Consumer stimulus could aid U.S. auto industry

January 26, 2009
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The Grant Thornton U.S. Dealer Analysis released Thursday indicates that the bailout of the domestic auto industry needs some help in the way of consumer stimulus actions. Weak auto sales are expected this year, particularly in the first half, but there are some steps automakers and legislators can take to spur demand and possibly prevent a huge wave of dealership failures, according to Grant Thornton LLC's Corporate Advisory and Restructuring Services group.

"Many automakers are reducing their costs and launching attractive new products. Recent government action is improving the liquidity positions of GM and Chrysler, and improving credit availability through GMAC and Chrysler Financial. But the consumer has limited incentive to shop for a new car," stated Paul Melville, a principal at Grant Thornton. "Taking action to reduce consumers' fears and anxiety will help all industry stakeholders, but none more so than the dealers. Months of depressed sales have many hanging on by their fingertips."

Average annual new vehicle sales per dealer have ranged from 740 to750 units for most of the last decade, or about 60 sales per month — a level last seen in 2007, according to Grant Thornton data. In October 2008, the firm estimated that a net reduction of 3,800 dealerships would be necessary for the average sales per dealer to match 2007 results. However, U.S. sales have declined more than what was predicted at the time. Now, with 2009 U.S. sales projected to be 11.4 to 11.7 million units, a reduction of more than 5,000 new vehicle dealerships would be necessary. About 2,500 new vehicle dealerships may close in 2009, due in part to restructuring strategies dealers are taking to remain viable, such as reducing inventory costs, overhead and selling expenses. 

"The best dealers are true entrepreneurs and amazingly resilient, but they can't purely cost-cut their way to prosperity," Melville said. "New products and creative sales promotions by the automakers aren't stimulating enough demand, so it's time to consider stronger medicine."

Melville said there are several potential strategies automakers and legislators could pursue to encourage consumers to purchase new vehicles and save some of the dealerships from going under:

  • Pay "cash for clunkers." Consumers in France are being paid to scrap their older, less environmentally friendly vehicles and purchase new cars. Similar programs in Europe helped support vehicle sales volumes during the recession of the early 1990s.

  • Roll back state sales taxes on new automobiles. Create enterprise zones where state sales tax rates are reduced. Such zones have proven to stimulate retail sales in depressed urban centers. Similarly, sales tax reductions for new vehicle purchases would help make new vehicle purchases much more affordable.

  • Offer expanded tax credits for fuel-efficient vehicles. Currently, only a handful of diesel and hybrid vehicles are eligible for federal tax credits tied to fuel economy, and the benefits mostly accrue to imported vehicles, according to Grant Thornton. Making this credit available on vehicles that achieve at least 30mpg highway would stimulate sales of dozens of Ford, GM and Chrysler product offerings.

  • Introduce National Credit Unemployment Insurance. Such a program would cover the monthly payments of all new car buyers in the event they unexpectedly lose their jobs. It could be funded by an "above the invoice" fee of 1 to 2 percent of each vehicle's wholesale price and government stimulus funds, according to Grant Thornton's  Corporate Advisory and Restructuring Services group.

"One or more of these programs included in the stimulus programs already under consideration by the Obama administration would provide the grassroots confidence and support the auto industry needs to accelerate its recovery. America's car dealers will do the rest," Melville added.

David Cole, CEO for the Center for Automotive Research in Ann Arbor, said he thinks all five strategies are excellent ideas that could have a fast and positive affect on Michigan's economy.

"I think there is merit in all of theses strategies in being very stimulative, and, in combination, they could have a great impact," Cole said.

Cole pointed to the new arrangement Hyundai has just come up with that's similar to the National Credit Unemployment Insurance concept: If a person purchases a Hyundai vehicle and then loses his job, he can return the car to the dealer. 

"We saw, for example, that after 9/11 when GM and others joined a low interest financing program, it almost instantly caused things to take off. Because of the high multiplier effect in the auto industry — every job in an auto assembly plant creates eight or nine other jobs in the economy — so when you put an auto assembly worker back to work, you put eight to nine other people back to work very quickly."

Rolling back state sales tax on new automobiles, expanding tax credits for fuel-efficient vehicles and making sales taxes deductible would obviously require action on the part of the Michigan Legislature, which doesn't always move quickly. But Cole believes there exists a sense of urgency today that would likely spur legislators to act.

"The challenge is that we already have a huge problem with state revenues, but by stimulating car sales, the state would end up getting more revenue than if didn't do it. My view is that legislators will do just about anything if it has some potential to turn this economy around quickly."

Consumer stimulus could aid U.S. auto industry

Anne Bond Emrich

The Grant Thornton U.S. Dealer Analysis released Thursday indicates that the bailout of the domestic auto industry needs some help in the way of consumer stimulus actions. Weak auto sales are expected this year, particularly in the first half, but there are some steps automakers and legislators can take to spur demand and possibly prevent a huge wave of dealership failures, according to Grant Thornton LLC’s Corporate Advisory and Restructuring Services group.

2007 economic contributions of Michigan’s new-vehicle dealers

Michigan auto dealerships maintain a multi-billion dollar retail industry, according to data supplied by the National Automobile Dealers Association:

Average sales per dealership

$31.9 million

Total sales of all Michigan new-vehicle dealerships

$24.2 billion

Dealership sales as percentage of total retail sales in state

20.7 percent

Estimated number of new-vehicle dealerships in state

759

Auto dealerships provide thousands of well-paying jobs in Michigan:

Total number of new-vehicle dealership employees in Michigan

36,258

Average number of employees per dealership

48

Average annual earnings of new vehicle dealership employees

 $52,347

Dealership payroll as percentage of total of state retail payroll

15.1 percent

Annual payroll of new-vehicle dealerships

$1.89 billion

Average annual payroll per new-vehicle dealership

$2.49 million

New-vehicle dealerships in Michigan also generate hundreds of millions of tax revenue for state and local government through sales revenue tax, corporate tax revenue and payroll tax revenue. 

Source: National Automobile Dealers Association

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