DeLorean Sports Cars went out of business because John DeLorean would not listen to any of his Financial Officers. DeLorean went through several of them and DeLorean fired them, in turn, when they gave him the same advice:
CONSERVE CASH!
By the accounts at the time, DeLorean was adequately financed and had sufficient funds lined up to make about 15,000 units.
The Financial Officers advised DeLorean to sell-to-customer-preorder. That is, wait for a customer to make a deposit and then build the vehicle. The general consensus was that DeLorean would sell 5000 vehicles the first year, maybe a few more the second year...and if every customer's check bounced they would run out of cash near the end of the third year.
DeLorean's ego killed the company. He ran the factory and made fifteen thousand cars and then they sat in shipping and on dealer lots.
It quickly became apparent that the brushed stainless steel exterior looked dingy after sitting in the rain. Stainless steel is most corrosion resistant when polished and the a brushed finish caught and held soot and allowed algae to get a toe-hold.
Constricting supply would have resulted in customers paying a premium and dealers making more per unit. They would have worked to sell DeLoreans. Having several DeLoreans parked on the dealership lot caused the model to lose some of its cachet and turned it into a me-too sports car.
Even worse, many of those vehicles sat on the lot long enough became "past model" and had to be very deeply discounted.
The rest is history.
History rhymes and echoes
One of our local factories makes the cab-over, medium duty truck similar to those used by Carvana.
Due to part shortages, they have hundreds of these trucks parked at various parking lots. The MSRP for these vehicles runs in the $140k-$170k range.
The two General Motors plants in Lansing have similar problems.
That is a boatload of operating capital tied up.
ERJ, conserve cash (or your medium of exchange) is never a bad piece of advice. Along with the maximum that having cash on hand often gets a deal that credit will not.
ReplyDeleteThere is an old Army Depot near me that manufactured munitions during wartime . It sat empty for many years until a local entrepreneur purchased the whole place and started fixing and renting out parts of it . The whole place is now full of small to medium industries ranging from newspapers , auto parts manufacturers , packaging factories , etc . It sits on a few hundred acres and Honda among other factories stores new cars outside . There are typically thousands of cars and trucks stored there waiting on shipment . Honda keeps the team working even when sales slow down . One day soon I look for that to bite them in the bum . Right about the time Joebama's plan is fully executed . There will be a fire sale of 20,000 Hondas . You will be able to buy a new Honda for around $5000 sheckles . Dollars probably not welcome or accepted . Central Bank Digital Currencies will arrive shortly thereafter . I have went lean on cash and strong on precious metals . Gold , silver , lead , etcetera .
ReplyDeleteMr. Orinsky: One advantage of your plan is that the central bank is NOT magic ing up trillions of rounds/ounces of Ag/ounces of Au, each year.
ReplyDeleteWell, there was that, AND the amount of coke he snorted that 'might' have affected his judgement...
ReplyDeleteDeLorean was a designer for GM....and a decent one. Among his ideas was the Pontiac Tempest GTO. He made the mistake of believing that since he could design cars he also knew how to run a 'car company'. Typical hubris. We see the same insanity in almost everyone who runs for public office. They think because they know something about ONE thing they know all they need to know about EVERY thing.
ReplyDeleteIf the fear mongerers have it right, this downturn will be one for the records. The kind that makes century-old brands disappear. It is also a time of great opportunity.
ReplyDeleteIf you or I owned the vehicles stored in those lots, even just one of them, lacking some electronic, made in Taiwan component, I bet one of us would figure out to provide workarounds and quickly begin SELLING THE FRICKIN PRODUCT!!!
ReplyDeleteStart jumpering out stuff and sell them with "limited features". Maybe the A/C runs all the time. Perhaps no ABS. As one who used to be an eng in ear and could spell it, people would expect me, and other engineers to quickly develop workarounds.
Conserve cash but maintain the core business. It was once called "selling cars". UGH.
Milton