You have to love Mike Jackson, CEO of AutoNation. He never shies away from speaking his mind, taking on the OEMs when he disagrees with their policies and calling things like he sees them.

During the recent Q1 2017 earnings call, Jackson reports that the automotive industry has crossed three “red lines” indicating that we’re entering a danger zone. Those “red lines” include:

  1. New car incentives surpassing an average of 10% of MSRP (Jackson notes, “To me, 10% has always been a red-line where there’s a severe diminishing return at 10%.”)
  2. New car leasing cross the 30% threshold (“To me, 30% leasing has always been a red-line, where you have a massive distortion if you take it above that.”)
  3. Inventory supply levels surpassing 70 days (“To me, inventories above 70 days is a red-line.”)

Jackson summarized, “We have three red-lines that the industry in total is over on new vehicles…I just don’t think there’s another step..if you level off incentives and leasing and bring inventories into line, then most likely you have some sort of  modest decline in new vehicle volumes.”

He continued, “We’re in the spiral that everything moves against the new vehicle market at a plateau – it takes higher incentives to stay at a plateau…and it will be difficult to maintain above 17M new vehicle sales.”

In a year where auto dealers are also facing threats to their profit margins in the form of additional interest rate increases and a flood of off lease vehicles hitting the market that is going to upset supply/demand and drive down used car prices (and steal sales from new car), dealers should take heed of Jackson’s warnings.

Dealers should be tightening their belts now to ensure they’re ready to weather the upcoming storm.