Ed Wallace

Where Is 2018 Trending?

We’re barely over a month into 2018, but already we’re seeing some positive indicators for the year, while other issues throw unnecessary doubt into the lives of automakers, dealers and their salespeople. And those facing turmoil should note that most of it was not necessary; as always, there’s a direct link back to an auto manufacturer’s Groupthink meetings, where everything sounds like a great, if not brilliant idea until it collides with real-world common sense.

First up comes Hyundai; along with sister company Kia, it’s hands down the most improved car company in the world over the past two decades. After Hyundai nearly died in the Asia Financial Crisis of 1998 and then resurrected itself as one of the best automakers in the world today, management decided that it was time to challenge the world’s most exclusive car companies and offer exceptional luxury cars to America’s upper crust. Of course, it’s been taking baby steps in that direction for well over a decade. But isn’t it amazing how quickly Hyundai went from offering its very Korean-looking executive sedan, the XG, in 1999, to the introduction of the Genesis, which from day one was compared favorably with previous generations of the Lexus LS sedan?

And then it got even better. Suddenly, in tonier neighborhoods across the country, one increasingly saw the Genesis gleaming in driveways, although the uninitiated had no idea it was a Hyundai product. Turns out that many Genesis models were sold by Hyundai dealers — if they went along with a common customer demand and removed the Hyundai nameplate from the rear deck lid. Actually, in time Hyundai did exactly that; the manufacturer announced a new luxury line franchise, Genesis, rebadging the original Genesis model as the G80.

Quickly it introduced another new full-sized luxury sedan, the G90; when I reviewed it I summed it up as being as nice as the Audi A8L, but for half the price. I wasn’t kidding, nor was I exaggerating.

Hyundai promised in the near future to add an SUV to the Genesis line-up, along with a BMW fighter and possibly a pickup truck. However, Hyundai dealers had to be certified to sell Genesis products; they had to carve out a special place in their showrooms to physically and visually separate the $69,000 G90 from the Accent sedan marked on sale for $11,995. In time Hyundai informed its top dealers that they would have to build a standalone showroom for its luxury car offerings.

Another few hundred Hyundai dealers received the rebadged Genesis G80, simply because they had sold that sedan before its renaming. So far, so good. That is, until Hyundai decided that trying to build a new luxury car franchise in America would work better if it had only 100 Genesis dealerships — and maybe even better if many of those 100 new stores weren’t even previous Hyundai dealers. Who knows? Maybe Lexus, BMW, or Mercedes dealers might also be interested in adding this new line of high-end vehicles.

Keep in mind that 32 years ago, when Honda brought Acura to America, all four Acura dealers in North Texas were aligned with successful Honda stores. Three were the McDavid brothers’ and one came out of the Spring Branch Honda store in Houston. On the other hand, Lexus had no such loyalty to previous Toyota dealers in many regions in the country, nor did Infiniti to Nissan stores. And by the time Lexus and Infiniti debuted, everyone had forgotten that when Mercedes had come to America, decades before, it had arrived as an add-on to Studebaker franchises.

But what did Acura, Lexus, and Infiniti absolutely not do? They didn’t ship their original luxury vehicles to Honda, Toyota, and Nissan dealers, only to tell them a year later, “Oops, made a mistake here; you probably won’t get that new franchise after all.”

In a world where tens of millions are often invested in large-scale dealership operations, you can’t just give everyone a new luxury franchise and then turn around and tell them time’s up. No, you have to buy out everyone that you shipped those new cars to.

Buying out dealers who sold maybe a handful of these new Genesis models might require astronomical payouts before they’d surrender that franchise to Hyundai. For example, this week the Automotive News suggested that Keyes Hyundai in Van Nuys believed — based on a webcast announcing the change in direction — that its buyout price would be $5 million. And that’s just one; there’s still around 350 elite dealers to go. And that still leaves maybe 500 more dealers who were also shipped the G80 just because it was a Hyundai in its previous incarnation.

How does anyone take something as promising as a newly minted luxury car lineup that had truly exceptional products from the get-go, and mess it up? Well, it’s just another day in the car business.

Corporate Utopian Dreams?

Meanwhile, Ford enjoyed record earnings in 2015 and 2016, then decided to fire the CEO who brought the company to that pinnacle and go with a former furniture salesman instead. And it turns out that Wall Street is less enamored with America’s oldest family owned automaker now, even though Ford claims to have had a vision of its future — as a mobility company. See, there’s a fine line between being out in the desert and having a religious vision of how the future will unfold and having a stroke. And in Ford’s case, Wall Street is thinking that maybe hiring a neurosurgeon may be a better idea, just to bring a bit of sanity back to the company.

