Credit Tightening May Be The Last Straw For The Automotive Industry

Implications: The same issues that drove the nations largest Chevrolet dealer group to close its doors this week may prove to be the last straw for auto buyers.

Analysis: High fuel prices, canceled floorplanning from its captive lender, too much reliance on sales of pickups and SUVs, a soft national economy and struggles in local markets are the root causes that claimed the Bill Heard group of dealerships this week.
 
The company, ranked No. 13 on Automotive News list of the top 125 dealership groups, had revenue of $2.13 billion in 2007 and employed over 2700 people.

Along with the above issues, another, more recent problem, has been plaguing Bill Heard and every dealer in the country, tighter lending policies by the captive lenders, local and regional banks and credit unions.

U.S. auto sales are going to continue, and even intensify their slide in coming weeks as American consumers react to this latest blow to their underlying confidence in the economic future, and as hypersensitive credit markets make it more difficult for willing customers to complete a vehicle purchase.

Recent market volatility causes uncertainty, so consumers postpone. And when they don't postpone, but are unable to acquire financing, they give up completely.

The concerns of experts center on two factors: the immediate impact on auto sales of a further tightening of credit, and the somewhat more diffuse blow to consumer confidence from the awful spectacle of the near-meltdown of the global finance system.

The tightening definition of "credit-worthiness" has already dealt a blow to automotive leasing over the past several weeks, creating an additional hurdle for OEMs ranging from the domestic Big-Three to luxury brands such as Audi, BMW and Mercedes Benz.

The automakers' captive finance companies have been pulling back on leases as their own credit facilities have deteriorated. And now banks and other institutions that have been making car loans and leases are becoming more reticent.

Credit standards are tightening and will stay that way until banks and other credit institutions, and finance companies, see the flow of money to them from investors.

Even if the federal bailout plan is enacted, it may take several months before you begin to see credit availability flow down to auto financing and have an effect on consumers ability to borrow.

In the meantime, lack of credit availability will have a direct impact on the sale of extended warranties, credit insurance and other aftersale products that are significant profit generators for auto dealers.

Experts now agree that we won't see any kind of measurable recovery in the auto market until late 2009, if then. Consumer confidence is the key here, and the only way we are going to see any improvement in consumer confidence is an improvement in the housing market, then we can talk about improvement in other markets.