Almost 20 years ago, South Korean auto manufacturer Daewoo decided to implement a truly unique way of selling a new car. The company’s plan was to focus on vehicles under $20,000 — and to chum the college market. It would accomplish the latter by having students become “campus advisers,” which meant they were going to convince others to go buy Daewoo automobiles, even though they didn’t own Daewoos themselves. Daewoo suggested that the campus advisers would be paid up to $500 for every student they suckered into buying one of those vehicles. As I recall, they even flew quite a few kids over to Korea to learn how to successfully sell cars on campus without even having a car to show, much less test-drive.
David Smith, then editor of Ward’s Auto World, said Daewoo’s plans were risky because it was bypassing new car dealers. But I had an in at the company; this region’s former Acura Zone Manager had left the company to head up Daewoo’s sales nationally. So I called Gary to get his opinion of Daewoo’s plan of action. Oddly, he sounded fairly down; true, he was pragmatic, but he’d always been upbeat, a cheerleader working to sell cars for the manufacturer. But, when I brought up their plan for college kids to sell other kids cars, he sighed and said, “These people are crazy.”
Of course, Daewoo did install franchise dealers for their products — and promptly alienated them. Wendy Churchill of Frank Kent fame was given the franchise for Fort Worth, with the agreement that she would be the sole dealer in Fort Worth. Yet just a few months later, Daewoo announced that another dealer would be placed on 121 near the Beach St. exit. Wendy was one of the most charming and gracious individuals I’ve ever known, but on that day she had no interest in doing business with an entity whose word was valueless.
What brought Daewoo’s mistakes to mind was the two stories that broke back to back in the February 6 Automotive News. One revealed how Chrysler is in the process of adding up to 400 more franchised dealers to its network — just years after announcing plans to cut back on its dealer body to improve profitability per store, which it claimed would lead to a better customer experience. Yet notwithstanding that PR push to reduce their dealer numbers, since then Chrysler has reopened every store that it once closed in our area. And word is that more are coming; Houston alone is scheduled for three to four more Chrysler dealerships, which is not going over well with our dealer neighbors to the south.
Selling Cars Like Smart Phones
The other story that day in the Automotive News was about Lynk & Co, a new luxury car start-up owned by China’s Geely Motors. According to vice president Alain Visser, the franchised dealer model of selling cars has been stagnant for too long and is widening the gap between winners and losers. At the risk of stating the obvious, that’s what capitalism does: It rewards the best and brightest, not the others. But here’s the whole Lynk & Co plan: Since Geely owns Volvo, their engineers will design Lynk’s vehicles, which will be built inexpensively in China and then sold direct to the public, eliminating the current franchised dealer model’s “inefficiency and waste.”
The argument about the current car-selling system’s wastefulness is not a new one. The one underpinning study years ago claimed that if manufacturers sold direct to the public, each vehicle would cost $2,500 or so less. But Mr. Visser, who spent 30 years with Ford, GM and Volvo, knows well that that particular study used specious logic. He also knows that it left out the far more important fact that would reduce the cost of each car built and sold.
The real way to cut the cost of building and selling each vehicle is to run your factory’s lines as fast as it can go. That’s so critical that in every Zone office, every manufacturer for most mass-market brands has someone whose job is to call new car dealers every week and try to get them to accept more of their slowest-selling product. That’s right, the most critical expense a manufacturer must deal with is a factory not running at 100 percent or more of capacity — other than shutting it down for a week or two because of insufficient dealer orders. Yet Lynk & Co claims it will save its customers money on each purchase by following the Tesla model of strip center dealerships’ ordering cars directly, and either setting up a chain of independent repair shops nationwide or forcing Volvo dealers to work on these other products. Believe it or not, that’s not exactly what luxury buyers are demanding, buying cars online with no legitimate place to have them serviced.
Visser went on to say that dealers are behind the times because customers want to buy cars the same way they buy their smart phones, and without haggling — so, naturally, there will be no discounts on their products. Do what, now? We see ads all the time offering a free or super discounted smart phone if you sign up for XYZ cell service.
