Leaner, more viable carmaker emerges
BY GREG GARDNER • FREE PRESS BUSINESS WRITER • July 12, 2009
One month after leaving bankruptcy court, Chrysler has slashed inventories without selling cars at fire-sale prices and already is seeing the estimated resale value of its vehicles increasing.
The company still has a long way to go to get competitive. Scars of 789 terminated dealerships remain fresh, and Chrysler sales for the first half of the year are down nearly 46%.
But suspending production for nearly two months and giving priority to retail sales rather than discounted deals with rental companies are beginning to pay dividends.
In June, Chrysler held 9% of the retail market — in which consumers buy from dealers — up from less than 8% a year earlier. The days of pumping them out and pushing them onto dealers appear to be ending.
Chrysler’s inventory is down to 71 days’ supply at the end of June, down from 114 days on April 30, the date of its bankruptcy filing, according to Ward’s Automotive Reports. Generally, a 60-day supply of inventory is considered ideal.
Detroit-area parking lots where Chrysler has stored bloated inventories are empty for the first time in years.
Not only were the 44,000 vehicles held by the terminated dealers sold off, but Chrysler is not pushing dealers to take more vehicles than they can sell.
“Right now, I put in orders for 400 more vehicles, but I may not get that many,” said Bill Golling, a Bloomfield Hills Chrysler, Jeep and Dodge dealer. “That is different.”
The result of that strategy has been stable prices. Chrysler’s average transaction price has settled at about $25,200, where it has been for about six months, according to J.D. Power & Associates. Now with 25% fewer dealers, that average price is expected to grow in the second half of the year.
The House of Representatives is trying to force Chrysler and GM to restore nearly 3,000 dealers, but the benefits of a smaller dealer network already are beginning to manifest themselves.
“When you have as many dealerships as these companies have had, there has been unnecessary competition that has driven down prices,” said Joe Spina, a senior analyst with Edmunds.com.
Automotive Leasing Guide, a Santa Barbara, Calif., research firm that automakers and finance companies rely on for pricing new car leases, has raised the residual, or resale, values (a vehicle’s estimated value at the end of a lease) for Chrysler vehicles with leases ending this month and in August.
For Chrysler-brand vehicles, ALG boosted the residuals to 32.5% of original sales price from 28.8% on leases that ended in May and June. Dodge residuals increased to 34.8% from 31.3%, and Jeep jumped to 37.4% from 32.4% in the previous two months.
The higher a vehicle’s residual value, the smaller the consumer’s monthly payments.
This is important because a year ago, Chrysler Financial stopped leasing altogether.
Resale values for large pickups and SUVs plummeted in the wake of $4-a-gallon gas prices. Leases, which had accounted for about 20% of Chrysler’s sales in mid-2008, were adding to the company’s losses because when they took those trucks and SUVs to auctions, they were selling them for less than the residual values used to price the leases.
Because of that, creditors began pulling back on financing or demanding more collateral.
Despite ALG’s upgrade, Chrysler likely won’t jump back into leasing aggressively. Post-bankruptcy, GMAC is the company’s primary source of financing for dealers and consumers.
“We don’t have a plan to finance any substantial volume of leases at this time. Standard lease rates are still cost-prohibitive for most customers,” said GMAC spokeswoman Sue Mallino.
Dan Frost, owner of Southfield Chrysler-Jeep-Dodge and Telegraph Chrysler-Jeep in Taylor, says some lenders, including U.S. Bank and Wachovia, are beginning to underwrite leases again.
Leasing might never return to the boom days of the late 1990s, but stronger residual values mean vehicles depreciate more slowly, eventually strengthening trade-in values.
These encouraging early signals are driven by Chrysler’s decision to stop building cars and trucks altogether for two months. Sustaining this modest momentum will require keeping production in line with demand.
“We can’t build more cars than we can sell again,” said Frost.
Contact GREG GARDNER: 313-222-8762 or ggardner@freepress.com
