High Interest Rates Hurt Manufacturers, Dealerships : Whole Auto Industry Squeezed by Sales Drop
With his sales half what they were a year ago, Dan Koeppel has had to postpone plans to spend $250,000 refurbishing his Chrysler-Plymouth dealership in New York.
“Profits are off--way off,” Koeppel said last week. “Any guy who puts a lot of money into a dealership right now ought to have his head examined because the volume is not there.”
Koeppel is not alone. The nation’s auto industry, which employs 860,000 to make cars and parts and 900,000 others in 25,000 dealerships, seems headed into its most serious sales slump since the one at the start of this decade. Experts say high interest rates are mainly to blame.
The slump means bargains for consumers. It has created a glut of many models that has forced auto makers to offer big rebates and cut-rate loans and has forced dealers to accept lower profit margins. Even Japanese auto makers, whose dealers once could demand $1,000 surcharges on many models, have been forced to offer cash incentives to dealers or direct-to-the-customer rebates.
“My sales are up, but my profit is way down because it’s a buyer’s market and the buyer expects a deal,” said Michael Lazarus, an Amityville Volvo dealer who is president of the Greater New York Auto Dealers, a trade group.
Raw sales figures tell only part of the story. Sales of passenger cars are running about 6% behind last year’s, totaling 4.5 million units through June 10, and sales of trucks are down 3% to 2.3 million units.
But the deepest concern among manufacturers and dealers is smaller profits. Despite shrinking demand, more cars and trucks are being poured onto the market. Foreign-based manufacturers are cranking up production at their U.S. plants or setting up new ones. Meanwhile, the Big Three--General Motors, Ford and Chrysler--have been unwilling to cut their own production by like amounts for fear of losing more of the market share.
Many Layoffs
“I think the Big Three are playing a game of chicken,” said Michael Luckey, an industry consultant based in New Jersey. “Nobody wants to back away much. There have been some minor cuts in production, but nothing like what they should have done.”
John Staluppi, owner of the Atlantic Auto Mall in West Islip, N.Y., said sales are running about 5% behind last year’s levels in the 16 Long Island new-car franchises he owns wholly or in part. He said there has been some improvement recently, but he said he has laid off 150 employees, leaving about 650. “We’ve cut our overhead and we’ve lowered the prices of cars,” he said.
To reduce the supply of unsold cars, workers at a number of Big Three auto plants, including one in Edison, N.J., that builds Ford Escorts, are being given longer vacations this summer for which, under their union contract, they get paid 95% of their regular salaries.
Experts analyzing the auto makers’ third-quarter production schedules say that, unless sales improve dramatically, inventories will grow in coming months and buyers can expect the sales incentives to continue through the summer. No one is predicting price cuts, however; like many retailers, auto makers make only temporary price reductions in the form of rebates, but they almost never reduce list prices.
Experts are, however, predicting hefty sticker-price increases on the 1990 models, averaging 4% or 5%, compared to less than 3% last year. The increases are meant to cover increased material and labor costs and help pay for passive restraints, the automatic seat belts or air bags required in all cars for 1990. Although some or all of the hikes might disappear in the form of rebates, some dealers are worried that they could further harm an already sick market.
Risk for Buyers
There is at least one potential risk for buyers in the current market. Experts see early signs of a shakeout that could force financially weak dealers--thousands, by some estimates--to close their doors over the next year or two. High interest rates have put an added squeeze on dealers by making it more expensive to maintain inventory. Like buyers, dealers usually finance cars they buy from the factory, then repay the lender when the cars are sold.
For buyers, the risk is that the dealership from which they purchased their car might have changed owners or shut its doors when they return later for servicing.
Auto makers, dealers and outside experts attribute the sales slump to several factors, but high interest rates usually are mentioned first.
“If you look at why the market is weak, it’s interest rates, primarily,” said Edward J. Sullivan, vice president for automotive consulting of the WEFA Group, an economic forecasting company based in Bala-Cynwyd, Pa.
Higher rates impair consumers’ ability to buy cars in several ways. They raise monthly payments for vehicles, including most imports, that are not covered by manufacturers’ cut-rate financing programs. They increase payments on other consumer loans, such as variable-rate mortgages and home-equity loans. And the rates are believed to have a psychological dampening effect on consumer confidence and, therefore, consumer spending.
Some experts say that because of strong new vehicle sales since 1984, the market is saturated. And some believe the car makers are paying the price now for the huge number of five-year loans offered in earlier years to help buyers afford new cars. Those loans have left many Americans with little or no equity in vehicles they now own, so they are unable to make down payments on new cars.
