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Monday, November 06, 2006

Chrysler: Oh Lord, Won’t You Buy Me A Mercedes Benz

The birds on the Detroit ostrich farm apparently can’t count. At least not according to the country’s car dealers. Mike Jackson, the head of big car dealer chain AutoNation, is quite direct about it. He says that the established practice of including fleet sales in inventory numbers "dramatically understates" the problem facing the old Big Three carmakers.

If Jackson’s numbers are right, the problem is acute and could undermine whatever progress the Big Three have made so far this year. Taking out fleet sales, GM would have a 94 day supply of cars. Ford’s inventory would stand at 105 days, and Chrysler’s at 126 days. Toyota inventories stand around 30 days.

Having this kind of inventory on hand means that getting newer cars onto lots is harder. The dealers don’t want to hold the extra cars. It also means that production needs to be repeatedly cut to drop the available supply of vehicles while dealers work through what they have in stock.

There is really only one solution to the problem, and it is a painful one. The large US car companies are going to have to have a massive sales of their remaining 2006 model vehicles. Otherwise, production will continue to drop early next year and getting 2007 models onto showroom floors will be further delayed.

If the boil is lanced now, perhaps the issue can be resolved in one short and bloody move. If not, the inventory problem could be around for months and the day of reckoning could be pushed much further into the future.

The Big Three still have the balance sheets to stage one last huge sale to push bloated inventory off the lots. They need to do it now, at the change of the model year. After that, if inventories build again, despite less robust production, the problems in Detroit may be insurmountable.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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