I’ve heard it before, first hand, when some entity purchases an existing business. At the first meeting with the new owners, the newly purchased corporation’s staff is told, “We bought this business because of you, the employees.” After the cheerleading sessions and typically by the end of the week, a sizable percentage of workers will have been made redundant. So at best, the new owners bought that business because of some of the employees.
In reality, as I’ve said here before, one can afford either the workers or the sizable debt that massive consolidation incurs in America today, but never both. This should not surprise readers; industry and business have been consolidating like crazy over the past 20 years.
How does this apply to the auto industry? Rarely will any dealer call me and say that they’ve put their dealership up for sale. And for excellent reasons: They don’t want to spook their employees, who are busy trying to make a living— and certainly they don’t want to upset their customers. Privacy is paramount, because the financial transaction to purchase dealerships has entered the stratosphere. A couple of dealers have asked me to please let them know if I ever hear of a dealership for sale, but numerous brokerage firms in this country handle many, if not most dealership buy/sell agreements. Hedge funds have entered the market looking for stores to acquire, with less success. That’s why I rarely hear about this stuff. Maybe five times in 20 years I’ve known upfront that a store is going to be sold.
One such call came my way a few years ago.
I’d actually seen a basic spreadsheet on the stores, which overall was profitable. The selling price seemed low as compared to the profitability, especially considering what multiples of earnings dealerships have sold for since the advent of national new car dealer chains. And I had the exact right buyer, or so I thought. Now, great dealers cannot always be found: One of the best true stories in North Texas comes from the early Fifties, when Frank Kent was a local and successful Ford dealer. GM badly wanted him to take over our Cadillac dealership and distribution of those cars. (At the time, certain Cadillac dealerships received all the vehicles for a certain region and controlled the distribution of vehicles to the other Cadillac dealers within their region.) Finding Kent was easy: He was on a Ford trip to Turkey. Given just days to get back and take over the Cadillac store, in the era of propeller-driven aircraft when international flights weren’t common, Frank Kent made it home to Fort Worth in time. The family still has the Cadillac store.
I finally found the dealer in question, out of state for one of his franchise’s national dealer meetings. When told of this store for sale, he thought for only a moment and said he’d pass. He added, “From here on out I’m going to stick to luxury dealerships only.”
If you really want to know how things are slowly changing in America, his tidbit of wisdom is a good starting point. Why? During the Financial Meltdown of 2009, the jobless rate was definitely not the same for all wage earners. No, according to Time magazine on February 10, 2010, those earning $12,160 or less had a jobless rate of 30.8 percent. The unemployment rate for those earning over $138,700, meanwhile, was a mere 3.2 percent. And those earning over $250,000 annually had a jobless rate lower than that. Keep in mind that, only because we have tinkered with how we calculate unemployment ever since JFK, across the board these numbers are better than they would have been. Kevin Phillips, the original author of the Southern Strategy used so successfully by the GOP during the Nixon campaign and administration, wrote a wonderful column, “Numbers Racket,” on that very subject for Harpers.
So, during the worst financial calamity since the Great Depression, somewhere around the top 15 percent of wage earners for the most part kept their jobs. No wonder one dealer decided that in the future he would prefer expand with luxury makes.
For what it’s worth, in 2006, according to the BLS, 17.3 percent of all households earned over $100,000, while on April 10, 2015, the Wall Street Journal said the top 20 percent of all wage earners in America paid 84 percent of all taxes. Again based on one dealer’s vision for the future, you may see where this is taking us.
None of this is really news. Citigroup famously put out a three-part series, now known as the Plutonomy Report, detailing how the smartest entities would tailor their businesses to the rich and near rich in the future because, “The world is dividing into two blocs – the plutonomies, where growth is powered by and largely consumed by the wealthy few, and the rest.” Then it reminds readers that plutonomies happened in 16th-century Spain, 17th-century Holland, the Gilded Age and the Roaring Twenties. Well, isn’t that reassuring?!
But in the third report released, there was one chart that is amazing; I read it again recently for its forecast for the future and to see whether Citigroup’s thesis had been right. It’s dated September 29, 2006, and it shows the rise of European right-wing, anti-immigrant parties, in contrast to corporate profits surging from 2001 to 2006; corporate profits doubled from 9 to 18 percent in that period. But the explanation of that chart is an eye opener:
“Figure 13: The ascendancy of European Right-Wing, generally anti-immigration parties has coincided with a rise in profit share (and a fall in wage shares).”
A decade later that seems to have been an extremely accurate economic and political prophecy; it’s been exported worldwide. It also goes a long way towards explaining the rise of subprime credit buyers in America over the same period.
But, if we’d looked, we could have seen small clues along the way that a shift in focus was underway. How about all the toll roads being built, even after the general public outcry resulted in politicians’ saying they’d heard and would demote toll roads as an option in the future? Yet the group that paying tolls never seems to bother falls into that 17.2 percent of workers that earns six digits or more. Even better, we’ve removed the toll booths that once made change on those highways, which means you need a credit or debit card to purchase a toll pass; this necessity thins out the motoring herd and impacts a large segment of the market — consumers who have poor credit or earn little money, or simply don’t have a bank account — from using those highways on a frequent basis. If at all. After all, if you lived in Lewisville and worked in McKinney at a minimum-wage job, with a toll pass around one hour of work each day would go to pay that toll. Without a toll pass, it’s about an hour and a half of your daily pay just to get to and from work — on the same road.
