Drip, Drip, Drip

Auto dealers earlier this year were saying the credit freeze was giving them a bad case of hypothermia.

Deep into the third quarter, after federal stimulus programs such as Cash for Clunkers and multi-billion dollar bank bailouts, credit issues continue to put a chill on dealers, consumers and auto sales.

Although some people detect a drip, drip, drip of melting ice, dealers wonder: Is the credit crisis really thawing 舒 and for whom? If it is getting better, dealers' fears aren't necessarily abating.

“The No.1 problem facing the auto industry still is tightness of the credit market,” says John Garff, CEO at Garff Automotive Group, St Lake City, UT.

He explains: “We have plenty of customers in the showroom, but they're being turned away because we can't get them financed. This is happening all over the country.”

The 54-franchise Garff dealer chain, which is 50% domestic brand, was founded in 1932 by his grandfather, Ken Garff. The group is No.18 on the Ward's Megadealer 100, posting $1.2 billion in 2008 annual revenues.

The group and dealers nationwide got a big boost in August from the popular Clunkers program, officially called the Car Allowance Rebate System, or CARS. “We did about 2,000 deals,” Garff says.

But many consumers did not qualify for the Clunkers and had to sit out the big whoosh of nearly 700,000 light-vehicle sales in August.

Consumers, accustomed to 0% financing, big incentives and stimulus programs, are waiting for the next big wave.

What's needed now is not another federal stimulus, but attention aimed at the credit industry, dealers say.

“I don't think the government needs to do anything to stimulate the market,” Garff says. “What they need to do is focus on banking and financial institutions to ease up lending. You can't have a healthy free market without credit and banks lending money.”

The first round of federal bailouts was imperative to stabilize the banking industry. And the government was working with banks to lend money.

“But most banks put the money on their balance sheets and sat on it,” Garff says. “Until markets can go back to functioning the way they did, with loans and credit being granted, things are going to be pretty tight.

“The banking and credit crisis got us to the spot we're in today.”

U.S. consumer credit plunged more than five times than what was forecasted. Banks are still restricting lending terms. Meanwhile, job losses have made Americans anxious about borrowing.

Consumer credit fell by a record $21.6 billion, or 10% at an annual rate, to $2.5 trillion, according to a Federal Reserve report in September. Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991.

Current year projections still are tentative, says Earl Hesterberg, president-CEO of Houston- based Group 1 Automotive Inc., No.5 on the Ward's Megadealer 100 with $5.65 billion in annual revenues last year.

“The CARS program helped spur vehicle sales but the direction sales will take remains to be seen,” he says.

Consumer credit and consumer confidence issues are the big unknowns.

“It appears that credit terms are becoming more flexible for borrowers with solid credit, Hesterberg says. “However, people with subprime or near prime are still having difficulty accessing credit. Only the highest credit tiers are benefiting from historically low rates.”

Consumer confidence is still the leading indicator of a market rebound, says Pete DeLongchamps, Group 1's vice president-manufacturer relations.

“Although some Group 1 business increased in the Northeast, overall consumer confidence is still not at a level to support a significant difference in SAAR (seasonably adjusted annual rate) sales numbers.”

Also seeing consumer credit improvement as the spur for better auto sales is Pete Gerosa, director of acquisitions and market strategy at Serra Automotive Inc., a 24-store dealer group headquartered in Grand Blanc, MI. and No.24 on the Ward's Megadealer 100 with nearly $1 billion in revenues.

A former General Motors Corp. executive, Gerosa sees hopeful signs compared to the credit freeze that occurred last year and extended into early 2009. It hindered commercial and consumer lending; the former affecting dealers, the latter, their customers.

“Financing is getting better,” he says. “GMAC is backing more loans, so it's not like it was in January. The market just has to settle down to where it's supposed to be.”

Serra sold about 630 vehicles through the summer Clunkers program. As a result, inventory became light. It reached a point where there was dealer trade activity, an indicator of brisk sales.

Serra participated in that selectively. “We don't give them up unless they've got a good dealer trade,” Gerosa says.

Like the Good Old Days – Almost

Proving that “cash is king,” consumers rushed to cash in on the Clunkers program. But it had fuel-economy standards that ruled out many segments. And a $45,000 limit on retail prices of new autos bought made other models ineligible.

Still, it helped push August sales to 1.2 million units, breaking the 1-million mark for the first time in a year. The SAAR rate, that had been under 10 million in previous months, hit 14 million in August, harkening back — almost — to the good old days of strong auto sales.

The CARS program favored auto makers stocked with affordable fuel efficient vehicles in their lineups. They rang in big numbers as a result of the up to $4,500 clunkers incentives.

Hyundai Motor America Corp. posted a record August sales period of 47% over August 2008; Ford Motor Co. 21%; American Honda Motor Co. Inc. 10%; and Toyota Motor Sales U.S.A. Inc. a 6%.