The original plan for Saturn Corporation was similar. No sales people, just hostesses who would hand you the keys to a car to self-demonstrate, then sit you down at a computer, where you’d order your car. A week later it would show up, and you were on your way. You’ll remember the company’s slogan, “A different kind of car company.” Oh, and Saturn didn’t discount its vehicles, either. I cannot tell you how many hundreds of people would walk into a dealership I was running and say, “Gosh, I wish all car dealers made it as simple to buy as they do at Saturn.” I would then inform them that we had adopted those exact practices; and when it came time to finish the transaction, I would point out the simplification part — no negotiating, and they would be paying list. Guess what percentage of customers said, “Oh, great! A real Saturn experience”? Right. Zero percent. They all wanted to negotiate their vehicle’s price downward. And of course, Saturn failed anyhow. What’s amazing is that Saturn had only one factory they had to keep open, in Spring Hill, Tenn.; and they couldn’t even do that long term.
The Big Nut — that Creates Jobs
Are there inefficiencies to the way we currently sell vehicles? Of course there are. One of the big ones is that dealers have to carry hundreds and hundreds of vehicles in inventory, even during slack sales periods. Having to cover the expense of financing and insuring that many new cars for sale can be quite challenging. But that’s one reason why selling cars direct fails, in the long term. It’s the fact that dealers will carry many hundreds of new vehicles even in slow times that keeps the factories open, the line operating speed high. The new car dealer and his credit lines are the buffer that keeps most car companies from failing. So, while it raises the dealership’s cost of doing business, it lowers the manufacturer’s production costs substantially. Selling direct means that in slack periods, or just one bad week of sales, the factories close for lack of orders — and the manufacturer’s cost of production skyrockets.
However, another major cost of doing business in the current system is the amount spent on advertising. No one gets out of doing it: The manufacturer runs ads for the product; car dealers also run ads; and in larger metro areas any given franchise line may have a dealer association. Think the North Texas Ford or Chevy Dealer Association ads you see every month. It’s not unusual in a good year for $900 – 1,000 to be spent for every car sold in America. Inevitably, when someone discusses the waste in the current car sales system, that advertising bill comes out to right at half of what direct-sales advocates claim they can save. But think of this in another light: First, that kind of money is being spent to remind you that things like the Accord, Camry or Ford F-Series are on sale now — not just for sale. Second, how do you sell an all-new vehicle of unknown quality, reliability or value direct to the public without advertising? No one even knows what it is — no track record exists. And third, jobs: What happens to the media, network and cable TV, not to mention creative, talent and sales jobs in the advertising industry, if suddenly $15 billion in automotive ads goes away?
An Educated Prediction
My professional guess is that Chrysler has a planning potential of somewhere around 1,500 sales per dealership that they’re adding. Should that happen, and should those new stores not cannibalize the sales of another Chrysler dealer nearby, that would equal 600,000 more sales for Chrysler each year. It won’t happen that way of course, but somewhere in Auburn Hills someone with an executive position is salivating believing it so.
Ironically, Lynk & Co has already told the automotive media that the company plans to offer up to five or six models of new vehicles — and that it fully expects to have worldwide volumes of 500,000 within a reasonable time after the product launches. Now, that’s selling almost as many new cars without dealers as someone at Chrysler is thinking could be sold by adding another 400 dealers. And by the way, it’s highly likely that both prophecies are wrong.
Twenty years ago we had a.) Dodge dealers, b.) Chrysler Plymouth dealers and c.) Jeep dealers. And over the past two decades, every Dodge dealer got the other two franchises, and vice versa. And yet today it’s hard to find a Chrysler Jeep Dodge Ram dealership that sells the same volumes that a standalone Dodge or Chrysler Plymouth store once did. But more important, the selling volumes Lynk & Co “fully expects” are twice the number of Infiniti’s worldwide — and some of the most respected dealers in the world represent Infiniti products.
At least no one else was foolish enough to think that, in their spare time on campus, college kids could or would sell cars that they had never even been in. But don’t rule out that goofy idea’s making a comeback, either.
© 2017 Ed Wallace
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, conferred by the Anderson School of Business at UCLA. He reviews new cars every Friday morning at 7:20 on Fox Four’s “Good Day” and hosts the top-rated talk show, “Wheels,” 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: email@example.com