DETROIT – An overly eager auto industry is producing too many vehicles, nearing the red line of inventory levels, says outspoken megadealer Mike Jackson, CEO of AutoNation.
“Is this where we want to end up again?” asks the head of the country’s largest dealership chain, referring to the days of industry overproduction that ran rampant until the recession decimated auto sales.
For a few post-recession years after that meltdown – when sales went from 16.2 million in 2007 to 10.6 million in 2009 – automakers cut back scheduled production in a newfound effort to match supply to demand.
It got to the point that some dealers complained about stock scarcities, although it increased transaction prices and reduced incentives.
But now, some manufacturers, spurred by heightened competition, are backsliding by increasing output past demand, Jackson says, calling it “massive ineffectiveness.”
He describes U.S. inventory levels of 3.5 million vehicles as far too high. Inventory reached 3.44 million units in December, the highest for the month since 2006 and a 13.6% increase over December 2012, according to WardsAuto data.
“People say 60 days inventory is acceptable, so everything is hunky-dory, but that includes fleet sales, not just retail,” Jackson says at the Automotive News World Congress here.
“Take out those fleet vehicles and you are talking about 90 to 120 days of finished goods sitting between the factories and dealerships.”
Days’ supply is calculated by dividing both the number of unsold vehicles in transit and on dealership lots by the daily selling rate of the previous month. Days’ supply was 64 in December compared with 58 that month in 2012.
Jackson warns of potentially returning to the days when automakers stored excess production units at airports and other places with vast parking lots.
Automakers fixate on just-in-time delivery from their suppliers to avoid stockpiling parts at assembly plants, he says. “But they don’t seem to care about the same thing when it comes to finished product.”
Excess inventory may force automakers to offer big consumer incentives and compel deep discounting at dealerships.
Jackson also decries the structuring of stair-step incentive programs some auto makers use to spur dealers to higher sales.
The programs distribute sales-performance rewards unevenly, encourage dealer end-of-month price slashing, create unfair advantages for some dealers, demoralize others and create pricing confusion among buyers, says Jackson.
“Consumers must search the marketplace because of disparity of prices depending on which dealer is where with what retro program,” he says.
“It can create huge disconnects. We’ve had programs with some manufacturers where the next incremental unit for our company is $400,000. I would pay a customer to take that car. ‘Please, here’s $20,000, drive that car out the door.’ It’s a crazy way to run a business.”
Long an opponent of incentive programs leading to “2-tier, 3-tier, 4-tier pricing,” he hyperbolically predicts an outcome like the “Breaking Bad” TV series finale with “everyone dead on the floor with blood running out.”
On the positive side, he says auto sales are brisk in large part because of low interest rates that should stay that way for a while.
He also applauds the quality and scope of product on the auto-show floor. “When you think about the pace and cadence of (automotive) innovation, it is mind-boggling. Where the industry is today is an unbelievable story.”
He recalls rating the displayed goods at the Detroit show 10 years ago. “My scorecard usually was 25% of the vehicles were crapola that wouldn’t sell without incentives, then there were a few winners and the rest fell in between. I shaped my acquisition strategy according to what I saw.”
Today, “they’re all winners,” he says, referring to high levels of design quality, innovation and technology offerings from brand to brand.
He points to the upbeat nature of this year’s event, contrasting it with the low spirits during hard times. “I’ve been to funerals where the mood was better than the auto shows of 2008 and 2009.”
