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For dealers, auto bailout can’t come too soon

Local dealers say that in the auto crisis, they are where the rubber meets the road. While a bailout of the auto industry won’t solve longstanding problems, they say, it could buy them time to ride out the credit crisis that has sent sales plummeting.
Image: Ford dealership
Ford SUVs sit on the lot of a dealership in Royal Oak, Mich. Bill Pugliano / Getty Images file
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Perhaps no other place in America outside Detroit has more at stake in the debate over whether to bail out the auto industry than National City, Calif., sandwiched between San Diego and the Mexican border.

National City is home to the Mile of Cars, one of the world’s first auto malls. More than a century after the first dealer set up shop, 21 auto dealerships squeeze along a single mile of the main drag of the city.

To a big extent, National City’s fortunes are intertwined with those of the Big Three Detroit automakers, whose chief executives are asking Congress to approve $34 billion in government loans to help them survive the worst auto sales in a quarter-century.

Sales taxes on automobiles alone generate almost $5 million a year for the city of 60,000, while a special property tax assessment on the Mile of Cars brings in $3 million more. Add in other taxes and fees on dealerships and supporting businesses like parts suppliers, and the Mile of Cars pumps in nearly a fifth the city’s general revenue.

“The future is uncertain,” the 2008-09 budget warns. “... Since we are sales tax dependent, we are impacted by regional, state and federal economic trends.”

In National City, those trends are terrible as, month after month, the Big Three report sales drops of up to 47 percent.

“This dealership has been here 60 years, and we’ve never dealt with anything that we’re going through now,” said Mike Palomata, general sales manager at McCune Chrysler-Jeep. The dealership recently laid off 50 employees, about a tenth of its workforce.

For now, National City is keeping its head above water, thanks to the massive San Diego Naval Shipyard, part of which spills over from San Diego. But Mayor Ron Morrison said the problems in the auto sector “are more than ripples. These could be more like tidal waves.”

‘Real serious real fast’
Auto dealers across the country, like those along the Mile of Cars, say that in the auto crisis, they are where the rubber meets the road.

“This is different than anything I’ve ever seen in 48 years of being in the car business, when the public just decides all at once that there’s no reason on Earth that they need to go out and buy a car,” said Les Donovan, owner of Donovan Auto and Truck Center in Wichita, Kan. “It gets real serious real fast.”

At You Me Affordable Automotive in Orlando, Fla., owner Sal Fusco spends part of every day taking phone calls from old friends looking for jobs. They had worked for Bill Heard Enterprises of Columbus, Ga., which was the nation’s largest Chevrolet dealership with $2 billion in annual sales before it declared bankruptcy and closed all of its 14 massive showrooms from Florida to Arizona in September. Overnight, 2,700 jobs disappeared.

“They’re friends, they’re colleagues, and they’re out of work,” Fusco said. “I can’t tell you how many calls, and I’m not in a position to hire any more people right now.”

Plenty of customers, but few can get loans
It’s not that there aren’t interested buyers — dealers say traffic to their showrooms has remained steady.

And it’s not that the manufacturers can’t supply the cars — just the opposite. At Youngblood Nissan-Chrysler-Kia in Springfield, Mo., for example, unsold cars are piling up on the lot so fast that sales manager Richard James has extended the usual 60-day inventory cycle to 100 days.

“The manufacturers are all just stuck with the inventory, which is costing money, and they have to lay the people off, because they can’t build more vehicles, because we’re not selling more vehicles,” James said.

The immediate problem is the same drying up of credit that brought the financial services industry to its knees. It hits manufacturer, dealer and buyer alike, creating a cycle in which dealers can’t get credit to buy inventory from the manufacturers and the manufacturers can’t get credit to buy supplies and reimburse dealers for sales incentives, all because the consumer can’t get credit to buy a car in the first place.

When General Motors announced last month that it would delay by two weeks its scheduled payments to reimburse dealers for rebates and other sales incentives, it had a ripple effect that was felt in the wallet of every consumer who was thinking about buying a GM car or truck.

