Detroit's Oversupply Problem

U.S. automakers are seeing unsold inventory grow and even deep discounts aren't enough to stimulate sales

• View Slide Show

BUSINESS WEEK | Matt Vella - - It's Economics 101. When there's more supply than demand, the supplier is in trouble.

That's the situation at DaimlerChrysler's (DCX) Chrysler division. People aren't buying their cars. Their dealers—including some of the country's biggest retailers, Group 1 Automotive (GPI) and AutoNation (AN), which combined own nearly 500 dealerships across the country—have stopped taking orders because of lack of demand.

In fact, Chrysler—which comprises Dodge and Jeep but not German luxury carmakers Mercedes-Benz or Maybach—found itself with an inventory of 533,200 cars and trucks hanging around its neck as of Oct. 1, according to Automotive News. Nearly 50% of those are Dodge vehicles, while Jeep and Chrysler brand units make up about 24% and 25%, respectively.

Chrysler chief Tom LaSorda and his top marketing executive, Joe Eberhardt, hope to convince dealers to increase orders, relieving some of the pressure from mounting unsold inventory. But their pleas are likely to be ignored, despite new, additional sales incentives of up to $1,500 for vehicles that have idled on lots for more than six months.

COMMON PROBLEM.

The models in excess supply track closely with the company's sales, which are down overall. Car sales declined 1.5% for the first nine months of the year, and trucks have tumbled 12.3%. In accordance with those figures, Chrysler is saddled with 123,900 of its once-popular Dodge Ram pickups, as well as 37,500 Caravan minivans. Three of Jeep's highest profile models—the Grand Cherokee, Liberty, and new Commander—all have inventories exceeding 30,000 vehicles each.

But Chrysler's not alone. Unsold inventories burden its cross-town rivals as well. Excluding its struggling Premier Automotive Group—which comprises Jaguar, Land Rover, Aston Martin, and Volvo—the unsold inventory of Ford's (F) combined Ford, Lincoln, and Mercury divisions add up to 643,000 units. Similarly, General Motors (GM) has nearly 1 million vehicles on hand from its American brands: Buick, Cadillac, Chevrolet, GMC, Hummer, Pontiac, and Saturn.

To gain a measure of how much those inventories are a drag on business, given the size and market share differences between the Detroit Three, analysts look at how many days' supply of vehicles each automaker has in the showrooms. The more inventory, the lower the sales.

JAPANESE ADVANTAGE.

Along those lines, Chrysler is, by far, in the worst shape of the three. The company currently has a 101-day supply of vehicles, according to Edmunds.com. That's far above the figure industry analysts commonly cite as a desirable minimum. A "healthy days' supply" is generally considered to be 60 days. Chrysler's cars are sitting around on dealer lots about 15% longer than those of its American competitors. Ford has an 84-day supply and GM an 88-day supply.

In contrast, the popular Honda Accord has the nation's lowest inventory, with only a 50-day supply.

Though Ford and GM appear better off, especially having won concessions from creditors and unions to allow them to reduce production, their supply still seems bloated in comparison to foreign rivals. Toyota (TM) and Honda (HMC) both maintain overall supply numbers that are nearly half as long, between 30 and 40 days. Moreover, should demand fall significantly, Ford and GM could find themselves with excessive supply as well.

Ford, for example, has the largest inventory of trucks in the country, with 239,100 of its best-selling F-Series sitting unsold on dealers' lots. Currently, that represents an 88-day supply, down from the same time last year of 93. But as competition heats up in the truck market, that number could go up quickly. In September, 2001, there were 206,500 F-Series on hand, which represented 66 days' supply.

PAGING DR. Z.

For Chrysler, it's the highest inventory number for the company in the past five years, and a nearly 17% jump from the same time last year. "Frankly, anything beyond 90 days is unacceptable," says Alex Rosen, industry analyst with Edmunds.com. "Ford and GM have been much more aggressive, Chrysler's sort of fallen asleep at the wheel," he adds.

The fault lies with Chrysler, which unlike Ford and GM, refused to cut back production. Stung by higher gas prices and several aging models, it found that even a repeat of last summer's successful employee pricing sales scheme, which attracted many eager buyers but shrunk already razor-thin profit margins, fizzled. Even last year, Chrysler didn't fare as well as GM, which shrunk supply to 65 days. This time around Ford and GM both held fast, swallowing losses while Chrysler's poorly received "Ask Dr. Z" advertising campaign fell flat on its face.

By July, Chrysler's market share dipped to 10.1%, the lowest it has been in half a decade. Then, in September, the company announced it was doubling its estimated loss for the quarter to a whopping $1.5 billion.

According to industry observers, the inventory glut is confirmation of stubborn adherence to old patterns. "The mentality out of Detroit has always been that you have to keep the factories running," explains Wes Brown, a partner at Los Angeles–based automotive-research firm Iceology. "Build it, let the dealers sell it."

CAR SHORTAGE.

Chrysler has yet to strike deals with the United Autoworkers Union, similar to the ones announced by Ford and GM. While costly, those agreements have allowed the companies to trim inventories, thereby reducing pressure to discount older models as new ones hit dealer showrooms.

Chrysler's product portfolio is also cause for concern, as consumers continue to turn away from large gas-guzzling SUVs: The company doesn't have enough cars in its portfolio. Though its new Dodge Charger and Caliber models are selling very well, and a revamped Chrysler Sebring is waiting in the wings, a mere 21% of the company's sales are cars and 79% trucks, SUVs, and minivans. Ford and GM's portfolios are more evenly distributed, 42% and 44%, respectively. The industry-wide average is 50.1% cars to 49.9% trucks and SUVs.

Chrysler also appears to be having difficulty capitalizing on a series of smash hits, including the Chrysler 300, Dodge Charger, and Caliber, all three of which have sold aggressively since their introductions. "The bottom line is that it has difficulty transferring the formulas that hit to the rest of its product lines in a timely fashion," says Brown.

To find out which cars have the highest inventory in the U.S.,

false;" target="toc"> click here.