This picture was above the fold at Drudge earlier today. It accompanied a story about the ever-evolving proposed auto-bailout. The picture, however, illustrates much of the problem, and contra-everything else you’ve read, it’s a problem that has nothing to do with the unions.
First, a little history. Years ago a new car buyer would go to the auto dealer and look at the cars on the lot. They would be a representative sample of that year’s models from which you could make a decision, but you weren’t expected to buy from the lot. No, once you settled on a model, then you would go to a book and order the exact options you wanted. Then a few weeks later the car would arrive and you would pick it up at the dealer. This is how I remember my father buying the 1970 Oldsmobile Vista Cruiser station wagon (tell me that this isn’t a Family Truckster) that we picked up literally on the way to the hospital before bringing home my mother and my baby sister.
Contrast that business model with the first picture showing a row of nearly identical unsold cars. Consider what it costs to pay the man shown cleaning them, or to pay the insurance on them, or the loan that the dealer takes to afford his stock. Now consider how much the dealer stands to lose on his unsold 2009 inventory when he has to slash prices to make way for the 2010s. I don’t know the actual numbers, but it wouldn’t surprise me if several thousand dollars of the cost of every car is attributable to overhead management.
Now consider how long it takes to produce a car. You might be surprised to learn that from start to finish the entire process takes hours, not days or weeks. Consider also that every dealership in the lower 48 is no more than four days from Detroit and you’re probably already seeing the makings of a solution to significantly reduce the price of a car, lower the dealer’s liability, and increase Detroit’s bottom line.
The solution is simple. Each dealer has a representative sample of cars on their lot–enough so that you can make a decision, but not so many that you should expect to drive off the same day with the car you want. (Aside: I can think of no other industry where you actually pay less to get exactly what you want now than you do to order it and wait. But Detroit’s business model is so utterly backwards that this is exactly what happens. If you happen to find the car you want on the lot, the dealer is so anxious to reduce his inventory that he gives you a price break to drive it away instead of charging you more for the convenience of immediately giving you what you want. How stupid is that?) You then order the car you want and the dealer guarantees a delivery date–usually less than ten days.
The benefits of such a system are obvious. The automakers would only plan to produce enough inventory to give each of their dealer’s a representative stock. That frees up their remaining capacity to produce to actual demand. The newly available time then allows the automaker to retool to produce more of the hotly-selling models and removes thousands of lemons that won’t sell from clogging prouduction.
The dealers won’t be sitting on millions of dollars of loans to cover the cost of large lots full of unsold cars that all require costly insurance, constant cleaning, and eventual markdowns to eliminate excess inventory at the end of the model year.
And the customers win by getting essentially the same thing they get now–I just bought a new car a couple months ago and since the dealer didn’t have exactly what I wanted, they had to ship it from another dealer, meaning that I had to wait several days for the car anyway–but at a lower price.
Everyone is so focused on the labor cost of a car, but even with the generous UAW contract, the actual labor cost of manufacturing a car is only about 10% of an average $24,000 car. Slash that by a third and the price of a car drops only eight hundred bucks. As much as I think the average UAW employee is overpaid, they aren’t the source of the problem. The larger problem is that, for the money, the cars that American manufacturers are manufacturing aren’t the cars that American buyers want to buy. By freeing up the capacity currently used producing to an (overly optimistic) forecasted demand, the car manufacturers could then have plenty of available time to make the cars that market says that people really do want to buy.
But they’re never going to get there if instead they’re busily building what is shown in this other Drudge picture: a lot full of cars, many of which will have to eventually be sold at a loss.
Bill Hobbs adds this comment:
Here’s the basic problem with your proposal: If I need a new car today, and Carmaker A tells me I have to wait a week, and Carmaker B has cars on the lots at dealerships near me, Carmaker B is more likely to get my business.
This is the current business model that the carmakers use. So let’s play with some numbers to learn why it is unsustainable.
If a car manufacturer has five different models, each available in eight exterior colors and two interior colors, along with two different engine choices, and three different option packages available, they will create 480 different standard configurations for that model year. For a dealer to stock just one of each kind he needs a three acre lot and has about ten million dollars in inventory, requiring about $50,000 a month just to service his loan.
So when Bill shows up to buy the Toyota Rav4 in burgundy red with the grey interior in a 4-cylinder model with the Limited package, they have it available . . . IF he was the first one to visit the dealer looking for that car. If someone else before him already bought the same configuration from the dealer, that dealer will have to wait six to eight weeks for a replacement to be manufactured and shipped. Now the manufacturer could try to mitigate Bill’s lost sale by forecasting how many of that particular package are going to sell that year, and therefore, stock more than one–but now we’re talking about doubling or tripling the dealer’s inventory. Sure, there are market analysts out there who will help you to project demand, but the number of 2008s (and even some 2007s) still on dealer lots right now tell you how successful those forecasts are–even when there isn’t a downturn in the economy.
This is the current business model the auto manufacturer’s employ. It is unsustainable, with or without a bailout package. It is also not specific to just American manufacturers. The model I mentioned above is the car I bought two months ago. I went to a local dealer, and from their lot full of dozens of Rav4s, they did not have what I wanted–and I didn’t even care about the color–I only wanted a 4-cylinder, 4-wheel drive, with a Limited package. They had to transship the car from another Toyota dealer somewhere else in the country so that I could have it a few days later.
If you are Volvo or Jaguar or some other overseas manufacturer you have no choice but to employ the business model described above–unless you employ the Harley Davidson model of order-and-wait. Surface transportation times virtually guarantee that orders can’t be filled in less than six weeks. But American manufacturers (and foreign manufacturers with American plants) aren’t confined to being weighed down with significant overhead.
One of the carmakers is going to figure out what I’ve described. And whomever it is will profit, even in this economic downturn, while those who don’t, will (or should) go bankrupt. Giving taxpayer money to any company who doesn’t understand that retail (the auto business is no different than any other retail) is all about increasing inventory-turns, is a waste of our money. And those who do understand that, don’t need, and won’t take our money.