Auto dealers continue to suffer from supply chain frustrations
Auto dealers fear a possible auto loan bubble as debt accumulates to $ 1.37 trillion in the fourth quarter of 2020. Photo of Obi Onyeador on unsplash.com
Written by Edward Smith
For local auto dealers, optimism is just as rare as semiconductor chips 18 months after the start of the pandemic.
Financial magazine “Kiplinger” reported that relief in the semiconductor industry may not come until 2022, maybe even 2023. Delta’s surge has forced chip testers and packaging facilities in Malaysia and Vietnam to close. Demand has never eased, as storms in Texas and a fire at a major producer in Japan earlier this year caused a significant ripple in the supply chain.
Consulting firm AlixPartners predicts that persistent shortages in semiconductors, plastic resin, steel and labor will cost manufacturers 7.7 million units they would have built this year. This is an increase from what is expected to be an annual shortfall of 3.9 million units in May.
Do what they can
The shortage comes at a time when spending is driven by pent-up demand, says Mike Gibson, president of the Central California New Car Dealer Association. Gibson is also General Manager of Fresno Lexus.
Dealers try to meet customer demands and do their best with limited resources, he says.
âEvery dealership tries to accommodate their customers,â Gibson said. âThey are grateful for being open and serving their customers.
Sales teams focus on what customers are looking for in a car, said Brett Hedrick, owner and general manager of Hedrick’s Chevrolet in Clovis. Then the cars will have to be placed on order. For this reason, almost all of the incoming models are pre-sold, Hedrick said.
âYou’d expect you to go buy a car and have to wait four months,â Hedrick said.
Manufacturers make what is popular. Tahoes and Silverados sell out, so that’s what comes first.
But Hedrick said that in recent months, production appeared to be trending down. Normally they would get 75-100 cars delivered per month, but last month they only got 26.
They only get a notification 30 days in advance of what’s being delivered.
âYou can’t predict anything until you know what you’re going to get,â Hedrick said. In March, they sold 165 vehicles. In April, they sold 152. In August, they sold 110 and in September, they will be less than 90.
Prince to a poor man
As sales teams make more money because of price increases, they need to be prepared for fluctuations, Hedrick said.
âYou can be a prince one month and a poor one the next,â Hedrick said.
Brad Maples, chief executive of BMW Visalia, said he plans to pay salespeople differently in the fourth quarter of 2021 and possibly the first quarter of 2022. He plans to use a base salary for his staff.
âThey have to pay their bills. I don’t want them to struggle, âMaples said.
If they receive eight cars, six will already be sold.
Maples said it was difficult to replace the right people. Its # 1 seller has been there for 15 years, followed closely by its second.
âIt’s hard to replace the right people,â he said.
Maples believes the changes in the auto industry are just beginning.
People paying too much for cars now add to debt levels that rise as people continue to trade, he said.
âIn three months, I think we’re going to see a tremendous amount of negative equity on auto loans,â Maples said.
Make bubbles ?
Auto debt hit an all-time high of $ 1.37 trillion in the fourth quarter of 2020, a 6% year-over-year increase, according to credit firm Experian. Even though the pandemic made it possible for many to work from home, that debt followed the rest of the decade. The average debt of individual auto loans in 2020 was $ 19,865, up from $ 19,231 in 2019. While the number of defaults actually declined at the start of the pandemic, the number of overdue accounts increased by 12 % from the third to fourth quarter of 2020.
According to Experian, borrowings from people with prime and super-prime credit scores accounted for 43% and 20% of all loan origination. And it is in these accounts that the loan balance has increased. Deep-subprime and subprime loans have declined.
Maples predicts that banks will have to expand their lending policies to cope with rising debt levels or that the lending arms of manufacturers will be forced to move inventory.
At present, cars are sometimes marked up to $ 8,000 to $ 9,000. And while used car trade-in values ââgrow just as quickly, the ballooning negative equity will have to go somewhere – usually ending up on the next car.
âIt’s like a golf ball waiting to become a basketball,â he said.
Dealers who don’t buy new vehicles pay what they can for used vehicles. This means that if values ââdrop too much and they can’t move their cars, they might be forced to sell a car for less than they paid for it.
âThis will put most dealers in a bad position because of their inventory,â Maples said. “What you pay today you may not pay tomorrow.”
Problems all around
For recreational vehicles, they face their own challenges.
RV dealers have enjoyed years of record sales, said Curt Curtis, president of RV Country in Fresno.
It only took 60 days after the closures for people to discover that going outside was one of the only things they could do.
At that time they had a lot to sell, Curtis said, but by August the writing was on the wall about plant closings and unbridled demand.
They have been affected by shortages of awnings, air conditioners, furniture and generators. Retailers have had an easier time buying generators – Curtis assumes that’s because retailers pay more for them because they don’t buy them in bulk – so manufacturers sent them to be installed in showrooms.
âIt’s up to us to put it in place, which obviously costs us more than if we got it straight from the factory,â Curtis said.
Gibson said after the pandemic, auto dealers are thankful for being open and serving their customers.
Auto dealers had the opposite problem during the last recession.
âThe question is, what will it look like when it bounces back,â Gibson said. “I don’t think a dealer knows that or when it does.”