AutoNation CEO warns of high inventory levels

Jamie LaReau, Crain News Service

DETROIT (Jan. 17, 2014) — Mike Jackson, CEO of AutoNation Inc., the largest new car dealership in the U.S., is warning manufacturers to slow production in 2014.

Speaking the 2014 Automotive News World Congress in Detroit, Mr. Jackson said the auto industry is unlikely to grow in 2014 at the same rate it has been growing in the past few years. That means inventory levels must be contained to avoid heavy incentive programs.

"2014 is going to be a test, the first real test after four easy years of a million units of growth," he said. "It will test do we really have the discipline to run this business in a rational way for the long term? It's the beginning of a test."

Mr. Jackson predicts growth of 3 to 5 percent over last year's light-vehicle retail and fleet sales of 15.6 million units. That creates a problem with stock on the ground as auto makers have been building vehicles to support double-digit growth to rebuild retail inventory during the past few years, he said.

Retail inventory is about 3.5 million units, he said, or about $100 billion worth of goods, which is more like a 90- to 120-day supply instead of the industry-accepted 60-day supply. He criticized the 60-day inventory figure, saying it includes fleet sales.

"We're not pushing back because the cost of money is free, but is this any way to run a business? Is this where we want it to end up again?"

He declined to name specific manufacturers that have overproduced, but he said, "I talked to manufacturers, and they're obsessed with just-in-time delivery from suppliers into the plant. As soon as we put those parts together, we don't care if it sits there for three months."

Mr. Jackson's comments are in stark contrast to — and perhaps a response to — comments made earlier during the annual Automotive News World Congress by Citi Investment's Itay Michaeli, who said auto sales will be stronger than expected this year and next because pent-up demand isn't used up but just starting.

The head of auto research for Citi Investment said Citi sees U.S. light-vehicle sales hitting 16.4 million this year, at the top end of the range of most forecasters, and 17 million in 2015, significantly higher than the pack.

He said the manufacturers are also concerned mostly with revenue from the wholesale sale to dealers. He called for an industry change in how automakers record revenue.

"There are $100 billion in unsold goods out there that revenue recognition has occurred on at the manufacturer level. Maybe it would be a good idea if we as an industry recognized revenue as the actual sale to a customer. That would be transformation."

Mr. Jackson warned auto makers that if they think they can force $120 billion of inventory on dealers this year, "That's not going to happen. You know why? We don't have places to park them anymore, unless you want us to go back to renting spaces at the airport. I don't know where we're going to park them. The asphalt's full."

Mr. Jackson predicted the industry will grow by about half a million units this year over 2013. To grow by any more given the competition of good products and already heavy inventory levels "is like climbing Mt. Everest. It's a different game today."

More on stairsteps

Mr. Jackson continued a familiar theme criticizing "stairstep" incentive programs.

"Retro programs are really designed by Walter White," he said in reference to the main character in the popular AMC television show Breaking Bad."

"At the end of the story, you're just going to be like the end of 'Breaking Bad' — everybody's going to be dead on the floor with blood running out of them. The program of two-tier, three-tier, four-tier pricing is Russian roulette."

Mr. Jackson said today's consumer wants a fair and transparent price that incremental incentive programs undermine.

"We've had retro programs where the next incremental unit for our company was $400,000," he said. "I would pay you to take the car! Please here's $20,000, buy the car. It's a crazy way to run a business."

No touch screens

During a question-and-answer session, Mr. Jackson was asked about in-vehicle technology.

He said many customers are trading in their Tesla vehicle because they dislike the center stack, which has essentially eliminated knobs and buttons and uses a touch-screen to run everything.

"I don't think that's the future," he said. "I don't think people want to take their eyes off the road to look at a screen and have to touch the right place. I still think there's a role for buttons and knobs in cars."

AutoNation is ranked No. 1 on the Automotive News list of the top 125 U.S. dealership groups with new-vehicle sales of 267,810 units in 2012.

Mr. Jackson has been AutoNation's CEO since September 1999 and chairman of the Board since January 2003. Prior to joining AutoNation, he was president and CEO of Mercedes-Benz USA L.L.C.

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Jamie LaReau is a reporter for Automotive News, a sister publication of Tire Business.