Cars Grow Scarce as Detroit Cuts Costs

Aug 12th, 2010 | By businessnews | Category: Business

August 11, 2010, 12:20 AM EDT

By Theo Keith

Aug. 11 (Bloomberg) — Ford Motor Co. used to flood Beau Boeckmann with more cars than he knew what to do with. Now, he’s not getting enough.

Boeckmann, vice president of Galpin Ford in Los Angeles, asked for 100 Fusion sedans in July. He received 7.

“I am begging for inventory across the board,” said Boeckmann, whose dealership is the automaker’s top-selling U.S. store. “I couldn’t sleep a year ago because I thought, ‘We have a year’s supply of these cars!’ And now I’m worried about our inventory again because we don’t have enough.”

With Ford, General Motors Co. and Chrysler Group LLC kicking a decades-long habit of building more cars than customers want, dealers are howling that they can’t get enough models to drive sales back to pre-recession levels. This newfound discipline preserves the automakers’ profit per vehicle and draws praise from investors. At the same time, it cuts retailers’ volumes.

Gordon Stewart, who owns Chevrolet dealerships in Michigan, Georgia and Florida, said GM isn’t producing enough Equinoxes to meet his requests. Sales of the Equinox could be triple or quadruple current levels if he had adequate supplies, he said.

“The requests mean nothing,” Stewart said in a telephone interview. “They appreciate the requests, but it does nothing for what they can produce.”

Increasing Output

GM said last week it would increase output of the Equinox. The company is trying to meet demand without building too many vehicles and relying on discounts as it did in the past, said Tom Henderson, a spokesman for Detroit-based GM.

“We’re working awfully hard to provide the additional capacity to meet that demand,” he said. “But we don’t want to go back to the days where we had overcapacity and had to use a lot of incentives.”

Chrysler slashed production by half in 2009, and GM cut 44 percent as the companies went through bankruptcy and extended summer plant shutdowns. Ford, the only major U.S. automaker to avoid bankruptcy, lowered output 16 percent, according to J.D. Power & Associates in Troy, Michigan.

Cutting production has allowed the automakers to curb the discounts they’d relied on to move inventory for years, said Tom Stallkamp, a partner at private-equity firm Ripplewood Holdings LLC and a former Chrysler Corp. president.

“It took the financial collapse to make them realize that pushing them down is not the best way, that having consumers pull is better,” Stallkamp said.

Ford had 349,100 vehicles of supply at the end of July, 30 percent less than two years earlier, while GM’s inventory dropped 43 percent to 424,000 and Chrysler’s declined 53 percent to 191,000, according to the companies.

Paying More

“Buyers have always been able to find 10 versions of the same vehicle they want,” said Jeff Schuster, J.D. Power’s executive director of forecasting. “Now we’re in an environment that they’re probably not going to get the exact one they want and they’re going to pay more because the incentives aren’t there.”

The trend contributed to lower-than-expected sales in the past few months, he said. U.S. auto deliveries reached an annualized rate of 11.5 million in July, according to Autodata Corp. of Woodcliff Lake, New Jersey. The average estimate of eight analysts surveyed by Bloomberg was 11.9 million. June sales also trailed analysts’ estimates.

Deliveries last year fell to 10.4 million, the lowest since 1982, compared with the average 16.8 million vehicles a year from 2000 to 2007.

Mexico Hurricane

A hurricane that delayed rail shipping in Mexico is holding back sales of Ford’s new Fiesta subcompact, George Pipas, the automaker’s sales analyst, said in an interview last week.

The company delivered 3,000 Fiestas, or less than one per store, and almost 7,000 are en route to dealers, Pipas said. Dearborn, Michigan-based Ford has no plans to increase production of any of its current models because demand is fragile in the weak economic recovery, he said.

Ford has been working to limit its inventory since 2005, in part to help retailers save money by borrowing less to stock their lots. The leaner inventories have been “healthy” for both the automaker and its retailers, Mark Fields, Ford’s president for the Americas, told reporters at a conference last week in Acme, Michigan.

“They don’t have to carry as much inventory so they have lower floor-plan expenses,” he said. “We can help turn their inventory faster so they get the sales but have lower expenses.”

SUV Shortages

Group 1 Automotive Inc. considers the inventories “ideal,” though there are shortages in SUVs, Chief Executive Officer Earl Hesterberg said.

“Every brand is short,” Hesterberg said on a conference call last month. “Every dealer is missing sales.”

AutoNation Inc., the largest U.S. dealer group, agrees the lower inventories are good for the industry, said Marc Cannon, a spokesman.

“We’re 100 percent in support of this new reality,” Cannon said.

Supplies at Sonic Automotive Inc.’s more than 120 U.S. stores, are “as close to nirvana as you can get,” Jeff Dyke, vice president of operations, said on the company’s earnings conference call last month.

Most of the shortages are of new or redesigned models such as the Cadillac SRX sport-utility vehicle that are in higher demand than previous offerings, said Jessica Caldwell, senior analyst at, a car-shopping website.

‘Desperate’ for More

“Dealerships have been struggling for some time now,” Caldwell said. “Now that they get their hands on cars that are selling, they’re desperate to get more of them.”

Ford’s redesigned Explorer also may be in high demand when it reaches dealers’ lots in December, based on customers’ reactions at the SUV’s unveiling in Los Angeles, Galpin Ford’s Boeckmann said.

“They were saying, ‘This is going to sell like crazy,’” he said.

Chrysler dealers have had to wait longer for revamped vehicles. The Auburn Hills, Michigan-based carmaker introduced the 2011 Jeep Grand Cherokee in June, the company’s first major redesign since its 2009 bankruptcy, and will release new versions of the Dodge Charger and Durango this fall.

Chrysler, now controlled by Fiat SpA, added a second shift to its Jefferson North plant in Detroit to make the Grand Cherokee, and Chief Executive Officer Sergio Marchionne said the automaker may add a third shift this fall to produce the Durango.

Chrysler said its plant in Sterling Heights, Michigan, which had been scheduled to close in 2012, will stay open and add a second shift in 2011.

Production Increase

The additional shift and overtime hours are increasing Grand Cherokee production to help meet demand, said Ralph Kisiel, a Chrysler spokesman. More overtime is possible when the automaker introduces new models later this year, he said.

The Grand Cherokee is helping the Bob & Chuck Eddy Chrysler Dodge Jeep dealership in Austintown, Ohio. While Grand Cherokee inventory is running low, it’s a better problem to have than last year, Chuck Eddy said.

“It’s the hottest I’ve seen that product in my life,” he said in a telephone interview. “Last year, it was survival.”

–With assistance from Mark Clothier in Acme, Michigan, and Keith Naughton in Dearborn, Michigan. Editors: Kevin Orland, Jamie Butters.

To contact the reporter on this story: Theo Keith in Southfield, Michigan at

To contact the editor responsible for this story: Jamie Butters at

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