Ed Wallace

The Coming Automotive War

Ed Wallace
Ed Wallace

Before this year is out, it’s estimated that automobile manufacturers will build and new car dealers sell almost 80 million vehicles worldwide — nearly half of them in the U. S. and China. Worldwide, automobile manufacturers are doing exceptionally well; the best are having phenomenally profitable years. So it’s no wonder that those running the world’s car companies want to upend the entire industry, which they’ve been trying to do for many years.

It started with manufacturers wanting to dictate every last detail of dealership buildings across the country, as if buying a car were the same thing as getting a hamburger from McDonald’s. Why would they want cookie-cutter-looking dealerships? To convince the public that there’s no functional difference between dealers in any given franchise. And that’s a mystery, since the automakers continuously make a big deal out of how Customer Satisfaction is their No. 1 goal, yet steadfastly refuse to release their dealer body’s CSI scores and let the public see who is in fact the “best of the best.” No, instead we get lots of talk on CSI and dealerships that all look the same from the freeway, and therefore real innovation in dealership design has died. Not to mention the best of the best kept invisible.

What hasn’t died is the ever-rising costs of these stores; to be fair, though, the lower interest rates of the past 17 years have offset part of that expense. Here’s how those costs affect the car-buying system. In the mid-Seventies, it wasn’t unusual to build a new car dealership for only around $1 million, though some were in the $3 million range. A dealer they allocate the cost (or rent factor) of a store to the new car department, service, parts, and used cars, often calculated at 1 percent of the dealership’s total cost.

In the case of that $1 million North Dallas dealership, that’s a rent factor of $10,000 a month. And it’s a guess on my part, but that dealer likely allocated half of that rent factor to his new car department and in his time, he sold around 160 GM vehicles per month. Therefore, every new vehicle he sold cost him $31.25 in rent factor.

Today we are seeing $40 million-plus dealerships; according to dealers who are a part of my radio show. Some may be much costlier than that. Keep in mind that national chains have been known to spend a fortune to buy out old line, successful new car dealers; and whatever ‘Blue Sky’ is attached to a buy-sell typically is shown as a higher rent factor once the ownership changes. But what is fundamentally different is the cost of the new and much higher rent factors against current new car sales volumes. True, we have some high-volume dealerships today that do unbelievably well compared to the new car sales volumes of dealerships 40 years ago; but many Buick dealerships from the Seventies had volumes as high as or higher than many Buick GMC stores today.

Here’s the point: If you have a mainline GM store today that cost $15 million, but has volumes identical to those of that 1976 GM store, then your rent factor per new car sold would cost not $31.25, but $468.75.

Immediately one wonders how this could be so and yet so many new car dealers are not just in business, but seem to be thriving. There are many answers to that question.

First, one would be surprised how many dealers don’t make much money anymore in their new car departments. That’s why so many have greatly enlarged their used car sales volumes, improved and expanded their finance groups, and done a great deal more to make their service and parts operations the first stop for their owners for years on end.

Oh, and all of this happened during a period when manufacturers continuously slashed the margins their dealers had on their products to negotiate.

Little of this seemed to affect the customers because, at the same time, manufacturers got into the rebate, subvented interest, and lease programs to ensure customers felt they were getting a fair, if not great, deal on their new vehicle. But what is a rebate, anyhow? It’s nothing more than a discount you get off list, only it’s being paid for by the manufacturer and not negotiated from the mark-up at the dealership.

Despite their currently massive profitability, however, manufacturers are looking at how much their rebates, subvented leases, and interest rates are costing them; and they now believe “there’s something seriously wrong with the car business.” In reality, the only problem is that the manufacturers wanted to dictate every last thing their dealers did, and they transferred the cost of negotiations on a new car from the dealerships’ profit column to their own expense columns, because they are the ones paying hard cash for those discounts once the car is sold.

How bad is it? In the summer of 2007 I was meeting with GM’s next CEO Rick Wagoner in Dallas and asked him, “If GM were paying the same level of rebates today as they paid back in the late Nineties, where would the company be for profitability?” Without hesitation Wagoner replied, “We’d be having the most profitable years in our history.” Instead, a little more than a year later GM went bankrupt. (It wasn’t just GM. At the time Ford had a $7,500 customer rebate on its $26,000 Mercury Grand Marquis. Like the rebate, that car line no longer exists.)

So now the auto manufacturers believe there’s yet a better way to sell new vehicles in the future. And they are hyping these possibilities to the business media, trying to gin up excitement for some truly foolish ideas moving forward. Almost as silly as the manufacturers’ slashing dealers’ mark-ups, then being forced to give out breathtaking corporate rebates instead, and only noticing the cost of that on their corporate financial statements.

Cars by Subscription?

First, many car companies are going to push subscription offers on some, if not all, of their vehicles. The idea is that you sign up and pay a flat fee for a vehicle, which includes insurance; and this claimed to be more desirable than buying or leasing a car. Volvo wants to do this with its upcoming XC-40 compact SUV at $600 a month, Ford offers this with a 3-year-old Edge Titanium for a mere $620 a month in West LA, Lynk & Co. wants to do this when it comes to America, and Porsche is already testing this in Atlanta — where, for $2,000, you can mix and match up to eight models for your driving pleasure or, for $3,000 a month, choose among 22 Porsches. In fact, the ability to drive one vehicle for that price for a few months and then switch it out for another model for a few months is one of the key selling points in the Porsche program. Of course, here’s where it all falls down.

