At this time of year, inventories are critical in the auto industry–and I do not like what I see. If there are too many of the old models in inventory (in this case, the 2007s), the dealers concentrate on getting rid of them, which hurts sales of the new 2008s. When inventories are bloated, car companies have to slash the prices on the old models, which also makes it harder to sell next year’s cars for a profit.If inventories are low, the reverse is true. Dealers push the new models and get better prices.On the production side, manufacturers like to pump out vehicles in the fourth quarter to give year-end profits a boost. Companies think short-term, and usually do not worry about the problems they will face in the first quarter if they move into the winter season with sales down and inventories high.These are not speculations. This has happened many times in the past.There are two ways to count auto inventories: The first is by the raw number of cars and trucks held by the dealers. A better metric is to go by the “days’ supply,” which is the number of days needed to sell the vehicles in inventory, based on the daily selling rate in the previous month. A 60-day supply is a number that many industry watchers consider acceptable. Dealers are in a panic when that number gets substantially higher, because those unsold cars do not get more valuable sitting in the lot, and dealers are paying interest charges on those vehicles. News source: Forbes Inventories are a much bigger problem for the domestic manufacturers than for most of the foreign companies. Toyota (nyse: TM – news – people ) and Honda (nyse: HMC – news – people ) (including their luxury divisions) always have low inventories, usually half the industry rate. As of Aug. 1, Toyota has 33 days and Honda 41 days, which is a bit high for the latter. One year ago, Honda was at 31 days, according to Automotive News. BMW and Mercedes, at 25 days and 33 days, respectively, are also in good shape. Other foreign companies are higher, but far from critical. Nissan (nasdaq: NSANY – news – people ) has 58 and Hyundai, 51. Of the foreigners who are struggling, Mitsubishi (otcbb: MSBHY – news – people ) has 80 days’ inventory and Volkswagen/Audi, 89.Detroit is a different story.As of Aug. 1, General Motors (nyse: GM – news – people ) had 945,000 unsold cars and trucks, up from 920,000 a year ago, when sales were higher. It is not a disaster, but it is a 72-day supply, compared with 57 days a year ago. GM has been making money on its trucks, but its trucks are piling up in inventory: 223,000 Chevy Silverado pickups, which represents 114 days; and 80,000 GMC Sierra pickups, 120 days. GM also has 90 days or more inventories for the Chevy Avalanche and Tahoe, GMC Yukon, Cadillac Escalade and its small pickups. Latest reports are that GM does plan to cut some truck production. That is a good idea.Of course, labor negotiations are under way, and there is a small chance of a strike. GM may be using that as an excuse to hold onto some extra inventory.Ford Motor (nyse: F – news – people ) is traditionally more conservative with its inventories than GM; that is true now. It has 530,000 vehicles in inventory vs. 704,000 a year ago. At that level, Ford has 66 days’ inventory vs. 73 on Aug. 1, 2006. Ford’s truck problem is not as bad as GM’s, with the F Series supply at 79 days.Chrysler (excluding former parent Mercedes) has 465,000 vehicles, or an 81-day supply. That is better than the 560,000 vehicles and 93 days’ supply it had a year ago. It is worth noting that Chrysler has mislead people about inventories before by hiding unsold vehicles around Detroit, so I treat the latest figures with a bit of skepticism.Inventory problems are an old story at Chrysler. A few years ago, though the company was bringing out a new line of minivans in the fall, they over-produced the old models in the spring. When the new ones came out later in the year, the dealers were busy selling the old ones, which caused a slump. Headquarters in Germany fired the American president and German officers took over the company. Chrysler has a new-generation minivan coming out this fall, but it appears that it has whittled down its inventories to manageable levels. A year ago, Chrysler said it had 79,000 minivans in stock; this year it reported 35,000. Chrysler does not want to make that mistake again.In short, today’s inventory numbers are not threatening–at least not now. The total for the industry–3,163,000 cars and trucks–is down from 3,311,000 a year ago. Keep in mind, however, that sales are running lower than last year–GM, for example, was down 22% in July. With the housing market in a steep decline, big problems in the credit industry and a Dow Jones industrial average that is 1,000 points lower than a few weeks ago, there is little reason to believe that consumers will go on a car-buying binge this fall.This is the time to hold down inventories, especially for the Detroit Three.