Auto bailout’s local fallout

It looks like Detroit’s carmakers will get their bailout. That’s good news for the 60 new car dealerships in the metro Richmond market, which employ about 3,500 workers, according to the Virginia Automobile Dealers Association. Without federal loans, Chrysler and GM would most likely end up in bankruptcy. That could slow sales even more and send GM and Chrysler dealerships into an uncontrollable skid.

It’s also probably good news for industries that depend on car sales, such as advertising. Local TV and radio stations rely predominately on car dealers’ spots. The average dealership spent about $380,000 on advertising in 2007, with a range from $70,000 for smaller dealerships to $850,000 for larger dealerships. In 2003, dealerships spent about $250 million in advertising in Virginia, according to the VADA.

Dealerships across Virginia also purchased approximately $1 billion in goods and services (including advertising) from other Virginia businesses, according to VADA. Together they paid $1.55 billion in payroll, or $2.82 million per dealership.

But the bailout will do little to spur sales, which are down 30 percent compared with last year. Several dealerships in Richmond have closed, including Mechanicsville Dodge and, last month, Hyman’s Saturn of Richmond. BizSense chased down Donald Hall, president of the Virginia Automobile Dealers Association, to learn more about the local effects of the bailout and figure out how Richmond’s dealers are coping. Below is an edited version of our conversation:

BizSense: Car sales are down about 30 percent from a year ago. How are dealers in Virginia faring?

Donald Hall: I’ve worked for 30 years in the car industry and never seen it worse. It’s the worst since the Depression. We’ve lost 20 dealerships in the last 12 months. Previously, we lost one in the last 10 years. In terms of profitability, most stores right now are at best breaking even. Most are frankly not breaking even.

RBS: Obviously everyone is talking about the bailouts – or billions in loans that Congress is about to make to the Big Three. Why is that necessary? Why wouldn’t a bankruptcy restructuring be as effective or more effective?

DH: GM, for example, is the producer of the product. If GM goes into bankruptcy, suppliers that supply so much of what they have, they go into a tailspin. And the dealers, they own everything that’s on their lot. They own the cars, the land, the signs and the buildings. People don’t seem to understand that. What’s going to happen, there will be a delay in payment. A slow pay in bankruptcy would be incredibly difficult for dealers.

RBS:
Isn’t it odd that American taxpayers are lending to companies whose products they seem not to be buying?

DH: That is actually a misconception. Fifty percent of all new vehicles sold in the commonwealth are produced by the Detroit Three. Seventy percent of the Virginia new car and truck dealers sell vehicles from the Detroit Three. And more than 65 percent of all vehicles on the road today are from the Detroit Three. So clearly Americans are buying domestic products.

RBS: Gas prices have plummeted to levels from five years ago, about $1.60 a gallon in Richmond. Detroit did great on SUVs. Do you think gas-sipping compacts will soon be a quaint historical footnote like they were in the early 1970s?

DH: No, I believe that fuel-efficient, smaller vehicles are our future. That includes the Detroit Three as well as imports. GM produces 20 vehicles that average over 30 miles per gallon, which is more than any other manufacturer, including imports and the Detroit Three. GM also has more hybrids on the road today than any other manufacturer. Fuel-efficient and environmentally friendly vehicles are the future. Keep in mind that the average used vehicle in Virginia is nine years old, so it takes years for the fleet of vehicles to turn over.

RBS: For the past quarter or two, we have heard that some businesses have less access to capital. Is this happening to dealerships locally?

DH: The floor plan [or the cars on the lot] is a line of credit. It’s secured by the cars. Some dealers have $5 million line of credit. But the interest rate on the floor plan has gone up. Secondly, something has happened that has never happened in the business. They’re being faced with curtailment, which requires them to pay down on the floor plan even though the cars aren’t sold yet. Now bankers are saying, “We’re afraid the cars aren’t worth $5 million. We want you to pay it down.” … If there’s a bankruptcy, lenders think the cars are worth less, or they’ll be stuck with cars they can’t get rid of.

RBS: We’re seeing some consolidation amongst dealerships in Richmond. How will dealerships survive in such a cold sales climate?

DH: Through consolidation and economies of scale. They’re stronger if they have more franchises under roof helping to pay the rent factor.

RBS: Car dealers also run repair shops, so aren’t they picking up business with all the older cars out there even if sales are slow?

DH: Well, normally when new car sales slow down, service picks up. But what’s happened [is] there’s an overall chill in the marketplace. People are afraid. They see their retirement statements. So people are postponing even repairs. That, too, will come back. You can’t put it off but so long.

I’ve never seen a situation where Toyota and Honda are down 30 percent in sales. That tells you this is not a function of a backlash against Detroit. The economy is in bad shape.

Aaron Kremer is the BizSense editor. You can reach hiim via email at [email protected]This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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