Tough time for auto

Thousands of new vehicles that would have cruised their way to Marylanders' driveways a year ago are now stalling at local dealer lots, in tune with the trend that dealerships are experiencing nationwide.

With today's economy, once-potential buyers are now worried about whether they'll keep their jobs, be able to pay for gas or qualify for a car loan.

Peter Kitzmiller, president of the Maryland Automobile Dealers Association, said new car sales in the state are down more than 10 percent for the year. He said he points to the economy for much of the slowdown.

"Even the used-car sales are down," Mr. Kitzmiller said. "It's been a very, very tough year."

George Mangos, who works in sales for Tate Chevrolet in Annapolis, said gas prices have affected business quite a bit, but he said he believes people's financial fears have been even more damaging to sales.

"It is true it's harder to get approved (for a loan) nowadays," Mr. Mangos said, "(But) the more people talk, the more people get scared. This year has sort of fallen off soft, but it should get better next year. We'll just have to see."

For auto dealers already suffering under the worst U.S. sales downturn in 15 years, the increasing credit costs to keep their inventory means every hybrid and SUV with a sale sticker is chipping away at dealers' profit margins and threatening to put them out of business.

On Friday, Paul Taylor, chief economist with the National Automobile Dealers Association, said dealership closures spiked in September, prompting him to raise his forecast of closures. He now said he expects 500 to 600 of the group's 20,770 dealerships to shut their doors this year, up from previous estimates of 300 to 400.

About 430 dealerships closed last year, and 295 closed up shop in 2006, according to the association.

"Sales are difficult pretty much across the board right now," Mr. Kitzmiller said. "You know I'm certainly hearing that businesses are trying to look at a lot of different things, like how to be more efficient and having a strong service department. But there's only so much they can do. All they can do is just try to ride this out."

Car dealers get vehicles for their lots through a practice called floorplan financing, where the funds needed to pay for inventory are supplied by a lender. The longer the vehicle goes unsold and the higher the interest charged, the more it costs the dealer.

The recent turmoil in the banking industry has sent London Interbank Offered Rate up significantly as institutions become wary about lending to each other. The three-month LIBOR stood at 4.33 percent Friday, up 1.52 percentage points from a month ago but still lower than it was this time last year.

Dealers who go through the automakers' financing units also are facing higher costs, especially those that deal with the Detroit-based automakers, which have lower credit ratings than many of their foreign competitors, making it more expensive for them to borrow money.

Yet not everyone in the industry believes the credit problems are as much a crisis as some have alluded.

"I know this credit crisis is getting a lot of play, but some of that is overblown," Mr. Kitzmiller said. "If you're qualified to buy a car two weeks ago, you're qualified to buy one now."

Richard Howse, senior director of auto finance for J.D. Power and Associates, said that while the automakers' finance companies are more focused on vehicle loans, they have a lot of the same problems as traditional banks.

"I think that they want to support the dealers as much as possible," Mr. Howse said. "But if they only have 'X' amount of capital to lend, I'm not sure they're any different."

Jim Farley, Ford Motor Co.'s group vice president for marketing, said Ford Motor Credit raised its floorplan expense financing by 50 basis points effective Nov. 1, citing its rising costs.

"We won't see how dealers will react to that, but I think that reflects the market realities today from funding and cost of credit," Mr. Farley said.

GMAC Financial Services, which is 49 percent owned by General Motors Corp., also raised its floorplan rates, is tightening credit standards and is keeping a closer eye on the health of the dealerships it serves, said Mark LaNeve, GM's vice president for North American sales.

At the same time, however, the automaker's dealers have pared back their inventories, which has helped rein in its financing costs, he said.

Industrywide U.S. auto sales last month fell below 1 million for the first time since February 1993, which nearly all automakers said was influenced by tighter credit standards knocking buyers from the market. Others likely stayed away from showrooms because gas remains expensive, or job losses and declining housing values have people curtailing their spending.

Mr. Taylor said he expects this year's vehicle sales to total about 14.2 million units, down from 16.1 million units last year and 16.5 million in 2006.

The amount of money dealers are making on the vehicles they do sell has fallen.

Since 2002, dealer profitability as a percentage of total vehicle sales before taxes has fallen 0.3 percentage points to 1.5 percent last year, according to the association, and the number of dealerships nationwide has been shrinking as the Detroit-based automakers try to group more of their brands at single locations.

The Associated Press contributed to this story.