Car Dealers ‘Optimistic, a Little Worried’

Brian MacDonald is on his second stint as president and CEO of CDK Global, an information technology giant serving car dealerships.

He headed the company from 2016 to 2018, then returned last year when investment firm Brookfield acquired CDK for more than $8 billion.

With annual revenue of $1.7 billion, CDK provides various technologies including dealership-management, customer-management and digital-sales systems. Its customers include automakers.

In a Wards Q&A, MacDonald talks about the ever-changing auto industry. Here’s an edited transcript of the interview.

Wards: What are dealers telling you these days?

MacDonald: They are optimistic but a little worried about 2023 and the economy. Obviously, vehicle prices and interest rates have gone up. Offsetting that is a lot of pent-up demand. It’s a mixed bag.

The good news is, the last couple of years have been very profitable for dealers. The balance sheets have never been in better shape. If we have a recession, we think it will be mild in auto retail.    

Wards: A while ago, if sales dropped from 17 million to 15 million, industry people would be jumping out of windows. They seem to handle things more calmly today.

MacDonald: Yeah. Most manufacturers have taken out a lot of costs and production capacities. Even for auto companies not affected by the bankruptcy of a decade ago, a lot of capacity came out. Their fixed-cost structure is not as high now. It’s still high but nothing like back then.   

Wards: Do you sense a certain tension between dealers and automakers regarding the current low-inventory situation? Many dealers seem happy inventories are tight because that increases per-vehicle profits. But you know automakers want to make more cars.  

MacDonald: OEMs and dealers say they want to keep inventories low and reap the benefits of that. But when you close the (conference room) doors, there’s a lot expressed skepticism. 

Wards: About what?

MacDonald: The dealers wonder if automakers will be willing to keep inventory at certain levels because they have factories to run.

Always remember that when a car leaves the factory gate, auto companies book the sale and get the revenue. There’s a short-term financial incentive to get that vehicle on a dealer lot.

But the balancing factor is that if there are too many (vehicles), you must use incentives to move them. It’s a question of the right balance. It’s been too low. No customer feels good about paying above MSRP.   

Wards: That wouldn’t be so bad if residual values lined up accordingly, but they don't.

MacDonald:  They’re not. And as residuals come down, that will be a bigger issue down the road, for sure.

Wards: How would you describe changes in dealers over the years?

MacDonald: Dealers are getting bigger. Bigger dealers are getting even bigger. Consolidation continues.

Wards: How about changes in automotive consumers?

MacDonald: It’s all driven by demographics, right? Us boomers are getting older, millennials are buying more cars. A lot of them are saying, “I can buy everything else online today; why not cars? Why can’t I do more of that process online?” It centers mostly on expectations.

Wards: What are you paying attention to these days?

MacDonald: We believe in the dealer model. For Brookfield to buy CDK we had to convince people of a few things.

One, auto dealers are not going away. Two, electric vehicles are not going to kill service-department profitability. Dealer consolidation will continue. Traditional OEMs will continue to be successful and relevant despite some new entrants.

Wards: Why won’t EVs affect service-department revenues?

MacDonald:  We’re doing studies on this. What we see in our early data is that dollars for repair orders are higher for electric vehicles compared with internal-combustion-engine vehicles in the last 18 months.

The number of repair orders per EVs are higher. And the number of recalls for electric vehicles is higher because they’re very software-driven and there’s a lot of new equipment on them.

The other thing is that collision rates are significantly higher in the first 90 days for people who buy electric vehicles.  

Wards: Why?

 MacDonald: Because they have so much torque. And the severity of the cost is higher because of all the sensors.

Wards: Is it really possible to buy a car completely online today?

MacDonald: It depends on the state. Some of them have forms that require a wet signature.

You can get close to a full online car purchase, but our research indicates most customers don’t want to do the full transaction online. At some point, they want to go to the dealership to drive the car and learn more.