But General Motors Co. and Chrysler LLC showed 20% and 15% drops, respectively.

Dave Zuchowski, Hyundai Motor America's vice president-sales, foresees the momentum continuing for the auto maker and its 780 dealers. “We see this as a launching pad for us.”

Asked why he thought Hyundai led the industry when credit was still supposedly tight, Zuchowski cites quality fuel-efficient products, good inventory and pre-Clunkers preparations.

That meant the sales force and paperwork were ready before the program began.

The credit picture is brightening but restrictions remain, says Michael Buckingham, CEO at Hyundai Motor Finance.

“Conditions to obtain new-vehicle financing have improved since the start of the year, but today's environment is more restrictive,” he says. “Availability of financing can also vary by manufacturer, with some captives more aggressive than others.”

Lenders have not been as aggressive as in earlier years, but many believe the economy is getting better, with auto makers' financing arms, banks and credit unions approving more.

But restrictions do apply more than in the pre-freeze days when lending was looser.

“There have been changes to lending fundamentals,” Buckingham says. “Down payments and customer payment-to-income ratios are watched much closer now, as well as their repayment histories.”

Customers with low credit scores will struggle to find financing, as they did six months ago, he says. “But the funding market for captives and banks is much improved since the start of the year which is helping to improve financing for consumers.”

Consumer financing varies by financing product. Home equity loans, auto loans and credit cards have tightened up over the past year.

Auto-lending requirements are tighter, but credit availability has been improving in the past six months.

But automotive lenders report an increase in the length of loan term; a decrease in how much they'll advance on loan-to-value ratios; and a reduction of some customers' credit rating — a sign of economic stress in a recession that has put many people out of work.

Credit card companies have tightened requirements more in the past six months, and home-equity credit availability is similar today as it was earlier this year.

Some analysts have called this an overcorrection to loose standards of the past that led to a stampede of financing customers who struggled to pay back their car loans or defaulted altogether.

Hyundai is leasing more vehicles, too. “On the commercial side, we've seen our dealer floorplan and working capital loans increase by 30% since the beginning of 2009,” Buckingham says.

While CARS did its job and took older gas guzzlers off the road, premium car makers mostly sat on the sidelines and watched the activities.

“Cash for Clunkers was a program that was not intended to boost the sales of luxury cars, so those vehicles took a hit from the program,” says auto analyst Joe Barker of CSM Worldwide Inc.

Tellingly, BMW of North America LLC, with solid market-share gains for 20 years, saw sales fall 24.5% in August. Still, the brand posted its best month in a year.

“It shows a strengthening of the premium market,” says Jim O'Donnell, BMW of North America's president.

O'Donnell praises the BMW 593-member dealer body for its role in strengthening the brand. Unlike some auto brands that have reduced dealer ranks, BMW plans to expand its dealer presence in the U.S. Its Mini brand will increase sales points, too. Those will increase about 20%, topping 100 stores within the next six months.

“At a national level, maintaining a healthy dealer network is a top priority for us,” he tells the Automotive Press Assn. in Detroit. “Our average dealer profit this year is 2%, and not many (auto makers) can say that.”

Mercedes-Benz dealers who discovered banks less willing to give them floorplan loans, found help from Mercedes-Benz USA's financing arm.

Mercedes-Benz Financial indicated it would support dealers as other lending sources disappeared during the tough times.

The company picked up more than 20 new inventory-financing accounts from among 345 Mercedes dealers in the U.S. It means the captive now finances two of every three vehicles in inventory.

“We have seen our floorplan financing portfolio gain slightly as we continue to support dealers who had previously been financed by banks,” says Steven Goodale, a vice president for Daimler Financial Services, which include Mercedes-Benz Financial.

He credits dealer for doing a “tremendous job in managing their inventory costs and other controllable areas during the downturn in the economy and sales.”

“We anticipate some gain in inventory levels next year and are already seeing growth in our capital loan portfolio as some dealers are using this slow sales period to make improvements to their facilities,” Gooddale tells Ward's.

“Even with Mercedes sales off 18% for year to date, we're seeing increased activity regarding dealership improvements.”

The big question is: How will total unit industry sales shake out in 2009?

J. D. Power and Associates, citing the summer sales boost, is increasing its annual industry forecast to 10.3 million units in total sales for the full year.

“Improved consumer confidence and credit availability during the past six months have combined with the CARS program to lift industry,” says Gary Dilts, J.D. Power's senior vice president-global automotive operations.

“These factors set the foundation for a gradual recovery in the months ahead,” he says.

But dealers, because of uncertainty and difficulty getting floorplan loans, are carrying leaner inventories. That is “likely to hold back some of this momentum,” Dilts says.

Garff tells why dealers aren't so bullish.

