Car industry heading for a pile up: Gottliebsen

The changes coming in the motor industry are more profound than anyone has so far conceived. They will affect every car owner, every motor dealer and every motor maker/or importer.

Automotive will be the first industry outside property to be fundamentally changed by the banking and finance revolution.

In the next three months there will be a fall in car prices. Just how sharp the fall will be depends on events in the US and whether the Federal Government wakes up to what is about to happen in the short and long term.

Those corporate executives who sacrificed salary into novated leases that come due later this year or in 2009 may need to dig deep into their pockets or keep driving their old car for a couple of extra years, so further reducing demand.

Many dealers will go to the wall or sell their business at low prices. Those that survive will do so because their financiers backed them. They are likely to be in a position to dictate better terms to motor makers and importers. In time, perhaps late in 2009 or in 2010, car prices will rise substantially.

These are dramatic claims. To understand what is going to happen we need to first go back into history. For over a decade there has been an abundance of money available to motor dealers enabling them to buy stock from makers and importers.

GE made a dramatic entry into the wholesale/dealer financing market, not only buying AGC from Westpac and Custom Fleet from NAB but offering big sums to dealers to stop using two of the leading dealer finance providers – Esanda (an ANZ subsidiary) and St George (now set to be part of Westpac).

Esanda held on to many of its dealers by offering quick decisions, but the GE offer was every seductive. GE, having outlaid close to a billion dollars to become the leading player in the dealer finance business, is now going to walk away, leaving its customers without a regular financier. General Motors’ GMAC will do the same thing.

Australian motor dealers borrow in the vicinity of $3 billion to fund their stock. GE provides between one third and a half of that total. GMAC probably has about 10% to 15% of the market. So Australian motor dealers holding more than half of Australia’s motor stock must now crawl to Esanda, St George, CBA, NAB or anyone else they can find and plead for help.

St George and Esanda are experts in the industry. The main financiers will cherry pick the GE and GMAC customers, only awarding loans to well funded and well managed motor dealers. Some of the saddest stories will come from good motor dealers who are highly leveraged because they expanded by buying properties and/or dealerships during the boom. Most of these will go to the wall, creating some nasty bank losses.

In theory, GE and GMAC are pulling the plug around the end of December. If they actually do that, motor car prices will be mutilated. Almost certainly they will give dealers time, although the US companies’ actions may be driven by whether the US motor rescue package actually picks up their losses in Australia.

At this stage no one knows, but if the US Government comes to the party, then whammo – cars may be sold in Australia like houses have been sold off in the US.

When there was plenty of money available to fund dealers, motor makers and importers were able to pressure dealers to take more stock than they could sell at good margins. Motor dealer margins were therefore cut to the bone and most made their money from selling insurance products and finance to consumers.

The financiers of the future are simply not going to allow that to continue, so motor makers who make or import too many cars will have to hold them. Accordingly they will need to make and import fewer cars.

Currently the motor makers are making far too many cars. There are very large shipments of cars headed to Australia. On the other side, consumers, led by those with novated leases, have listened to the warnings of the PM and Treasurer and zipped up their wallets, because they are preparing for hard times. All these forces are coming together in a so called “perfect storm”.

And there are a few other games. The lower dollar will lift costs. The lower tariffs will reduce the value of used cars. There are also bargain hunters waiting to pounce.

But with the changes ahead there will be a much reduced number of powerful dealers who will be able to say “no” to GM, Ford, Toyota, Honda and so on. And if they are bullied, they can say, truthfully, that their financiers will not provide them with the money to buy too many cars and sell them too cheaply.

The balance of power in the motor industry will, in time, change towards dealers who have financiers. The success of the Federal Government’s rescue package will depend on how well it adjusts to this change.

This article first appeared on Business Spectator