If you want evidence that challenging times lie ahead for the automotive industry, look no further than the theme of the annual convention of the nation’s auto dealers in San Francisco this week: “profitability.”
It’s a worthy goal for the 91-year-old National Automobile Dealers Association, especially when you consider the challenges dealers face this year.
Auto sales are likely to be hit hard as the housing downturn continues to drag the economy down into a possible recession. U.S. vehicle sales are likely to fall 3 percent this year to 15.5 million units, which would make it the worst year since 1998, according to Global Insight, a research firm.
And the Big Three U.S.-based automakers are stepping up their efforts to consolidate their bloated dealership networks.
“The profitability issue has been a concern [for dealers] for the past year, and we felt we might as well get right out there and be upfront and get dealers’ attentions to see if we can help them to improve it,” said Dale Willey, NADA’s outgoing chairman and owner of Dale Willey Automotive in Lawrence, Kan.
Dealers are cautious about the year ahead, Willey said.
“There’s a general lack of confidence — a sense of doom and gloom about the economy, the mortgage market and the subprime situation,” he said. “People have been using the equity in their homes as a personal savings account, and now that the value of their homes has depleted they’re not in the mood to spend money.”
Automakers have cut tens of thousands of jobs in recent years, and now they are turning their attention to the dealer networks. GM reduced its dealer network by about 7 percent between 2005 and 2007, and the automaker wants to further consolidate the market distribution of it brands into four distinct dealer channels comprising Chevrolet, Saturn, Buick/Pontiac/GMC and Cadillac/Hummer/Saab, according to The Detroit News.
GM has a glut of dealerships, especially when compared with its Asian rivals. Toyota and Honda, which sell the No. 1 and No. 2 best-selling cars in the nation, respectively, have far leaner networks. Toyota has 1,244 U.S. dealerships compared with 4,000 for GM’s Chevrolet — even though the two brands sold almost the same number of vehicles in 2007, the newspaper reported.
Automakers also are boosting incentives. Cars sold in January on average carried factory incentives worth $2,401 per vehicle, up $167 or 7.5 percent, from January 2007, Edmunds.com reported.
“We do not foresee a dramatic turnaround in market conditions for at least the next several months, and yet the race for increased market share is in full force,” said Jesse Toprak, executive director of industry analysis at Edmunds.com. “This will provide a test of the automakers’ discipline about incentives.”
Still, with household budgets expected to be tight this year amid broad economic weakness, automakers are expected to keep incentive spending high. Ford reportedly is planning to hike incentive spending to counter aggressive pricing by competitors and ensure demand for its most profitable vehicles like the best-selling Ford F-150 pickup truck, which is under threat from Toyota’s Tundra and the new Dodge Ram.
Although automakers have long said they want to get away from the reliance on discounts and incentive deals, which can cheapen brand image and hurt resale values, NADA’s Willey doesn’t think the manufacturers will be able to wean themselves off the discounting any time soon.
“Lots of people who want to trade in their car still owe a balance on their original car loan, and so the incentive they received on the original car loan helps them to pay that off,” he said. “So it’s going to be difficult for them to give up on these incentives, at least for the next year and a half.”
Mike Jackson, chief executive of AutoNation, the nation’s largest automotive retailer, believes the aggressive interest rate cuts being engineered by the Federal Reserve will revive consumer spending by the second half of the year.
“We have two consumers in front of us,” he told CNBC recently.
One is ready to buy but under financial stress, and the credit situation has deteriorated so much in the last three to four years, that only a large drop in credit standards would allow for a sale. The other would like to buy, but has a sense that there may be a “super, mother-of-all” incentive programs on its way, so they are waiting, he said.
“I don’t see any super incentives coming,” he said. “Our industry has cut production rather than taking incentives to another level. Combined with the rate cuts I think it’s going to seep into the consumer’s mind-set that this is it, and that it’s safe to buy big-ticket items, whether it’s housing or automotive, and I think you’ll see that later this year.”