“The demand is there to sell 12 million cars and trucks a year,” he says. “Why isn't that happening? It all goes back to the credit crisis. It's a long way from being fixed — or healed.”

Group 1 VP: “Banks Not Advancing What They Once Were”

In an interview, Lee Mitchell, vice president-finance of the Group 1 Automotive Inc. dealership chain talks to Ward's about credit issues affecting the auto industry.

Wards: How does the consumer credit situation look from your viewpoint for the fourth quarter? Has it loosened up more than a year or six months ago?

Mitchell: The manufacturers have continued to be supportive and we still rely heavily on our preferred lenders and those within our lending syndicate. Generally speaking, we are able to get customers terms, but the banks are not advancing what they once were.

Wards: Do you see consumer confidence easing up and helping vehicle sales?

Mitchell: Consumer confidence is the most closely aligned economic indicator with new-car sales. There has been some resilience on the Northeast in regard to consumer confidence, but concerns persist overall.

Wards: Are some parts of the country doing better in terms of sales and consumer confidence than others?

Mitchell: California is still soft in terms of demand, while Texas and the Northeast remain relatively stable for us.

Wards: The Cash for Clunkers program seemed to rev up U.S. car sales for part of july August at least. What brands in Group 1's portfolio benefited the most? What would have happened without Clunkers?

Mitchell: Toyota, Honda, Nissan and Ford. Imports and domestics had more activity than the luxury segment due to the nature of the program. Absent (Clunkers), we would have seen a SAAR (seasonably adjusted annual rate of sales) level in August and September consistent with the first seven months of the year.

Wards: What are some examples of tight credit being more available?

Mitchell: We are seeing some banks becoming more aggressive with low rates, though it all depends on the individual customers and their credit score.
— By Lillie Guyer

“Lot of Good Dealers Going To Come Out Stronger”

While consumers are having difficulty finding auto credit and house loans, dealers are facing their own burdens in securing financing for floorplans and other big projects.

““There's been no progress in freeing up credit for dealers,“ says Scott Gorden, principal in charge of dealerships at LarsonAllen LLP, a Minneapolis-based accounting firm that serves 600 dealers nationwide.

“Far and away, getting personal financing is still the biggest issue faced by dealerships today. If you cut credit to them, they will be closing. If they can't get the floor plan financing needed, they will shut down,” says Jason Duffner, a certified public accountant and dealer specialist at LarsonAllen.

“Credit for dealers is definitely not loosening up. Bankers see (auto) as a dying industry and are not anxious to loan dealers money presently,” he says.

“With the Cash for Clunkers program over, everyone is afraid it took potential sales out and jammed all of them into a few months,” Duffner says.

Auto dealers' credit troubles started about a year ago. Banks nationwide began tightening their credit requirements in response to the deepening recession.

But the issue came to a boil when industry-tied lenders such as Chrysler Financial, General Motors Acceptance Corp. and Ford Credit began to tighten up standards.

After some upheaval, GMAC was able to return to a more normal retail underwriting policy in January.

“Today, GMAC is back to extending credit with responsible underwriting standards to a broad range of customers across the credit spectrum,” says GMAC spokesman Mike Stoller.

GMAC has reduced the standard rates it charges on new- and used-vehicle contracts nine times since January, he says. “These reductions have been applied across all of our credit tiers.”

Still, dealers in many states have had a particularly tough time in the current economy. In Connecticut, about 55 dealers have shuttered their showrooms since 2008, according to industry trackings.

Despite the boost from Clunkers, auto dealers are still struggling, in part because they can't find financing to buy new cars from auto manufacturers.

The Federal Reserve introduced Term Asset Backed Securities Loan Facility (TALF), a program intended to spur lending at low rates. It provides up to $1 trillion in low-cost financing to investors to buy securities backed by consumer and commercial loans.

So far, it is not widely known or used. But some auto makers' captive financing arms are using TALF creatively to help their dealer bodies.

Hyundai Motors Finance CEO Michael Buckingham sees TALF as a shot in the arm for future lending, giving dealers some edge on both the consumer and commercial side.

TALF has gained “tremendous momentum in the past 30-45 days with many captives as well as some banks participating,” he says. “We recently had a successful TALF loan offering and are now reviewing similar transactions for lease and dealer commercial products.”

The program has aided automotive lenders by providing needed liquidity at reasonable pricing levels, Buckingham says. “TALF will make much more funding available to be utilized to support the dealers both for consumer and commercial products.”

Stoller believes federal programs such as TALF help auto sales. Dealers are looking for any chance to gain a market edge. Some people are betting they will make it.

“This industry is not dead,” says Duffner. “There are a lot of good dealers out there that are going to come out stronger in the end. There's less competition and there's still demand for quality cars” in the market.
舒 By Lillie Guyer