Auto Dealer Credit Squeeze Wildfire
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The finance arms of the big three automakers are cutting back on credit extended to their dealers. This is putting some auto dealers in extreme jeopardy. The WSJ discusses the bleak dealer situation in Tight Credit Puts Squeeze On Big Three Auto Dealers.
The credit crunch squeezing Detroit's Big Three auto makers is now spreading to some of their dealers, adding financial pressure to a group already strained by this year's big drop in auto sales.Auto Dealer Wildfire
The latest and most prominent example is Bill Heard Enterprises Inc., one of the largest Chevrolet dealers in the country, with 2007 sales of $2.1 billion. Earlier this month GMAC LLC, the financing company partly owned by General Motors Corp., stopped doing business with Bill Heard over concerns about financial losses related to the privately owned chain of 14 stores, Bill Heard confirmed through a spokesman.
In the past, GMAC, Chrysler Financial and Ford Motor Credit were key elements in how Detroit pumped up vehicle sales. They typically offered dealers easy credit to help them sell as many cars and trucks as possible, even if they gave away some of their margin to do so.
But now that the car makers and their once-lucrative financing units are racking up losses and struggling to raise funds themselves, they are getting tougher on dealers with weak finances. And since GMAC and Chrysler Financial are both controlled by private-equity group Cerberus Capital Management LP, each is now being run to maximize profits, not auto sales.
Other domestic-brand auto dealers around the country are also feeling the pinch. In Sacramento, Calif., Winter Volvo Lincoln Mercury is preparing to close its doors on Sept. 2, after 60 years in business. Also in the Sacramento area, Elk Grove Ford closed at the end of June and Great Valley Chrysler Jeep went out of business in May. After suffering a big sales drop in the first few months of 2008, Longhorn Dodge, in Fort Worth, Texas, shut down in May.
GMAC declined to comment on Bill Heard. But a spokeswoman acknowledged that "clearly this is a challenging market environment," adding that its actions "are not different than that of other financial-service companies."
Dealers are stuck with SUV and truck inventory they cannot sell and GMAC is bleeding losses so badly that it is in no position to grant subprime leases, one major way GM sold cars. Bill Heard is in particular trouble. Imagine owning 14 stores and having GMAC financing completely shut off. And remember we are only in the 3rd or 4th inning of the credit crunch.
This makes GM's Ridiculous Bluff to announce price hikes in June look even sillier. Dealers are hurting, cash strapped customers are hurting, sales are plunging and GM thought it could raise prices.
Now, games with leasing are not even an option. A few dealers have already thrown in the towel. Expect to see hundreds more before this mess is over. Dealer bankruptcies are going to spread like wildfire.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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