That’s because an auto dealer makes only about 5 percent gross profit on the average sale. Sixty percent of that — 3 of those 5 percentage points — isn’t realized until the end of the financial quarter, when deals with manufacturers, shippers and numerous other middlemen are reconciled. Until then, that cash flow has to be financed to pay the day-to-day bills, said Ed Williamson, owner of 11 General Motors franchises in the Miami area.

That means dealers need credit, which is backed up by sales. But because of the overall credit shortage, buyers often can’t get auto loans, meaning sales are drying up.

Lenders traditionally have worked with buyers who have less-than-premium credit ratings, but no more. Now, unless their credit ratings are at least 750, 25 points above the national median, buyers are often frozen out.

“We’re probably losing at least 20 percent of our sales because we can’t get anybody financed that’s got a credit score of 650,” Williamson said.

Buying time for $34 billion
The hope is that if the government steps in with $34 billion to help the automakers, demands on dealers will lessen, allowing them to offer better deals.

“Maybe with some of the [money], we can make the car more affordable so the credit that is available can help us put people in more cars,” said Scott Adams, president of three Toyota and Chevrolet dealerships in Kansas City, Mo.

Rex Gingrich, a Chrysler dealer in Kokomo, Ind., said: “We don’t look at it as a bailout. We look at it as a loan.”

Dealers acknowledge that it’s hard to make the public see why it would be a good thing to divert tens of billions of taxpayers’ dollars to the Big Three.

It’s true that the automakers are inefficient behemoths, offering too many models of cars, said Kirk Stump, president of Dale Jarrett Ford in Charlotte, N.C. At the same time, he said, the government aid would buy time for the automakers to get back on their feet.

Under no circumstances, said Stump and numerous other dealers, should any of the Big Three be allowed to declare bankruptcy, which they said would destroy consumer confidence in the entire U.S. auto industry.

O.C. Welch, owner of O.C. Welch Ford-Lincoln-Mercury in Savannah, Ga., said it still wasn’t clear to him how a bailout would lead directly to increased sales. But “if GM or Ford files bankruptcy, I don’t know who would buy a car from a bankrupt manufacturer.”

Williamson, the GM dealer in Miami, shook his head and said, “Ooh,” when asked about the impact if one of the Big Three went into bankruptcy.

“They’ve done the research to see what the buyer’s attitude would be about buying an automobile from a company that’s in bankruptcy. That’s not a very pretty picture,” he said. “So anything to keep them out of bankruptcy is a good thing.”

Propping up a rock of the economy
A bailout might seem like throwing good money after bad, but the auto industry is so deeply embedded in the American economy that there there’s no real alternative, dealers and economists said.

Including extended sectors like parts companies and repair businesses, the Big Three account for about 3 million U.S. jobs, retirement and health benefits for millions more and a big chunk of tax revenue. So the demise of one or more would have a devastating effect on local economies everywhere.

“You can’t just let one go under,” said Ronnie J. Phillips, an economics professor at Colorado State University. “You could start to see unemployment rates like we have not seen since the Great Depression.”

Malcolm Harris, an economics professor at Friends University in Wichita, said: “If you have a half a million or a million people out of work, with retail sales in real terms already down 5 percent over a year ago, you’re taking what’s becoming a significant recession and making it a lot nastier.”

Then there’s the carry-on effect.

“It’s getting kind of scary,” said Jim Florian, who manufactures auto parts for Quality Mold & Engineering in Baroda, Mich. “If they file bankruptcy, we’re all in trouble.”

Stump, the North Carolina Ford dealer, asked: “If we shut down, what does that do to the restaurants that are nearby? What does that do to the mortgage companies? What does that do to the housing industry?”

“This is big-stakes stuff,” said Craig Bickmore, executive director of New Car Dealers of Utah, an industry trade group. “It’s a big impact here.”