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Prompt dealer action limits finance damage
Rapid de-stocking pumps money back into financiers, who then fill the GMAC/GE hole
24 Mar 2009
By IAN PORTER
PROMPT stock clearance by dealers and car-makers late last year helped make for a relatively smooth transition to new finance arrangements to cover the sudden withdrawal of GMAC and GE Money from the floor plan finance industry, according to the Australian Automobile Dealers Association (AADA).
However, AADA president David Nutter, who is also the dealer principal of David Nutter Ford in Berwick and Pakenham, Victoria, said “many” dealers still had not found a new financier.
“There are still an unfortunate number of dealers out in the breeze, but it’s a small number in terms of the whole industry, and they are predominantly small rural operations,” said Mr Nutter. “I understand there are some dealers under stress. I don’t think we have seen the end of the fallout.” Mr Nutter said he understood that metropolitan dealers could also be under stress. He said it was unlikely the federal government’s Special Purpose Vehicle, funded by the four big banks, would pick up every dealer who had lost finance when GMAC and GE Money withdrew.
“Depending on who they are, these small rural operators are the guys who might not have made it anyway,” he said. “The SPV was always about helping viable dealers, not propping up unviable dealers.” However, Mr Nutter said he was pleased at how quickly about 80 per cent of the GMAC and GE Money dealers had been picked up by the remaining financiers, which include Esanda, St George, Capital and the manufacturer-backed operations.
“Where did they get the money to fund the GMAC and GE Money clients? The answer is simple,” Mr Nutter said. “Little dealers like me have de-stocked 25 per cent and paid more than $1 million off our floor plan.
“If you multiply that by the 80 per cent of dealers which were not affected by the withdrawals, it is clear the money came from dealers de-stocking and all of a sudden the financiers had the money (for the 20 per cent).” Mr Nutter said he had cut back on all areas of inventory in his dealerships. “As we have been selling new stock, we haven’t been replacing it although, to a large degree, we have with used stock. We have been harsher on our demo fleet.” He said that when there was a sedan and a hatch, a manual and an automatic in one model, he had carried them all as demonstrators.
“Well, you can get by with half the stock. The manufacturers don’t like it, but now they are facing the reality that this is where Australian dealers are heading.”
Left: Ford Territory Ghia Turbo.
Mr Nutter said Ford was working to help dealers on this front by reducing model proliferation, as evidenced with the facelifted Territory.
“With the Territory, as well as the TX, TS and Ghia models, there used to be 13 or 14 options. There are now less than half the options because they have packaged more equipment into each model.
“That means there are less stocking combinations, while giving us a higher chance of having a car in stock that suits the customer,” he said.
Mr Nutter also had some advice for dealers holding old stock that may be worth less than they paid for it: get rid of it now.
“Old stock has been falling dramatically in value, until the last six weeks or so,” he said.
He said values had been rising, despite the fact that demand for used cars had fallen and despite the fact there had been some attrition among used-car dealers.
“Why are values rising? Because there are fewer trade-ins. Used-car prices are increasing across a number of brands and models. That’s a short-term drift we are seeing.” “That’s all the more reason to get rid of ageing stock and buy in the current market.
“It makes it easier to take a hit on the old stock if you are still not out of it, because the hit is a bit smaller if you act now.” Dealer money games over
THE days of dealers using other people’s money to fund their businesses is fast coming to a close, according to David Nutter.
It has been common practice for car wholesalers and car yards to on-sell cars quickly before they have paid the original car yard or the wholesaler for them.
If a dealer could sell a car during the settlement period of seven days, floor plan finance could be avoided.
Mr Nutter said that allowed dealers to stock, say, 30 cars on the yard when they really could afford to finance only 25 cars.
He warned that a business built on other people’s money (OPM) was “a pack of cards”, and warned that it was about to come crashing down.
Tougher conditions in the market and the likelihood of more dealer failures had prompted dealers and wholesalers alike to become registered credit providers. That means they can put a lien on a car and register that lien at the Vehicle Securities Register (VSR).
“If you sell a car in the trade and don’t get paid, you don’t alter your lien at the VSR,” Mr Nutter said. “That means, when someone falls over, you are more likely to get paid faster because you will get a higher ranking.” However, he said an unintended consequence was that the old method of using OPM to fund part of the inventory so a yard could carry more stock was about to end.
In a typical sequence, car yard A sells a car to wholesaler B on terms of seven days. B then sells the car to car yard C, also on seven-day terms. If car yard A has a lien on the car, Mr Nutter said the whole sequence can grind to a halt.
“Wholesaler B can’t get his money from C because A has a lien on it. A says we won’t take the lien off until he gets paid,” he said. “The net result is that people will have to unravel this nonsense of not paying everyone else because everybody is using OPM.” He said the lesson for wholesalers was to urge their car yard clients to scale back from, say, 30 cars on the yard, to the 25 they can really finance.
“My point to the wholesalers is go and educate your yards to get rid of their five cars too many. Sell them at any price and run the business on 25 cars.” “They have to unravel the packs of cards because the whole world’s pack of cards is unravelling. Get smart, drop the five cars too many and then everyone can pay everyone else on time.” Mr Nutter said the recent failure of a Melbourne wholesaler demonstrated how complex things can get when dealers hold a lien.
“There is a very long story there about who is in the receiver’s queue and who gets paid,” he said.
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