Big Dealer to Detroit: Fix How You Make Cars

Trust GM to say "It's not like we have some crisis...". This does not bode well for the future of Detroit.
"But there are limits to how far Detroit is willing to go. Adopting a system
in which market intelligence drives manufacturing would represent a profound and wrenching change for the industry. And many industry executives say they're comfortable with the current inventory levels. "It's not like we have some crisis," says Mark LaNeve, GM's head of North American sales and marketing. GM has more than one million unsold cars in the pipeline. By contrast, Toyota Motor Co. has 320,282."
Big Dealer to Detroit: Fix How You Make Cars
Michael J. Jackson, chief executive of the U.S.'s largest chain of auto dealers, wants Detroit to change how it makes cars -- and he may have the clout to succeed.
At one AutoNation Inc. location in Delray Beach, Fla., scores of "orphan" vehicles have been sitting on the lot for months. One hulking silver Dodge Ram pickup has languished unsold for 237 days, an eternity by automotive standards. The problem? Chrysler equipped the truck with a V6 engine instead of the V8 requested by most buyers of big trucks.
Parked nearby is a red Jeep Grand Cherokee with four-wheel drive, a feature popular in snowy climes but not sunny Florida. One Chrysler Sebring convertible is so loaded with options that its sticker price is $32,000 -- nearly as much as a BMW 3 Series.
"No customer would have asked for these vehicles that way, and they never should have been built that way," says Mr. Jackson. "This has to change."
One of the toughest problems facing the ailing U.S. car industry stems from Detroit's century-old business model, which dates to Henry Ford's mass production of millions of largely identical Model T's. Rather than build cars to suit customer tastes, U.S. auto makers churn out what makes sense for their plants, and then use incentives and rebates to lure buyers. The thirst for revenue to pay for mounting health-care and pension costs has further encouraged companies to keep plants running regardless of demand.
In years past, it was dealers who suffered as this excess inventory -- in the form of unsold cars -- sat idly on their lots. But the rise of powerful national dealership chains, exemplified by Mr. Jackson's AutoNation, has changed the equation. He's pushed Detroit to cut production more than it wants and has cut orders when it hasn't responded. Last year, when DaimlerChrysler AG's Chrysler Group pressured dealers to take thousands of unwanted cars, AutoNation and other chains led a revolt that forced the car maker to backtrack.
At the Detroit auto show last month , Mr. Jackson had private meetings with the chiefs of General Motors Corp., Ford Motor Co. and Chrysler -- a dance card few in the industry could match -- and offered to help. Last year, AutoNation began sifting through its trove of data to identify the best-selling configurations of every vehicle on the market. He wants GM, Ford and Chrysler to join the effort and use the information to produce vehicles customers actually want.
Officials at the big three companies are publicly supportive of Mr. Jackson's efforts. "He's absolutely right on," says Ford Chief Executive Officer Alan Mulally. "When you have big inventories, you get further and further away from that customer decision." Mr. Mulally says excess inventory "hurts everybody."
But there are limits to how far Detroit is willing to go. Adopting a system in which market intelligence drives manufacturing would represent a profound and wrenching change for the industry. And many industry executives say they're comfortable with the current inventory levels. "It's not like we have some crisis," says Mark LaNeve, GM's head of North American sales and marketing. GM has more than one million unsold cars in the pipeline. By contrast, Toyota Motor Co. has 320,282.
The increasing clout of the dealers is one part of a broader restructuring of the U.S. auto industry as it faces a historic crisis. Alongside dealer pressure, suppliers are less willing to give car makers price concessions, often because they are in bankruptcy proceedings or have been bought by hard-nosed financiers. The combination has left domestic auto makers in a painful financial crunch that's forced them to close plants, mortgage assets and rewrite labor pacts.
U.S. auto makers say they've been working for some time to be more responsive to customer tastes. "Today, we are much better in balancing production and demand than we were two years ago," says Troy Clarke, president of GM North America. "If the trend continues, we will be right where we want to be."
Until the 1980s, auto retailing was dominated by entrepreneurs who relied mainly on selling one Detroit brand for their livelihoods. Though often among the wealthiest citizens in town, traditional dealers couldn't match the economic power of GM or Ford, whose managers could make their lives easy, or very hard.