Here’s what we do know: Today Ford is an exceptional manufacturer of high-end trucks and SUVs that sell in incredible volumes. Those vehicles aren’t all that profitable for local dealers, but the Ford Motor Company is minting money on them left and right. Now, based on its vision that Ford will soon morph into a mobility company what would cater to people sharing rides, leasing bicycles, ordering up autonomous vehicles, and other foolishness, Moody’s Investors Service hinted at those issues, and then downgraded Ford again last week to just a hair above junk bond status. Moody’s also said gravely that it doesn’t expect things to get much better for Ford in the near term.

Remember, Ford came off two record years for profits; and, despite last year’s minor drop, it still posted strong profits for a large auto manufacturer. And yet it’s almost funny: Wall Street loves Tesla, thinks Elon Musk hung the moon, and assumes he’s going to set up a colony there soon — yet all he’s managed to do is lose billions in his car company. On the other hand, Wall Street is sending Ford warnings about the path it is on, even though Ford makes billions of dollars in profits. Why?

Well, apparently because Elon Musk knows his future is in building cars; you know, the basic concept for a car company. While at Ford, they believe their future is having Ford-branded bicycles piled up on downtown Dallas street corners, to replace all the piles of Lime Bikes that currently litter those corners because no one is using them.

But here’s our shot at trying to shake Ford’s visionaries back to reality. The hottest thing you have going right now is your new $90,000 Lincoln Navigator. Yeah, eight out of every 10 standalone Lincoln dealers in America have disappeared, yet it’s still the hottest thing in the market. Ford may be making over $40,000 dollars on each one of those higher-end Navigators, but apparently all they can think about is how many bicycles they can buy with those profits to rent by the hour?

Cut the Hand that Feeds You

And that takes us to GM, which is altering its long-standing bonus program for salespeople across America. Now this is critical because, since the passage of the newest tax reform bill — which is really just tax cuts and not much reform — all of America has heard how major corporations are going to share their corporate tax savings, slashed from 35 percent to a mere 21 percent. Forget the fact that in many years the average American corporation didn’t even pay 21 percent in taxes before this legislation.*

No, immediately numerous corporations told us how they will pass out $1,000 bonuses to their current employees. Oh, and one mega-retailer will raise its starting salaries to $11 an hour.

Right. Like a tax return, you find out what is really happening only in the small print. First, $11 an hour today is only 13 cents an hour more than minimum wage was, adjusted for inflation, in 1969. Moreover, in the late Sixties the U.S. corporate tax rate had just been dropped to barely under 50 percent of earnings. That’s right, corporate tax rates in America have fallen — from over 50 percent to 21 percent — in the past 55 years; yet 13 cents an hour more in starting wages is all their workers got out of the deal.

Even its splashy promise of $1,000 bonuses to workers comes with a disclaimer: Must have 20 years employment with this firm. The average worker in this particular company has been working there only 3 years.

For years General Motors has had a program that pays local salespersons directly based on sales volume. The idea is to retain the finest salespeople, because that’s the best way to ensure consistency with customers and therefore, long-term success. Maybe the best thing I’ve ever done in my career is that in February of 2005 I had a hand in getting that program bonus increased by 50 percent per car sold for everyone selling Chevys, Buicks, and GMC products nationally. It wasn’t hard; I surveyed volume new car dealers in the Metroplex, met with the top GM executives in Detroit, and showed them a salesperson’s income in 2005 compared to what we had earned selling GM products 30 years earlier. The very next day Ken Thompson from Classic Chevrolet called me to say GM had increased those payouts to salespeople. And that happened in a year when GM’s long-term future was starting to be questioned by the business media — and rightly so.

Now, 13 years later, that 50 percent increase in long-term bonus pay for GM salespeople is gone. One wonders whether GM CEO Mary Barra got the memo that the PR spin for huge corporate tax cuts was supposed to raise the wages of workers by $4,000 per year. Or maybe she did get the memo and knew it was PR spin.

And so begins 2018. Sales were up in January, Dallas/Fort Worth is on fire economically, shortly you’ll be hearing about dealerships bought and sold, and, as always in the auto industry, at the end of the day hope springs eternal.

An old saying observes that we learn all our good habits in bad times and all our bad habits in good times. For the auto industry, these must be very good times indeed.

*In 2013 the General Accountability Office released data showing that U.S. Corporations were paying federal taxes averaging 12.6 percent of total earnings. Adding in state and foreign taxes brought the total tax liabilities to just under 17 percent. In later years reports had corporations paying in the mid-20-percent range.

© Ed Wallace 2018; 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