Once in a blue moon I’m asked to comment on a problematical automotive subject. In early 2005 it was in Detroit with the executives running GM discussing ways to improve their business. That day I also warned GM’s top executives that if their sales fell below 25 percent of the total market, then the business media would start writing non-stop that GM would likely end up in bankruptcy. And that would become a self-fulfilling prophecy.
When GM’s sales then fell under 25 percent market share, that’s exactly what happened.
A few years after that I was asked to speak to one of President Bush’s friends and advisor on why it was critical to save Detroit after the 2008 meltdown. I’m not sure my input with him or his input to the president made any real difference, since the president’s Council of Economic Advisors had already warned that if we didn’t save the auto industry, then we would never be able to put a floor under the financial collapse then in progress.
Ideas out of Thin Air
Last year I was asked to speak to the national convention of ALEC, the American Legislative Exchange Council, responsible for a great deal of the legislation that could be deemed business conservative and what could best be described as conservative social activism. Personally, I didn’t think much of my speech that day; so I was surprised when Stephen Moore, head economist for the Heritage Foundation, followed me and must have said, “Ed is right,” five or six times during his discussion.
And so it came to pass that I was asked to speak at this year’s Texas Automobile Dealers’ Association Convention in Dallas; and, although I committed myself to do it, I just didn’t have anything breathtaking to say. But this happens all the time; when I spoke to the Dallas Petroleum Club a few years ago, I had no idea what to talk about. Until the very morning of that luncheon, that is, when scientists announced that they had found a way to make fuel out of the carbon in the air.
“Gasoline Out of Thin Air” for a Petroleum Club luncheon? Doesn’t get much better than that.
For the TADA I got lucky again. Chrysler, online lead providers and Congressman Roger Williams gave me an outline for that late April speech. Just a few days prior to the event, Chrysler announced that it was raising the invoice amounts of its vehicles across the board by 1 percent. Not the window sticker, mind you, just the invoice amount dealers pay for its products. Believe it or not, this would leave the base model of the Dodge Dart with only $15 mark-up from the factory invoice to what was shown on the window sticker.
No, I’m not kidding.
I’ve mentioned in numerous articles over the years, both in the Star-Telegram and at BusinessWeek online, that I would not know how to sell cars today because the average new car buyer expects a reasonable discount off list as a sign of good faith. And how do you do that when there’s only $15 mark-up on the vehicle they like?
Of course today there’s all sorts of incentives and rebates. So I went to one of the online lead providers to see how a Dodge Dart with $15 mark-up was being quoted. Believe it or not, it kicked out a target price $2,424 off list. And that meant I had to call some friends in the business to see what they had in extra incentives to make that huge discount a reality in a car with just $15 mark-up. The dealers didn’t have anything other than holdback and a sales bonus based on volume targets, which most were going to miss. In fact, I couldn’t find any dealer who said he agreed to that low-price offer on that Dart, in spite of the fact that they were signed up with that online lead service.
What a great way to start a speech to new car dealers.
But then my friend, Congressman Roger Williams, spoke just before me, discussing the so-called balanced budget that was making its way through Congress. As he put it, it wasn’t going to balance for a decade; and he gave it as his opinion that no corporation in America could survive running deficits for that length of time and stay in business.
There was the balance of my talk.
It’s not what you and I were taught. No, whether you like car dealers or not, it’s not right that they be forced to build dealerships that can easily exceed $20 million in cost, carry all of the expense of selling automobiles (the national average is around $2,000 in expense per vehicle sold), and then have their manufacturer send them a vehicle with only $15 mark-up in its sticker price. Then the online lead service that they are paying for suggests that dealers are willing to lose thousands selling it.
As for corporations being around for years, even decades without profits, that exists today. As I pointed out, Amazon.com has been around since 1994 with accumulated losses of around $2 billion. Tesla has been in business for a decade and never once made money. Trucar.com is operating at a loss, and who knows how Uber is doing. Yes, contrary to Congressman Williams’ belief, not making money for years on end is actually the business model of many of the hot tech companies that Wall Street and the business media gush over. Only we don’t call it capitalism anymore. We refer to these groups as disruptive technologies.
By disruptive, apparently, we mean companies that never have to have positive earnings, but put out of business corporations that did turn profits. And when these so-called “disruptive” companies run out of working capital because they don’t actually make money, they don’t go out of business like capitalism demands. No, in spite of their ongoing losses, huge sums reappear in their bank accounts. Just last week some automotive analysts said Tesla may need to raise another $2 billion in working capital; its negative cash flow will burn through what capital it has by the third quarter of this year. Any bets they get it?
These are strange times. A company that owns a piece of software that never manages to make money is touted as the greatest thing in the world, with seemingly endless money being funneled into that losing operation. Meanwhile real corporations turning profits, the old-fashioned way that is the hallmark of capitalism, are called “old brick-and-mortar” businesses — like they’re some 80-year-old abandoned factories, devaluing the scenery off the Interstate in downtown Cleveland.
The fact is that there’s one commonality to all of this; it’s companies that own software as the gateway to a particular product — but pass all of the expense off to those who actually sell or distribute that product. Let’s face it, Amazon is no more a book publisher than Internet automotive lead companies are car manufacturers or even dealerships. Similarly, Uber, Lyft and others don’t pay the maintenance, and fuel costs for, much less own the vehicles they send your way through their taxi service.
Never before in our history of capitalism have so many money losing companies come into being that put other major money making corporations out of business. Yet think about it: Those companies are the darlings of Wall Street and the business media.
One wonders what these software companies will do once they put all of the “old brick-and-mortar” businesses, on which they depend for their products, out of business. Then again, one wonders how car dealers will make it long term when their $18,000 cars have $15 profit built into the window sticker price.
© Ed Wallace 2015
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism. He hosts Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: email@example.com; read all of Ed’s work at www.insideautomotive.com.