Since then, as the pioneers of the 1950s and 1960s retired or died, a new breed of dealer has emerged. These new auto retailers, some of which are publicly traded, own multiple stores in multiple cities and sell an array of models. They no longer rely on a single manufacturer -- indeed, Detroit's battered brands are often the weakest links in their diverse portfolios.
Big retailers like Wal-Mart Stores Inc. and Target Inc. long ago learned to use information they accumulate daily to influence manufacturers of food, cosmetics or clothes. Mr. Jackson's company has 334 showrooms, accounts for about 4% of new vehicles sold in the U.S., and is in the vanguard of auto retailers starting to do the same.
The chains have good reason to fight back. Because dealers borrow to buy their inventory, rising interest rates -- after a long swoon -- have increased the cost of handling slow-selling models. AutoNation's share price has doubled over the past five years, but has made little progress in the past 12 months. Its price-to-earnings ratio of 16.22 is higher than that of U.S. auto makers and suppliers, but trails retailers such as Target to which AutoNation is often compared.
"Mike's got to do this," says H. Wayne Huizenga, the businessman who founded AutoNation and remains a major shareholder. "Wal-Mart wouldn't operate this way." Another big shareholder, with a 24% stake, is hedge-fund billionaire and current chairman of Sears Holdings Corp., Edward S. Lampert.
The son of a refinery engineer and a homemaker, Mr. Jackson, 58 years old, grew up in Moorestown, N.J., 15 miles east of Philadelphia. At 13 he got a job shoveling manure at a horse stable, earning a dollar a stall. After getting a political science degree, he married, bought a used Mercedes SL roadster and drove to Cape Cod for the summer. When the car broke down in Hyannisport, Mass., Mr. Jackson scrounged a job at a Mercedes dealership to pay for repairs. His wife landed a spot as a cook, and the use of a bungalow, at the nearby Kennedy compound.
After the summer, Mr. Jackson got a job as a mechanic trainee, worked his way into sales and management, and eventually saved enough to buy a stake in a Bethesda, Md., Mercedes dealership. In 1989, Mercedes hired Mr. Jackson to run sales and marketing in the U.S.
By 1992, he was president of U.S. operations, and Mercedes was losing money and market share. In a preview of his prescription for Detroit, Mr. Jackson dumped inflated sticker pricing, stopped discounting and cut the number of dealers by 20%. By 1999, Mercedes was the top luxury brand in the U.S. market by sales.
"This is very difficult for people to understand, but you can sell more cars if you have less inventory and fewer dealerships," Mr. Jackson says. "By keeping the supply tight, your product becomes more desirable, and you create future demand."
In 2000, Mr. Jackson was hired to fix AutoNation, a company created four years earlier by Mr. Huizenga, the founder of Waste Management Inc. and Blockbuster Video. Mr. Jackson shut down its used-car megastores, sold underperforming dealerships, added stores selling luxury cars and imports, and streamlined back-office operations.
Still, selling cars isn't the same as selling televisions or toothpaste. For one thing, it takes up to three years for a car company to design and build a new vehicle. Consumer tastes can shift almost overnight as gasoline prices rise or fall, or as one automotive fashion fad gives way to another.
The Big Three are trying to be more market-driven, but it isn't easy. Because they have big and rising costs for union health care and pensions, they need to maintain revenue, which means they often keep plants open and build more cars than the market demands. Their operations and those of their suppliers -- many of whom are also ailing -- tend to be older and less flexible than those of Japan's Toyota and Honda Motor Co.
While U.S. car companies often offer a large number of options, they're not always geared toward particular buyers. Japanese companies, by contrast, typically manufacture a small number of variations tailored to specific groups of customers -- minivans with leather seats for retirees, for example -- and can move quickly to adjust if sales are poor.
Detroit often misses when it tries guessing the market. Chrysler thought buyers of its redesigned Jeep Wrangler would want two doors and a canvas roof. Dealers say the four-door model with a hard top is a big seller.
Michael Manley, Chrysler's vice president for sales and dealer operations, acknowledges the company built many vehicles in 2006 that were not equipped the way dealers wanted. He says the company has dramatically improved its forecasting system. Predicting demand for the Wrangler, he says, is "tougher" because the vehicle is "such a runaway hit."
