Credit crisis adds to pressures on auto dealers

Hundreds of thousands of new cars and trucks that would have quickly made their way to people's driveways a year ago are now stacking up on dealer lots across the country, with potential buyers worried about whether they'll keep their jobs, be able to pay for gas, or qualify for a car loan.

For auto dealers already suffering under the worst U.S. sales downturn in 15 years, the increasing cost of the credit they use to keep inventory in their showrooms means every Ford Focus and Jeep Grand Cherokee with a sale sticker in the window is chipping away at dealers' razor-thin profit margins every day and threatening to send more of them out of business.

Like the banks that have been collapsing under the weight of the credit crunch, auto dealers are highly leveraged, making them some of its first victims, said Sheldon Sandler, founder of Bel Air Partners, a New Jersey-based firm that helps car dealers find options when they want out of the business.

"Car dealers are like the canaries in the coal mine," he said. "The energy crisis had been affecting their revenue for a while. And now with the credit crisis, in some cases, banks are turning off their credit."

Paul Taylor, chief economist with the National Automobile Dealers Association, said Friday that dealership closures spiked in September, prompted him to raise his forecast of closures. He now expects 500 to 600 of the group's 20,770 dealerships to shut their doors this year, up from previous estimates of 300 to 400.

About 430 dealerships closed last year and 295 closed up shop in 2006, according to the NADA.

Car dealers get vehicles for their lots through a practice called floorplan financing, where the funds needed to pay for inventory are supplied by a lender. The longer the vehicle goes unsold and the higher the interest charged, the more it costs the dealer.

Ray Ciccolo, president of Village Automotive Group in the Boston area, said his financing costs have doubled in recent years. That's had a "disastrous" effect, he said, on his six dealerships that sell Cadillac, Saab, Volvo, Honda, Hummer, Nissan and Hyundai vehicles.

In some cases, funds aren't available at all. Ciccolo said one of his dealers recently expressed interest in picking up another franchise but couldn't find a bank willing to finance the inventory.

"I've been in this business for 46 years and this is the first time I've seen anything like this," Ciccolo said. "It's a perfect storm of calamity."

Ciccolo, like many dealers, gets his financing through independent banks whose terms are based on the London Interbank Offered Rate, which measures the interest large banks are willing to accept on short-term loans. It's the benchmark for about $10 trillion in corporate loans, mortgages and student loans around the world.

The recent turmoil in the banking industry has sent LIBOR up significantly as institutions become wary about lending to each other. The three-month LIBOR stood at 4.33 percent Friday, up 1.52 percentage points from a month ago but still lower than it was this time last year.

Dealers that go through the automakers' financing units also are facing higher costs, especially those that deal with the Detroit-based automakers, which have lower credit ratings than many of their foreign competitors, making it more expensive for them to borrow money.

Richard Howse, senior director of auto finance for J.D. Power and Associates, said that while the automakers' finance companies are more focused on vehicle loans, they have a lot of the same problems as traditional banks.

"I think that they want to support the dealers as much as possible," Howse said. "But if they only have 'X' amount of capital to lend, I'm not sure they're any different."

Jim Farley, Ford Motor Co.'s group vice president for marketing, said Ford Motor Credit raised its floorplan expense financing by 50 basis points effective Nov. 1, citing its rising costs.

"We won't see how dealers will react to that, but I think that reflects the market realities today from funding and cost of credit," Farley said.

In addition to the increase, Ford Motor Credit will no longer provide financing for Mazda Motor Corp. vehicles and focus more on its own brands in the tight credit environment, Ford Motor Credit spokeswoman Meredith Libbey said.

GMAC Financial Services, which is 49 percent owned by General Motors Corp., also raised its floorplan rates, is tightening credit standards and is keeping a closer eye on the health of the dealerships it serves, said Mark LaNeve, GM's vice president for North American sales.

At the same time, however, the automaker's dealers have pared back their inventories, which has helped rein in their financing costs, he said.

Industrywide U.S. auto sales last month fell below 1 million for the first time since February 1993, which nearly all automakers said was influenced by tighter credit standards knocking buyers from the market. Others likely stayed away from showrooms because gas remains expensive, or job losses and declining housing values have people curtailing their spending.

The NADA's Taylor said he expects this year's vehicle sales to total about 14.2 million units, down from 16.1 million units last year and 16.5 million in 2006.

Meanwhile, the amount of money dealers are making on the vehicles they do sell has fallen.

Since 2002, dealer profitability as a percentage of total vehicle sales before taxes has fallen 0.3 percentage points to 1.5 percent last year, according to the NADA, and the number of dealerships nationwide has been shrinking as the Detroit-based automakers try to group more of their brands at single locations.

Farley said Ford, which has been working to thin its dealer ranks mainly through financial incentives since 1995, is on track to meet this year's consolidation goals.

"The market is helping and we really are feeling for our dealers right now on the profitability issue because they are facing the same thing we are," he said. "But really what we are seeing is the number of transactions and consolidations is on par with where we had planned."

The financial turmoil in the industry has resulted in at least one notable casualty.

Bill Heard Enterprises Inc., the nation's largest Chevrolet dealer, filed for bankruptcy protection Sept. 28, blaming a "perfect storm" of problems that began last year including high gas prices, lower demand for trucks and sport utility vehicles and the credit crunch.

The Georgia-based company, which operated in seven states before it shut down last week, said its 14 dealerships started posting significant operating losses in 2007 that grew to between $2 million and $5 million a month this year. It blamed a drop in sales coupled with a lack of available credit.

In August, GMAC Financial Services discontinued credit for new inventory for some of the company's dealerships.

Gina Proia, a spokeswoman for GMAC, said the company does not discuss its actions involving individual dealers, but continues to evaluate the credit worthiness of its wholesale customers to minimize its risks.

AP Auto Writer Tom Krisher in Detroit contributed to this report.