Inventory Traffic Jam Hits Chrysler
* JANUARY 12, 2009
Inventory Traffic Jam Hits Chrysler
With Sales Down Sharply, Dealers Aren't Ordering New Cars Despite the Frail Auto Maker's Requests
After a deep slide in sales in the fourth quarter, Chrysler LLC now faces a new obstacle in its battle to survive: Many dealers are loaded with inventory and aren't ordering new vehicles.
Take Bill Rosado, owner of a Chrysler-Dodge-Jeep dealership in Milford, Pa. He says he is resisting the company's requests to add more stock to his already-crowded lot.
"We're not ordering any cars in spite of the pressure they give us. We are going to sit tight with what we have," Mr. Rosado said. "We don't see any peak coming up where all of a sudden Chryslers are going to be desired."
Chrysler's financial troubles compound his concerns. Four months ago, Mr. Rosado had to close a Dodge store in Wilkes-Barre, Pa., after sales slowed, and he is still waiting for payment from Chrysler for parts that he returned.
"They are so behind paying us," he said. "We're all very cash-strapped at this point. So to build up additional receivables is certainly not attractive to us."
An auto maker books sales when vehicles are shipped from its plants to its dealers, so a slowdown in orders reduces a car company's revenue.
Chrysler was nearly out of money last month before it got $4 billion in emergency loans from Washington. During the next few months, the company needs to find a way to keep revenue coming in as it scrambles to slash costs. By March, Chrysler has to show the U.S. Treasury Department it is viable as an independent company, or it could be required to pay back the money or be denied further loans.
At the North American International Auto Show in Detroit, Chrysler Chief Executive Robert Nardelli acknowledged the company's cash reserves are dwindling. Chrysler ended 2008 with $2 billion in cash, he told reporters, compared with $11.7 billion in June. The company's cash holdings will hit a low point this month, he added.
He added that Chrysler is expecting to get an additional $3 billion in government loans, and said Chrysler doesn't expect a rebound in the market during the first quarter. Chrysler, a private company controlled by private-equity group Cerberus Capital Management LP, expects an annualized selling rate of 10.6 million vehicles in the quarter, in line with the depressed levels of the past few months.
Chrysler's situation is the most extreme example of an inventory glut plaguing all auto makers as a result of the slide in auto sales at the end of 2008.
The inventory pile-up is likely to add gloom to the Detroit auto show, which opened on Sunday. Normally, the show provides a swell of enthusiasm that helps spur sales in dealer showrooms. But the mood in Detroit is downbeat after sales slowed to their lowest level in 25 years.
AutoNation Inc., the country's largest chain of car dealerships by revenue, estimates that 3.2 million vehicles are now sitting on dealer lots across the country. At the current retail sales pace, that is enough to last more than four months. Mike Jackson, chairman and chief executive of AutoNation, said Sunday that his company will cut new vehicle orders in half for the first quarter.
On average, vehicles that were sold in December had been on dealer lots 92 days before being bought, up from 59 days a year earlier, according to J.D. Power & Associates. Chrysler vehicles sold in December had been on dealer lots for 142 days, the most of any maker, compared with 70 last year.
The logjam of vehicles stems from the fourth-quarter slide in U.S. vehicle sales. Total U.S. sales fell 35% from a year earlier in the final three months of 2008. Chrysler's declined 46%, according to Autodata Corp.
In reaction, Chrysler has shut down all of its plants for a month until the middle of January, and won't have any revenue coming in until its plants start up and begin shipping cars and trucks.
Chrysler is "at a high-risk state," said David Cole, chairman of the Center for Automotive Research. "They will probably somehow be absorbed somewhere in the industry," he added. "Whether they are divided into pieces, it all depends on if there is a policy decision."
Other manufacturers also have put the brakes on production to address mounting inventory. Toyota Motor Corp. this past week said it will idle plants in Japan for 11 more days than it had previously planned in the fourth quarter. Ford Motor Co. is extending its year-end shutdown at 10 North American plants by an additional week. General Motors Corp. has idled most of its factories for much of January.
That will have a direct impact on their revenue, said Haig Stoddard, an industry analyst at IHS Global Insight. "At the end of the first quarter we may really find out who is going to make it or not," he said.
Chrysler is offering financial incentives to get dealers to stock up. In the fourth quarter, dealers could earn bonuses if they ordered extra vehicles.
But many are balking. Greg Simpson, general manager of York Chrysler Dodge Jeep in Crawfordsville, Ind., saw his inventory double after he closed a sister Dodge dealership. He has only seven vehicles on order for January. "Hopefully they are not going to shove anything down our throat," he said.
LINK:Inventory Traffic Jam Hits Chrysler - WSJ.com
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