Credit crunch hits auto market's weak link

By Poornima Gupta and David Bailey - Analysis

DETROIT (Reuters) - The next shakeout in the American auto industry has started to play out on Main Street as weaker dealerships face closure as the credit crisis worsens and car and truck sales slide to 15-year lows.

Detroit's automakers have been trying to prune their weakest dealers for years with only limited success because each dealership is an independent, franchised business often owned by a family and closure negotiations can prove costly.

But financial market turmoil in recent weeks has put a vice-like squeeze on auto dealers, who face reduced and more expensive credit to finance both their own inventory and consumer purchases, analysts and industry executives say.

"Dealers who have been in this business for decades say they have never seen anything like this before," said Annette Sykora, who chairs the National Automobile Dealers Association, a trade group that represents the over 20,000 franchised car dealers in the United States.

"Dealers can't move product. And they're facing higher rates themselves. So the products they can't move are costing them more money," Sykora said.

Analysts see a Darwinian consolidation ahead. If the shakeout is limited, it could help the Detroit Three by culling lagging and loss-making stores without the ability to put marketing money to work to support the U.S. auto brands.

"There is a silver lining, " said Michelle Krebs, editor of Edmunds-affiliated AutoObserver.com. "This will accelerate the consolidation."

But there is also a risk the credit crunch sets off a wave of auto retail closures, risking further downward pressure on orders from General Motors Corp (GM.N), Ford Motor Co (F.N) and Chrysler LLC when they are scrambling to ride out a downturn that has already run deeper and longer than they had expected.

U.S. dealers had been swamped earlier this year by a weak housing market, a slowing U.S. economy and rising gasoline prices that cut demand for SUVs and pickups that had been the most lucrative slice of the new vehicle market.

But truck sales have tumbled. Cash-strapped consumers are holding off purchases of new and used cars -- typically higher margin deals for car retailers.

The result has been a strain on U.S. dealer profits, which are down 25 percent on average, according to auto sales and dealer tracking firm Edmunds.com.

Bill Heard Enterprises Inc, one of the biggest Chevrolet dealerships, filed for bankruptcy last month, citing decreased demand for vehicles and lack of credit. At its peak, Heard's revenue had been about $2.5 billion per year.

The strain is also evident on U.S. automakers. GM shares fell to their lowest level in more than 54 years Tuesday and Ford shares hit a quarter century low, having dropped more than 90 percent since the stock reached a peak in 1999.

GM shares fell 10.85 percent to $7.56 and Ford shares fell 20.87 percent to $2.92.

'A DISASTER' IN THE MAKING