Further, though the politicians promised to slow down on the toll road building, it’s still going strong. So much so that, though most have missed this part, President Trump’s $1 trillion infrastructure plan is primarily based on, you guessed it, privatizing more of our nation’s infrastructure. Again, those who earn lots of money don’t care about tolls, because they hate wasting time stuck in traffic. Well, we all do, but for them it’s worth the extra money to be able to drive in those lanes and faster than the speed limit that those who won’t or can’t pay the tolls must obey. This is why, when HOT lanes first arrived out West, Californians immediately labeled express toll roads “Lexus lanes.”
Notice that when a highway is privatized, it’s never a country road; you need lots of traffic for a strong return on investment. So it’s always going to be a major road in a heavily populated area where investors can maximize their capital return. So growing high traffic, high incomes areas will always be preferred.
Elaine Chao, our new Secretary of Transportation, was quoted in the March 4 Washington Post as saying that “new and innovative ways” were necessary to find funding [for infrastructure]. She also said that could mean more tolls on roads and bridges. Not to mention that the President’s proposed plan would already give an 82 percent tax credit to those who invest in these projects for privatization. Again, this is not knocking the affluent or those who choose to use the massive system of toll roads and express lanes we have in Dallas Fort Worth today. It is simply pointing out that what is happening today shows our government favoring the motoring affluent in our society. And this is no different from the new car dealer who, in the future, believes the safest bet is with more luxury car stores.
Here’s the crux of it all. When we used a gasoline tax to build our freeways we were the owners of those highways and could use them at will. When everything becomes a toll road, we are no longer the owners, but simply renting our use of them. That’s right, we are moving from an era of national highway ownership to mere on-demand renters of toll roads we have to use daily.
But it’s not just our toll roads that tell that story. The March 7 New York Times covered the road issues in Omaha, Neb. It told the story of Anne Amoura, who had lived in town for 40 years on a street of potholes. Finally a city work crew showed up, and she thought that at long last her road problems were solved. Nope. They simply ground the asphalt into gravel and used the term “reclaiming” to describe the process. Now her neighbors have to use wheelbarrows full of gravel they purchase to keep their cars from getting stuck in the mud when it rains.
Worse, there’s insult to add to this story’s injury. Todd Pfizer, Omaha’s assistant director of public works, said that when those houses were built two decades ago, the builder used substandard material for the roads, so the buyers of those houses saved money. Then he added, “Now you’re asking the rest of the citizens to come in and essentially subsidize you and rebuild your road.”
Two thoughts come to mind. First, where were Omaha’s building inspectors two decades ago, when those home and road constructions were approved and permitted? Second, Mr. Pfizer apparently doesn’t understand that in an advanced industrial society, we all pitch in and subsidize solutions to each other’s problems. I too pay taxes, but as I have no potholes on my street, we’ll assume my taxes are fixing others’ potholes. I’m good with that.
But a second part of that Omaha story shows things in a different light. Bruce Simon, head of Omaha Steaks, has a $2.3 million mansion with a bad road in front of it. And he sued because the city refused to fix it. So they agreed to, as long as he paid for half of it. Simon was sent a bill for five grand for his half. That’s it, $5,000 for a new road. One can’t rebuild the driveway in front of their home for that little money. Mr. Pfizer did not comment on whether the builder of his mansion also had built a subpar road in front of it.
But wait, there’s more: With enough time, money and stability, today you can get TSA prescreening for many airlines and airports, not to mention be preapproved for the Global Entry card for international travel: You get your own special short line at most major airports.
In January car sales in Dallas Fort Worth were a bit erratic. I even heard some volumes that were incredibly low, but only at dealerships that focus on the middle class. Ford dealers will tell you their most popular trucks today are also the ones with the highest window stickers — year after year, the Experian Report on car sales by wealth continues to name the F Series Truck as one of the best sellers. Yet the Honda Civic is there also. But what I did hear about what sold and didn’t in January also included many mainline and less expensive vehicles made by everyone from Hyundai to Chevy, Ford and Chrysler. Ford’s Fusion, often sold with incentives for less than $20,000, saw a 35 percent drop in sales last month. Nissan’s Sentra sales dropped by 22 percent, and the Corolla’s sales fell by 13.5 percent. What if it isn’t just the low price of gas, but the car prices’ financial impact on their buyers?
Edward R. Murrow once famously said, “The obscure we see eventually. The completely obvious, it seems, takes longer.” What’s slowly happening is staring all of us right in the face, but we’re not seeing it for what it is. One can see this in our automotive society, from sales to roads. Then again, Citigroup in economic letters to its top investors laid all of this out 11 years ago. Right down to the rise of populist, anti-immigrant political parties. Good thing nobody read it.
© 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