It might have snowed in Atlanta a week ago, but let’s say the Porsche program really took off in that city. Assume that hundreds, if not thousands of people there don’t realize you can lease a Porsche for a third of that program’s cost, and so in the winter they all want to drive a Macan or Cayenne. But come spring, maybe most of them think they’d like to drive a convertible while the trees blossom. Keep in mind, for two grand you can pick one of eight different models at a time, so can a car company anticipate what every last customer wants to drive and be able to deliver those models the second customers ask for them? How many vehicles does a manufacturer have to put into the system to make sure their customers have the car they are demanding on the right day?

It can’t be done.

On the other hand, Ford’s Canvas subscription delivers that 3-year-old used Edge Titanium for a price much higher than one can lease a brand new one for. Again, the pitch is that it’s a subscription, includes insurance, and can be extremely short term. OK, now it makes sense; this program costs less than half what leasing a Nissan Rogue from Hertz for a month does, although the Rogue will be a newer car. But again, why would someone want to pay $620 for a used car when you can lease a new one for less? Come to think of it, you probably can buy that used car for less and have equity when the payments end.

So why does anyone find this service appealing? Well, the hype is convenience — and its high cost is commensurate with that convenience. But as it is currently constructed it cuts their dealers out of the action. That’s right, car companies want to use this system because they can charge more than any new car dealer can for the same product, end their suicidal rebate expense, and book extra profits for themselves because of that higher cost.

Virtual Futures

But that’s not all. In China this week, Ford announced that it’s going to join with the Amazon of the Orient, Alibaba, to sell its products on line. This follows Ford’s moves in China to online-only stores, virtual reality and pop-up mobile sales centers. You know, everything but what it takes to successfully sell cars.

Now, I don’t want to give away any spoilers, but General Motors tried this on eBay Motors when the Chevy Equinox first came out. Probably because like Ford’s today, GM’s executives didn’t really understand what creates demand on an auction website. First, it has to be a hot product and second — if one wants to get top dollar for whatever it is they are selling — it has to be hard to find. When one puts expensive mass-produced vehicles on a bidding website, the tactic fails completely.

Then too, people want to drive, touch and find out all there is to a new expensive car. Can’t do that online. Worse, GM doubled down on its mistake by using an all-new vehicle no one had even seen, much less driven. So, every day I would look at those $32,000 compact Equinox SUVs to see if anyone would bid more than the $17,000 offer online. (Really? Did GM think someone was going to bid $31,500 to buy a $32,000 SUV online?) They didn’t.

Instead, the Chevrolet Equinox became a runaway hit the old-fashioned way: New car dealers bought them, the product excited them, and they translated that excitement to its potential buyers. But don’t be misled, online it was a failure of Biblical proportions for GM. Fortunately, Ford’s new CEO knows nothing about the car business, nor, apparently, that GM already tried what Ford’s about to. And who knows? Maybe the Chinese consumers will go for this — but I doubt it. (On Wednesday came the story that GM will join Ford trying to sell cars on Alibaba. Apparently forgetting the eBay story too.)

Keep in mind that car companies are still promoting the idea that by 2030 the entire world will be taken over by the self-driving cars they will create and either sell to Uber and Lyft, or use to start their own Internet taxi companies with an on-demand app. Yes, some in the car industry have even suggested that in the future none of us will own a car, but instead will use their robotic vehicles like we’re in a bad Will Smith movie.

Are you seeing the same confusing pattern here that I am? At the exact same time automobile manufacturers are demanding bigger, more expensive, outright extravagant super palaces for selling cars, they’re talking about subscription services where you “rent but not to own” their products — and they hope you don’t catch on to how much more money it costs than leasing. Then they claim they want to sell cars online (Ford in China is not the only one planning to try that again); but if that’s the future, then it makes no sense to ask dealers to spend a fortune on a new or updated dealership.

And finally, they are trying to sell you and me on the concept that nobody is going to own a car in the future anyhow, because of the self-driving vehicles they’ll have out soon.

Make up your minds, automakers: Which future will it be?

Self-driven Silliness

Last week it was revealed that auto manufacturers wanted protection from the state of California for any self-driving car that might get into an accident because the vehicle’s owner failed to clean or maintain it well enough that the sensors would keep working. Meaning, no one could sue the maker for any wreck a self-driving car might get into because the owner let the sensors get so covered in road grime that they didn’t work. California said no. But the fact that car companies were worried enough about that to ask for legal indemnity tells us all that self-driving cars are not ready for prime time and, based on that one fear, may never be as foolproof as hyped.

At the same time, San Francisco had several companies start up over the past year that use self-mobile robots to deliver such things as your ham sandwich for lunch. And these little high-tech boxes of goodies are so all over the city doing their app-based chores that people trying to use the sidewalks or bike paths are tired of sharing the cement with them. Norman Yee, the San Francisco supervisor who authorized the legislation making these little sidewalk-clogging robots possible, told London’s Guardian, “Not every innovation is great for society. If we don’t value our society, if we don’t value getting the chance to go to the store without being run over by a robot, what is happening?” Gee, Norman, don’t you know? You’re the one who OK’d this.

And finally, GM allowed numerous journalists to take rides in its self-driving cars in San Francisco a few weeks back. Most of the reviews were scathing, and few bothered to do the fourth-grade math that showed that those cars’ average speed was only 9 mph. GM said those vehicles will be good to go in a couple of years.

Meanwhile, it is estimated that the world will buy almost 80 million new cars this year. From dealers, the old-fashioned way they’ve always been sold. And that kind of success is apparently driving the world’s automotive executives completely nuts.

© Ed Wallace 2017

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: edwallace570@gmail.com