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Another flip side effect. My dad is a CFO at a car dealership and tells me that the banks are having problems due to the lack of cars as well. A dealership will

Another flip side effect. My dad is a CFO at a car dealership and tells me that the banks are having problems due to the lack of cars as well. A dealership will normally float all their inventory on a big bank note but they basically have no cars on the lot to sell which means the banks underwriting those notes are making no money on interest. Multiply it by thousands of dealerships nationwide and this has big impacts on revenue to those banks.

shard 5y ago
Could you clarify what this means for a layman? AIUI you are saying that a car dealership will borrow money from the bank to purchase their inventory, but nowadays with no inventory, banks are not getting payments from the dealers for the money they've borrowed. 1. With no inventory, why does the dealer need the money from the bank? 2. If the dealer is still borrowing money from the bank despite having no inventory, don't they still need to pay interest? I think there is something fundamental that I am misunderstanding here.
- skybrian 5y ago
  It sounds like dealers choose how much to borrow. If they borrow less, banks get less interest, meaning less income, unless they replace it by finding other people to make loans to.
- mdavis6890 5y ago
  Dealers have a line of credit, like a credit card, that they use to purchase inventory. They pay it back as they sell cars, and run it up as they buy new inventory to replace it. So the overall loan balance roughly represents their current unsold inventory. No inventory means no loan balance, which means no interest payments to the bank.
KiranRao0 5y ago
This seems like a really good thing for the dealership. They are able to operate with ~0 inventory and ~0 inventory holding costs.
- eru 5y ago
  Amazon famously has (or had?) something like negative inventory on the books. To be more technical, it's negative working capital, or negative cash conversion cycle. That's because in whole-sale you typically have something like 90 days to pay your bills. But Amazon sells its inventory on to retail customers (who up front) before those 90 days are up. Now, if I describe it as 'negative working capital' it sounds like some desirable thing. But the flip side is that you can also describe it more mundanely as: Amazon gets loans from its suppliers.
  - clairity 5y ago
    walmart pioneered negative working capital for retail well before amazon existed (70s-80s iirc). it's how walmart jettisoned itself into a retail juggernaut. carrefour cribbed that part of the playbook from them to expand across france and europe, and bezos very likely did so as well. it only works when you have enough monopsony power to persuade/coerce the supply chain into cooperating.
    - eru 5y ago
      > it only works when you have enough monopsony power to persuade/coerce the supply chain into cooperating. What makes you think so? If you offer attractive enough terms, you can get financing from your suppliers just fine. And what makes you think Amazon, Carrefour or Walmart etc have monopsony power?
- Andys 5y ago
  The Tesla model. I wonder if any of them will realise they can just sell cars without a flashy dealership showroom with sales staff and demonstrators?

shard 5y ago

Could you clarify what this means for a layman? AIUI you are saying that a car dealership will borrow money from the bank to purchase their inventory, but nowadays with no inventory, banks are not getting payments from the dealers for the money they've borrowed. 1. With no inventory, why does the dealer need the money from the bank? 2. If the dealer is still borrowing money from the bank despite having no inventory, don't they still need to pay interest? I think there is something fundamental that I am misunderstanding here.

skybrian 5y ago
It sounds like dealers choose how much to borrow. If they borrow less, banks get less interest, meaning less income, unless they replace it by finding other people to make loans to.
mdavis6890 5y ago
Dealers have a line of credit, like a credit card, that they use to purchase inventory. They pay it back as they sell cars, and run it up as they buy new inventory to replace it. So the overall loan balance roughly represents their current unsold inventory. No inventory means no loan balance, which means no interest payments to the bank.

KiranRao0 5y ago

This seems like a really good thing for the dealership. They are able to operate with ~0 inventory and ~0 inventory holding costs.

eru 5y ago
Amazon famously has (or had?) something like negative inventory on the books. To be more technical, it's negative working capital, or negative cash conversion cycle. That's because in whole-sale you typically have something like 90 days to pay your bills. But Amazon sells its inventory on to retail customers (who up front) before those 90 days are up. Now, if I describe it as 'negative working capital' it sounds like some desirable thing. But the flip side is that you can also describe it more mundanely as: Amazon gets loans from its suppliers.
- clairity 5y ago
  walmart pioneered negative working capital for retail well before amazon existed (70s-80s iirc). it's how walmart jettisoned itself into a retail juggernaut. carrefour cribbed that part of the playbook from them to expand across france and europe, and bezos very likely did so as well. it only works when you have enough monopsony power to persuade/coerce the supply chain into cooperating.
  - eru 5y ago
    > it only works when you have enough monopsony power to persuade/coerce the supply chain into cooperating. What makes you think so? If you offer attractive enough terms, you can get financing from your suppliers just fine. And what makes you think Amazon, Carrefour or Walmart etc have monopsony power?
Andys 5y ago
The Tesla model. I wonder if any of them will realise they can just sell cars without a flashy dealership showroom with sales staff and demonstrators?