Mr. Jackson acknowledges the Big Three have pressing issues to address -- including health-care costs and union contract talks. But he says tightening stocks is a critical step. "They are used to selling what their factories can produce, not what the customer is asking for," he says.
At AutoNation's Ford store in Fort Lauderdale, a recent drop in gasoline prices spurred sales of the Expedition, a big sport-utility vehicle. Just a few months ago, Expedition sales were in free fall amid $3-a-gallon gasoline. The store's general manager, Mike Devan, thought of ordering more, but couldn't get Expeditions with 20-inch wheels.
"Seventy-five percent of the people who come in for the Expedition want the big wheels," he griped, waving a hand at his computer screen in frustration. "I can't get them. I can only get them with 18-inch wheels. It's been this way for two weeks."
Walking through his lot, he patted the hood of one of three large-wheel Expeditions. "I have to make a choice," he shrugged. "Do I stock the vehicle with 18-inch wheels or just not have it in the store?" That day, he chose the latter option.
A Ford spokesman blames the shortfall on a problem with a supplier and says the large-wheel model is now available.
AutoNation's Toyota and Honda stores typically carry enough cars to last 35 to 42 days. Its GM, Ford and Chrysler locations used to have 65 to 70 days of inventory. These days, as domestic manufacturers have continued to lose market share, that number has climbed to between 80 and 120 days.
Frustrated the Big Three aren't moving fast enough, Mr. Jackson is taking matters into his own hands. About a year ago, AutoNation hired McKinsey & Co. and two other consulting groups with retail expertise to mine consumer data. The goal is to identify the few versions of every vehicle that are big sellers among the thousands of possible variations. GM's Mr. LaNeve says his company is seriously considering joining with Mr. Jackson to create a "predictive modeling" system.
The project got under way just as an inventory crisis was brewing at Chrysler. In late 2005, Chrysler had a stockpile of more than 100,000 "unassigned" vehicles. It pushed dealers to stock more vehicles than they needed, and many complied. But the combination of options and features selected by Chrysler's production planning staff was off the mark.
Last summer Rolfe Tessem, a TV producer in New York went to lease a new Jeep Grand Cherokee. He wanted the most luxurious interior possible, but coupled with a relatively small V6 engine to save on gasoline. His dealer said Chrysler's top-of-the-line interiors came with V8 engines only. Even though he'd owned four Grand Cherokees in succession, Chrysler "couldn't make what I was looking for," Mr. Tessem complains. He leased a Lexus instead.
By August, the higher cost of stocking extra vehicles was becoming too much for many dealers. AutoNation, Group 1 Automotive Inc. of Houston and Lithia Motors, a Medford, Ore., chain, all but stopped taking cars from Chrysler. In September, Chrysler said it would have a loss of $1.5 billion in the third quarter. Lithia and AutoNation saw earnings fall 30% in the same quarter, partly because of higher inventory costs.
Mr. Jackson told his board he would push the Big Three harder to cut inventory. In October, he gathered the company's top 15 executives at a resort in Aspen, Colo., and passed on the word.
Since then AutoNation's GM, Ford and Chrysler dealerships have been cutting back orders to lower their stocks. After last year's fiasco, Chrysler apologized to dealers, promised to stop building cars without orders and agreed to cut production.
"The bottom line is we will never be in the same situation again," says Tom LaSorda, Chrysler's chief executive. Mr. LaSorda says the company made another significant production cut in January but wouldn't specify its size.
The Fort Lauderdale Ford dealership run by Mr. Devan now has enough cars to last 83 days, compared with more than 100 in the fourth quarter. He's under orders to get the number down to 65 days.
He recently pulled up data on Expedition sales on his computer. Although Ford offers about a dozen versions -- two- and four-wheel drive, long and short wheel base -- Mr. Devan says just three types account for 75% of the sales in all of South Florida.
"Those are the one's I'll order," he said, touching a finger to his display screen. "Anything else, I'll pretty much stay away from."
-- "The king of Israel answered, "Tell him: 'One who puts on his armor should not boast like one who takes it off."
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