Sunday, November 12, 2006

Big Three carrying excessive inventory

Friday, October 27, 2006
Big Three carrying excessive inventory
Head of AutoNation claims fleet sales give automakers unreliable count of vehicle supply.
John D. Stoll / Dow Jones Newswires

DETROIT -- The head of the largest U.S. auto-dealer group said Thursday that U.S. automakers and sales analysts need to "move into the real world" and recalculate vehicle inventory estimates in a way that better reflects how deep a hole Detroit's Big Three are in.

AutoNation Inc. CEO Mike Jackson said the current practice of calculating days' supply of unsold vehicles is "outdated" and "dramatically understates" how much excess inventory is being carried by dealers selling vehicles from General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler Group.

He said that automakers and certain analysts currently calculate days' supply based on both the pace of retail sales to actual consumers and fleet sales, such as deliveries to rental car firms and government agencies.

Jackson said fleet sales should be removed and automakers should only calculate days' supply inventory based on retail demand. The Big Three rely on fleet sales for at least 25 percent of total light-vehicle sales.

Automakers constantly strive to keep inventories in check in an effort to hold availability in line with demand. A glut of vehicles leads to high costs for dealers who pay interest on unsold vehicles, and forces automakers to dish out generous sales incentives that deflate vehicle profitability. GM, Ford and Chrysler have scheduled costly production cuts for the second half due to high inventory.

The Big Three U.S. automakers reported earnings earlier in the week and each posted losses in the United States, where falling market share and production cuts have pulled down overall results. Jackson said that a change in inventory-estimating practices would help GM, Ford and Chrysler be sure the inventory crisis is "fully understood and addressed."

Jackson said the current practice of estimating inventories dramatically skews the inventory picture at the domestic automakers. GM, according to auto-sales tracking firm Autodata Corp., has 76 days' supply of inventory. But AutoNation says the number, minus fleet sales, is actually 94 days' worth. Ford's reported inventory is 75 days' supply, according to Autodata, but AutoNation says it is actually 105 days. At Chrysler, AutoNation estimates retail inventory is 126 days' supply, not the reported 82 days.

Jackson said that a 60 days' supply is ideal.

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