IE 11 is not supported. For an optimal experience visit our site on another browser.

Auto dealers feeling pain of credit crunch

The tightening credit markets means countless car buyers are unable to get auto loans, and it’s hitting automotive dealerships hard.
Image: 2008 Chevrolet Colorado pickup truck
Despite price slashing and special events, dealers aren't seeing much traffic in showrooms.David Zalubowski / AP file

With legislation to fix the nation’s current financial crisis still up in the air, the view from the showrooms of McEleney Autocenter in Clinton, Iowa, is gloomy and getting gloomier by the day.

“I wouldn’t characterize our business as doing great,” said John McEleney, who runs the pair of automobile dealerships selling General Motors, Toyota and Hyundai vehicles.

“Sales in September were OK; Hyundai sales were down and Toyota sales were down a bit. We kind of mirrored what’s happening nationally, but not quite as bad. The national sales numbers for September were ugly, but here in Iowa we weren’t hit as hard by the credit crisis.”

Rattled by higher gas prices, turmoil on Wall Street, a string of high-level bank failures and tighter lending standards, car shoppers are shying away from buying new vehicles, and it’s hitting auto dealers hard.

Stark evidence of the problem came Wednesday, when new data showed U.S. auto sales  dropped below 1 million last month for the first time in over 15 years.

Every major vehicle brand — including more popular names like Toyota and Honda — reported drops of over 20 percent from the year before, except for General Motors, which saw its sales drop 16 percent. Automakers are now expected to sell about 14 million cars and light trucks in 2008 — the worst annual mark in over a decade.

“Domestic dealerships are under stress,” said McEleney, who is chairman-elect of the National Automobile Dealers Association, a trade group.

“Volumes are down, and underwriters are more cautious when it comes to extending credit,” he said. “In a few cases, customers were not able to get loans. It’s not impossible for people to get credit, but it’s certainly more expensive now because of higher interest rates and stricter terms.”

Just as dealers were getting a handle on the shift away from larger pickup trucks and SUVs toward smaller, more fuel-efficient cars, the credit crisis has come along to make a terrible year much worse.

“What’s most interesting in the September auto sales numbers is the focus of the crisis in the automotive sector has changed,” said Aaron Bragman, an auto analyst with the consulting company Global Insight.

“It’s no longer about the switch from big vehicles to small cars; it’s the fact that you can’t even get a car if you want one,” he said. “This is one of the most visible facets of the paralysis in the credit markets. When sales of the Toyota Camry are down over 20 percent, you know there’s a serious problem.”

The outlook for dealerships certainly looks grim. In the final 10 days of September, when media outlets were filled with news of the financial crisis, floor traffic fell at vehicle showrooms more than 50 percent from the same period a year ago, according to CNW Marketing Research in Bandon, Ore. It was the worst month for showroom traffic showing since CNW began keeping track in 1986.

“Manufacturer incentives aren’t pulling in the crowds,” said Art Spinella, president of CNW, in a research note. “Dealer ‘blowout sales’ aren’t working,” he added. “And without showroom traffic, it’s tough to sell anything.”

Another report form consulting firm Grant Thornton LLP says car dealership failures could accelerate this fall and in 2009 as weak sales, increased operational costs and the credit crunch continue to take their toll. The firm estimates that 3,800 or the nation’s 20,700 or so dealerships — or about one in five — will need to close.

“An increasing number of dealers are simply closing their doors because sales have plummeted, credit has dried up, the overall retail environment is increasingly challenging and potential investors are sitting on the sidelines,” said Grant Thornton partner Paul Melville.

Georgia-based Bill Heard Enterprises, which operated the nation’s largest chain of Chevrolet dealerships, ceased operations on Sept. 24, blaming difficult financing conditions and the declining automobile market.

The pressure is also on for Detroit’s auto-finance companies, including GMAC Financial Services, Chrysler Financial and Ford Credit.

While they’re supposed to make it easier for consumers to buy vehicles at the major automakers, a tighter credit market means they’re reducing their exposure to risk, according to Jessica Caldwell, manager of pricing and industry analysis at automotive research Web site

“So only those with good credit have a chance of financing,” she said. In September the average down payment on an auto loan rose to over $3,000 for the first time in a few years, while the annual percentage rate on auto loans rose to its highest level since February, she said.

The three auto financing companies have either eliminated their leasing programs or pared them back substantially. They’ve lost billions of dollars in their leasing operations because the weak auto market means those leased vehicles are worth significantly less at the end of the lease terms, Caldwell said.

All three financing companies are lobbying to be included in the Federal Reserve’s $700 billion bailout plan that was originally intended to take on troubled mortgages. The auto financing companies want their bad loans covered too. Congress already has approved $25 billion in federal loans to help bail out the auto industry.

“So they’ve lost billions of dollars and now people aren’t buying cars, so they’re getting hit at a time when they don’t have a lot of financial stability” said Caldwell.

McEleney says the enactment of the $700 billion financial rescue plan for Wall Street, which was passed by the Senate and is awaiting its fate in the House of Representatives, would go a long way toward stemming the current plunge in auto sales.

“From my standpoint, we need to get this rescue plan approved,” he said. “There’s so much lack of consumer confidence out there, and people are worried about their jobs; the plan is better than no resolution, and it would prevent auto sales from deteriorating more than they have to. I think it would go along ways to helping the auto sales numbers and I think most dealers would agree with me.”