Auto Dealer on TV

I recently saw a video clip on the news from the president of the country’s largest auto chain (Auto Nation?)  and was very surprised with what he said.  Essentially he stated that the high gas prices and demand for small cars is good for him.  Huh?  He strikes me as nuts and let me explain what troubles me.

A year ago with lower gas prices, automakers sold a range of autos and probably far fewer small cars.  The most popular cars were probably SUVs and trucks and so there was little incentive to manufacture or promote small and fuel efficiant cars.  This may seem odd, but if fuel prices are low, who cares if your care is a gas guzzler?

Now, gas prices are much higher and this is forcing people to consider small cars.  Unfortunately, automakers are slow to react.  Car manufacturers have dedicated production for each car or truck model, and it is very expensive if not impossible to rapidly switch from one car to another.  Thus when one car type comes in vogue (like small cars, in this case), the automotive company cannot just stop making all other cars, but can only modestly adjust production for the popular model.  Similarly, the manufacturer forces their dealers to take a range of both popular or unpopular cars.  Thus dealers are stuck in the same bind as the manufacturer with lots full of undesirable cars and inability to keep high demand cars in stock.  Eventually, the situation will correct itself as the auto manufacturer gradually adjust production to demand.  (e.g. fewer poor selling cars are produced and more popular ones are manufactured.)

The sudden change in gas prices causes an imbalance in the system.  Suddenly people have little interest in gas guzzling SUVs and trucks and small cars are hot.  Of course, the automotive companies were unprepared for the change (as were all of us consumers) and dealers are stuck carrying many SUVs while small cars are in high demand.  This is bad for the auto companies and dealers because they have to get rid of the excess gas guzzler inventory which means aggressive price cuts and/or rebates which harms profitability.

Don’t get me wrong, switching to small cars is good for fuel economy and the green movement, but it certainly is not for auto dealers.  In the short term, both dealers and manufacturers will suffer.   Dealers would be better off from a profitability standpoint with low fuel prices and so I am surprised by the dealer’s statement.

What am I missing?

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