Turning Into a Skid
Texas auto dealers take a rough ride.
By the beginning of 2009, the American automobile industry was against the ropes. Tightening credit markets, increased foreign competition and global economic fallout had severely crippled car manufacturers and dealerships. The economic shockwaves are still being felt, and auto dealers across Texas are responding accordingly.
Feeling the Pinch
In May 2009, Chrysler announced it would not renew the contracts of 50 Texas auto dealerships, as part of a move to eliminate 789 dealers nationwide. General Motors, facing a sharp decline in sales, filed for Chapter 11 bankruptcy protection. GM’s Arlington assembly plant, which employs about 2,500 workers and is the company’s only plant still building full-sized SUVs, began a nine-week shutdown but appeared otherwise relatively unscathed from the fallout.
Toyota’s San Antonio plant, which employs about 2,000 workers and produces the company’s popular Tundra pickup truck, has adopted a number of cost-saving strategies, among them slowing vehicle production to avoid layoffs [see “Promising Stability,” May 2009 Fiscal Notes].
“Last May, I sold 27 cars, and this May I sold 18,” says George Insuaste, Internet sales manager at Randall Reed’s Prestige Ford Lincoln Mercury in Garland. “And I feel blessed to have sold that many. We definitely feel it.”
In Texas, average transaction prices for new cars fell by 10.4 percent from June 2008 to June 2009, to $23,502, according to Comptroller data.
“There are fewer vehicles circulating because new-car dealers are also increasing their inventories of used cars.”
– Jeff Martin, Director, Texas Independent Automobile Dealers Association
And that shortfall is affecting the state’s coffers. Motor vehicle sales tax collections from January through June 2009 were down 24.2 percent from the same period in 2008.
According to the New Car Dealers Association (NCDA) of Metropolitan Dallas, Texas auto sellers are finding some relief in the fact that the state hasn’t suffered foreclosure rates as badly as many other states, and has been somewhat sheltered from the downturn by its diverse economy and productive work force.
Given the financial crunch, however, loans for new cars have become increasingly difficult to obtain, especially for less-qualified buyers.
New Deal for Old Cars
In response, many new-car dealers have retooled their sales strategies to boost used car sales. While the used-to-new car sales ratio used to be roughly one to one, it’s now about three to one, according to NCDA.
“Cash For Clunkers”
Drives Auto Sales
Car sales across the nation got a boost from the federal Car Allowance Rebate System (CARS) — commonly called the “Cash for Clunkers” program — that President Obama signed into law in June.
The program is meant to encourage the trade-in of older, less fuel-efficient, cars for newer, more efficient and less polluting models. It provides a credit of either $3,500 or $4,500 toward the purchase of a new car, if the old car meets the program’s qualifications.
Nationally, auto sales picked up in July 2009, thanks largely to the program. General Motors reported that July sales were its highest in 10 months, accounting for nearly 12,000 more vehicles sold than in June.
According to Green Car Congress, July sales of hybrids were especially strong, rising by almost 32 percent above sales in July 2008.
Texas’ most recent motor vehicle sales tax data also indicate that car purchases are picking up; the net value of Texas auto sales jumped from just under $2.6 billion in May 2009 to more than $3.1 billion in June.
That’s a bitter pill for many dealers, considering that it can take two used car sales to generate the revenue of a single new car. And the shift has new-car dealers moving into direct competition with existing, often smaller used-car dealers.
Jeff Martin, director of the Texas Independent Automobile Dealers Association, which represents used-car dealers across the state, says many of them are feeling the pinch. As new-car dealers focus more on used cars, competition for these vehicles has increased.
“There are fewer vehicles circulating because new-car dealers are also increasing their inventories of used cars,” he says.
And even for used cars, finding financing can be difficult.
“One of the biggest problems for us right now is the lending market,” Martin says. “When the credit market tightens, it makes it hard for the buyer to make the purchase and difficult for the dealer to bring in the dollars.”
As a result, many dealers are shifting their operations to include the full scope of financing, warranties and service, all of which can increase dealer revenues. Now, “a high percentage of our consumers finance through the dealers,” says Martin.
But tough times may lead to some positive results.
“We had record turnout at our convention this year,” Martin says. “That’s usually an indicator that dealers are creating and looking for new ideas, which is ultimately good for our business and our customers.” FN
The total net value of Texas auto sales has fallen in recent years, due at least in part to a greater number of lower-priced used vehicles in the product mix.
|Month/Year||Auto Sales Net Value|
Source: Texas Comptroller of Public Accounts
Rocky Road for Hybrids
U.S. sales of hybrid cars took a major hit in late 2008, due to tightening credit markets, declining gas prices and seasonal market fluctuations, but have recovered somewhat in 2009.
Source: Green Car Congress