On May 1, North American car makers (or more accurately, their dealers) had 2.1 million units on hand. That sounds like a lot — and I would certainly hate to have to wash all those vehicles — but in the grand scheme of things, it is remarkably little (Carmakers turn into inventory control freaks, May 17, Automotive News).
Ever since the disruption of cash for clunkers last August, automakers have matched production closely to U.S. sales. It has paid off in leaner, more balanced inventories. 2.1 million units on hand May 1 equaled a 56-day supply, the lowest in 19 years of records for the month. The average has been a 69-day supply. For manufacturers and dealers, there were 562,900 fewer unsold units to finance than a year ago, even though April sales volume jumped 20 percent.
“Since the end of 2009, there is a real sense of discipline with the balance of supply and demand,” said Jeff Schuster, head of forecasting for J.D. Power and Associates. “The true test will be the continuation of this approach post-recovery.” Except for Toyota, all major players have reduced incentives this year, raising per-vehicle margins.
To further put those numbers in perspective, industry inventories were averaging 86 days in early 2009. Going back to the relative boom years from 2004 – 2007, industry inventory was around 4.3 million units which represented about 70 days of demand. Thus both the absolute and relative amount of inventory in the supply chain have fallen.
Much of the decrease is due to Chrysler and GM. The last year has seen both firms cut their inventory by 42%. Of course, some of the absolute decrease in inventory is due to them kicking dealers to the proverbial curb as they exited bankruptcy. On top of that, GM no longer has Hummers, Saturns, Pontiacs or Saabs on its books.
Still both firms have been fairly disciplined about trying to stick close to demand as sales have rebounded as opposed to stuffing dealers with inventory. One reason is that the UAW blinked and agreed to eliminate the Jobs Bank. For years, laid off Big 3 workers were paid for not working. They received over 90% of their regular wages to wait around for demand to pick back up. It’s good work if you can get it, but it provided horrible incentives for the Big 3. If you can’t shed costs by idling a plant or scaling back to one shift, why not keep it open for two shifts and hope to sell the cars? That was a large part of why the Big 3 always had such huge inventories. The Jobs Bank went away with Chrysler’s and GM’s bankruptcy and they are now able to make more sensible production and inventory decisions.
In a related vein, BMW is planning to push custom ordered cars in the US (BMW Tries to Convert ‘Impulsive’ Americans to Orders, May 14, Bloomberg). Obviously, if a cars are spoken for before they hit the dealer’s lot, inventories go down. The question is whether US consumers will play ball.
Built-to-order vehicles, which can help manufacturers reduce costly inventory and ward off discounting, are rare in the U.S., with Toyota Motor Corp.’s Lexus saying 2 percent of its monthly deliveries are pre-ordered. In Germany, every other BMW sold is customized. BMW’s effort to change this trend may run into cultural and competitive hurdles, said Jeremy Anwyl, chief executive officer of U.S. automotive Web site Edmunds.com.
“Ordering has not been part of the car buying process” in the U.S., Anwyl said in a telephone interview. “Consumers are used to going into a dealership and driving away with a car. We tend to be very impulsive.”
The article goes on to discuss the various measures that BMW and other luxury makers are taking to induce custom orders. For example, BMW is offering exclusive options and reaching out to current lease holders (i.e., people they know will be in the market fairly soon).
There is some evidence that this can work. Audi offers a program that lets customers order nonstandard paint colors and interior fabrics (You can match your favorite shirt!) and has seen pre-orders go from 5.4% to 14% of sales. Given sales around 90,000 cars per year, that’s an extra 8,000 cars that never sit in inventory. That matters. However, the long-term success of such a program depends on two factors. First, there must be some gain to customization. That is, you have to be able to get a fairly personalized car without paying too much of a premium. Second, the car maker has to show some discipline. If the dealer is awash in cars, why wait? Indeed, the question is what comes first, the inventory reduction or the spike in custom sales? It may well be that there needs to be a cut in inventory first before lots of customers are interested in custom orders.
Finally, it should be noted that less inventory might also mean fewer sales. That’s the story in a Wall Street Journal article on Polaris, a maker of all terrain vehicles (Polaris, Maker of Sport Vehicles, Races to Catch Up With Business, May 24).
Polaris cut its U.S. and Canadian dealer inventories by nearly a quarter last year and expects an additional 15% drop this year, taking them to their lowest level since 1997. But sales so far this year “are better than we expected for all products,” says Polaris President Bennett Morgan. To cope, the company has recruited almost 200 more people for its production work force—an increase of roughly 10%—and will likely boost employment significantly again during the second half, Mr. Morgan says.
The craziest fact in the article is that Polaris dealers have traditionally ordered twice a year! That seems just crazy to me. An ATV isn’t a BMW but a single unit can still represent thousands of dollars. It seems crazy to force retailers to have to guess what number of units would cover half a year’s demand. Polaris has been moving dealers to a program that allows them to order every two weeks. And that in fact has been part of the reason for being short of inventory. Frequent orders can mean less inventory and high sales if supply is reliable. If delivery times stretch out, dealers can be left with empty show rooms.