For dealers, auto bailout can’t come too soon

Perhaps no other place in America outside Detroit has more at stake in the debate over whether to bail out the auto industry than National City, Calif., sandwiched between San Diego and the Mexican border.

National City is home to the Mile of Cars, one of the world’s first auto malls. More than a century after the first dealer set up shop, 21 auto dealerships squeeze along a single mile of the main drag of the city.

To a big extent, National City’s fortunes are intertwined with those of the Big Three Detroit automakers, whose chief executives are asking Congress to approve $34 billion in government loans to help them survive the worst auto sales in a quarter-century.

Sales taxes on automobiles alone generate almost $5 million a year for the city of 60,000, while a special property tax assessment on the Mile of Cars brings in $3 million more. Add in other taxes and fees on dealerships and supporting businesses like parts suppliers, and the Mile of Cars pumps in nearly a fifth the city’s general revenue.

“The future is uncertain,” the 2008-09 budget warns. “... Since we are sales tax dependent, we are impacted by regional, state and federal economic trends.”

In National City, those trends are terrible as, month after month, the Big Three report sales drops of up to 47 percent.

“This dealership has been here 60 years, and we’ve never dealt with anything that we’re going through now,” said Mike Palomata, general sales manager at McCune Chrysler-Jeep. The dealership recently laid off 50 employees, about a tenth of its workforce.

For now, National City is keeping its head above water, thanks to the massive San Diego Naval Shipyard, part of which spills over from San Diego. But Mayor Ron Morrison said the problems in the auto sector “are more than ripples. These could be more like tidal waves.”

‘Real serious real fast’
Auto dealers across the country, like those along the Mile of Cars, say that in the auto crisis, they are where the rubber meets the road.

Video   Round two for automakers Dec. 3: Representatives of the “Big Three” will travel to Capitol Hill on Thursday, seeking to make up for a poor first impression in assking for billions in bailout funds. NBC’s Kelly O’Donnell reports. MSNBC

“This is different than anything I’ve ever seen in 48 years of being in the car business, when the public just decides all at once that there’s no reason on Earth that they need to go out and buy a car,” said Les Donovan, owner of Donovan Auto and Truck Center in Wichita, Kan. “It gets real serious real fast.”

At You Me Affordable Automotive in Orlando, Fla., owner Sal Fusco spends part of every day taking phone calls from old friends looking for jobs. They had worked for Bill Heard Enterprises of Columbus, Ga., which was the nation’s largest Chevrolet dealership with $2 billion in annual sales before it declared bankruptcy and closed all of its 14 massive showrooms from Florida to Arizona in September. Overnight, 2,700 jobs disappeared.

“They’re friends, they’re colleagues, and they’re out of work,” Fusco said. “I can’t tell you how many calls, and I’m not in a position to hire any more people right now.”

Plenty of customers, but few can get loans
It’s not that there aren’t interested buyers — dealers say traffic to their showrooms has remained steady.

And it’s not that the manufacturers can’t supply the cars — just the opposite. At Youngblood Nissan-Chrysler-Kia in Springfield, Mo., for example, unsold cars are piling up on the lot so fast that sales manager Richard James has extended the usual 60-day inventory cycle to 100 days.

“The manufacturers are all just stuck with the inventory, which is costing money, and they have to lay the people off, because they can’t build more vehicles, because we’re not selling more vehicles,” James said.

An msnbc.com-NBC News special report Alex Johnson is a reporter for msnbc.com. Lee Cowan of NBC News and Phil LeBeau of CNBC and the following NBC stations contributed to this report: KNSD of San Diego; KSL of Salt Lake City, Utah; KSNW of Wichita, Kan.; KUSA of Denver; KYTV of Springfield, Mo.; WCNC of Charlotte, N.C.; WESH of Orlando, Fla.; WSAV of Savannah, Ga.; and WTHR of Indianapolis.

The immediate problem is the same drying up of credit that brought the financial services industry to its knees. It hits manufacturer, dealer and buyer alike, creating a cycle in which dealers can’t get credit to buy inventory from the manufacturers and the manufacturers can’t get credit to buy supplies and reimburse dealers for sales incentives, all because the consumer can’t get credit to buy a car in the first place.

When General Motors announced last month that it would delay by two weeks its scheduled payments to reimburse dealers for rebates and other sales incentives, it had a ripple effect that was felt in the wallet of every consumer who was thinking about buying a GM car or truck.

That’s because an auto dealer makes only about 5 percent gross profit on the average sale. Sixty percent of that — 3 of those 5 percentage points — isn’t realized until the end of the financial quarter, when deals with manufacturers, shippers and numerous other middlemen are reconciled. Until then, that cash flow has to be financed to pay the day-to-day bills, said Ed Williamson, owner of 11 General Motors franchises in the Miami area.

That means dealers need credit, which is backed up by sales. But because of the overall credit shortage, buyers often can’t get auto loans, meaning sales are drying up.

Lenders traditionally have worked with buyers who have less-than-premium credit ratings, but no more. Now, unless their credit ratings are at least 750, 25 points above the national median, buyers are often frozen out.

“We’re probably losing at least 20 percent of our sales because we can’t get anybody financed that’s got a credit score of 650,” Williamson said.

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