Glut Threatens Chrysler's '07s

2006 models, like the Dodge Durango, are not selling well for Chrysler.

Dealers cut down on orders of the new cars as they try to move a pile of '06s

By BRADFORD WERNLE | AUTOMOTIVE NEWS

AutoWeek | Published 09/25/06, 8:34 am et DETROIT -- Some Chrysler group dealers are virtually halting their purchases of 2007 vehicles because they still have too many 2006s parked on their lots.

"Until I get rid of these 2006s, I'm not even looking at 2007s," says Mike Christopoulos, owner of Olympic Dodge Inc. in Chicago. "First of all, interest rates are too high, and there's no customers walking through the door."

Bloated backlogs of 2006 cars and trucks, on top of high floorplan interest rates, have driven up the cost of doing business. That has caused many dealers to cut back on buying.

Chrysler group executives admitted last week that they had produced too many vehicles for months and announced they will slash production. Dealers may want to help Chrysler but say they have to be sensible businesspeople, too.

Group 1 Automotive Inc. in Houston, which owns 28 Chrysler group franchises, is watching its purchases of 2007s, says Randy Callison, Group 1's senior vice president for operations and corporate development. Inventories of Chrysler vehicles are above 75 days, the Group 1 target for domestic brands.

"They'll help you with your flooring expense," Callison says of Chrysler. "The problem is you don't know how long you'll have to sit on the cars. Is it good business to take those cars?"

Chrysler is counting on robust sales of 2007 models to lift it back into profitability after a summer sale fizzled and the group announced a huge impending loss in the third quarter. Several of the new vehicles are smaller and more fuel efficient than the slow-selling trucks and SUVs that Chrysler has depended on.

'Very challenging'

Chuck Eddy, co-owner of Bob & Chuck Eddy Chrysler-Dodge-Jeep in Youngstown, Ohio, credits Chrysler executives with acknowledging that they didn't slow production fast enough. He says dealers should help the company out of its jam.

But Eddy has slowed his purchases. "It's very, very, very challenging, to say the least, right now with inventory levels and costs," Eddy says.

"I think they're going to have a hard time selling all the cars they need to by the end of the quarter. There's going to be a significant amount of cars carrying over.

"Interest rates are up, and my inventory is up. It's a bad combination."

Chrysler group spokesman Kevin McCormick says Chrysler inventory had been "a little slow in the beginning because dealers were already carrying an inventory."

"Because we are directly addressing that situation with them, we would think that orders that looked like they were lower would begin to rebound."

Not all dealers are backing off orders. John Schenden, owner of Pro Chrysler-Jeep Denver, says he is happy with his inventory and with the new models coming in. "We have an orderly plan to get out of the '06s," he says. "We have about the same number we had last time."

With the new Chrysler Sebring, Jeep Compass and four-door Jeep Wrangler Unlimited, Schenden says: "I have to increase my inventory to accommodate those new products. It's a nice problem."

Last week, DaimlerChrysler AG CEO Dieter Zetsche said Chrysler has cut third-quarter deliveries to dealers by 90,000 vehicles, to 290,000. That's down nearly 24 percent from the planned 380,000.

Chrysler says it will reduce second-half retail shipments by 16 percent from what it had planned. Zetsche announced the cuts last week, four days after the company said Chrysler's third-quarter loss would be $1.52 billion, more than twice the $600 million it had forecast.

Chrysler reduced its supply from 93 days in July to 76 days in August. Says Chrysler spokesman Jason Vines: "We're getting inventory in line and allowing space for new stuff."

He admits that Chrysler's earlier programs, including its summer employee-pricing sale, didn't do the job because production stayed too high: "We were bailing water out of the boat with a hose in the boat at the same time."

Accepting blame

Last week, Zetsche and Chrysler group CEO Tom LaSorda accepted blame for not curtailing production when it became evident that sales were falling. But the Chrysler group's inventory has been swollen since late last year. The company paid dealers as much as $750 per unit to take extra stock after its supply reached 92 days Dec. 1.

A Michigan dealer who declined to be identified says Chrysler not only produced too many cars and trucks but also made the wrong mix. The automaker pushed feature-laden vehicles that dealers are hesitant to buy.

The dealers says: "The bean counters said, 'This is the mix you need to sell to hit targets for profitability.' They ended up with a huge sales bank of cars, a mix we as dealers wouldn't order.

"They kind of jammed us. We all took way too much inventory. The net result is we're still sitting on too many cars, and there ain't nobody making any money because we're all paying the juice on these things at 9-plus percent."