts both the brand's reputation and the resale value of used cars.
Despite this year's slumping sales, the U.S. industry had a moderate 61-day supply as of June 1, Automotive News said. But that average includes a fat 90-day supply of trucks, and a skinny 41-day supply of cars.
"It's the haves and have-nots," said Ford's Farley. "Dealers tell us they want a lot more of these, and not a lot more of those," he said.
The dealers want cars and crossover vehicles, especially with four-cylinder engines. "You have dealers screaming for any type of four-cylinder product from us," Farley said.
What the dealers don't want are trucks, especially full-size pickups and SUVs. "We have areas in the country where we have a lot of pickup truck inventory," Farley said. Even more ticklish, demand for small fuel-efficient cars and hybrids is outrunning supply. For example, Toyota recently said it had only a one-day supply of Prius, meaning the car is essentially sold out with a waiting list, and Ford is adding production for its Focus.
But autumn is just around the corner, and with it comes delivery of 2009 models. There may be fewer trucks and SUVs and, with any luck, more fuel-efficient cars. But with their arrival, the 2008s may be harder than ever to move. If they linger on well into next year, they may not sell at all.
Click through BusinessWeek.com's slide show to see which are the worst-selling cars for the first half of 2008.