A Bad-News, Good-News Year?

When looking back on 2004, will new-car dealers say it was the best of times and the worst of times?

Everyone is talking about the potential of a strong 17-million unit sales this year. Ward's is forecasting 2004 sales in the 16.8 million -17 million range. Gary Cowger, president of General Motors Corp. North American operations says it may be more like 17.2 million.

The economy appears to have been righted, and interest rates will continue to be low for the foreseeable future, according to the Federal Reserve Board.

Add to that the 60 new vehicle launches planned for 2004. How could the year be anything but great?

Two words: Joan Claybrook. The former head of the National Highway Traffic Safety Administration runs the Public Citizen, a consumer advocacy group founded by Ralph Nader.

She thinks many car dealers are a bad lot who engage in unethical practices cheating customers “to remain competitive in a marketplace awash in ill-gotten gain.”

In a letter to all 50 state attorneys general, the Public Citizen urged them to begin comprehensive investigations of dealerships. The group also wants legislation that would create more regulatory oversight of the purchase process.

Her campaign, announced in December, is one example of negative attention directed at car dealers that occurred during the last months of 2003.

There was J. D. Power III's Wall Street Journal opinion piece that claimed outdated franchise laws and inefficiencies in the automotive retail system add 30% to the cost of a vehicle. In December, Dateline NBC did a hidden-camera story focusing on dealership F&I fraud and deception, taking specific aim at megadealer Sonic Automotive.

Do these stories reflect a national anger toward dealerships?

Alan Starling, chairman of the National Automobile Dealers Assn. doesn't think so.

“There's a tendency to wake up in the morning and think we're getting beat on,” he says. “But the retail franchise model is still a good model.”

There are about 22,000 franchised car dealerships in the U.S. and they handle more than 40 million new- and used-vehicle transactions a year.

Because of those numbers alone, some fraud and illegal practices are going to happen.

But Starling says, “Most new-car dealers are family businesses that have been an important part of their local communities for decades. Repeat business is the cornerstone of their operation. Their business is based not only on making people happy, but getting them to tell everyone else how good they are.”

Traffic in dealerships is brisk, as are the sales. Studies by Automotive Retailing Today, the Dohring Group and J.D. Power and Associates show buyer satisfaction to be high.

Yet this could be a dangerous year for dealers on the legal front. Lawsuits are becoming commonplace today and attorneys are targeting dealerships.

Accordingly an industry insider says his company regularly exhorts dealers to make sure their finance & insurance practices are above board.

“It is becoming a big concern for dealers,” he says.

Here's the situation on a couple of other dealership fronts:

Used-car Sales

Like new-car sales, used-vehicle sales are up and the market appears to have stabilized. Still, pricing on used vehicles is being restrained by the new-car market, according to the Manheim Used Vehicle Value Index, a statistical measurement of used-vehicle prices.

The index stood at 106.8 in November, a 0.2% decline from October's level, but when compared to year-over-year figures, the index posted a 0.2% increase.

Certified used-vehicle sales continue to increase. Through November, GM had increased those by 21% to almost 365,000 units.

Toyota Motor Corp., meanwhile, reports an increase of 105% in its year-over-year certified sales for a total of 218,244 units.

Jerry Reynolds, owner of Prestige Ford outside of Dallas, believes all that activity could hurt new-vehicle sales.

“I think we're already seeing that happen,” he says. “I had my worst November in six years for new-car sales, but my best month ever for certified.”

More and more lenders are bypassing auctions in remarketing off-lease vehicles. Companies such as GMAC have been conducting their own online auctions to sell off-lease vehicles directly to dealers.

This has led to reduced vehicle volumes at auctions. It's probably why the price of competing dealer consignment cars increased faster than any other segment during the last quarter of 2003, according to Tom Webb, executive director of industry analysis for Manheim Auctions.

Finance & Insurance

A Kelley Blue Book survey says 54% of car buyers are looking to secure financing outside the dealership because they believe they can obtain lower interest rates.

Consumers aren't just shopping online for vehicles, they're using the Internet to look for financing. If the study is correct, 13% of all buyers will obtain financing online, up from 1% in 2002.

Finance managers must work harder to get deals done. That will continue throughout 2004. Lenders cite narrowing margin levels as the reason they are being more careful with car loans to the credit-challenged.

“It's never been worse than what it is today,” says Garry Marquiss, senior vice president and general manager, Auto Finance Division, National City Corp., an independent lender. “We're seeing it from our dealer customers and from our competition.”

The trick is to resist “unusual pricing models,” says Marquiss, citing some lenders' activities. “That tends to be short-lived.”

Captive finance companies have a little more leeway, believes Michael Buckingham, vice president-operations for Hyundai Motor Finance Co. “As a captive, we'll be able to buy deeper to support our product lines,” he says. “But that margin compression is there and it's not going away. We see the independents chasing our business.”

Hyundai loses some business because “there is a line we will not cross,” says Buckingham. “We do get some push back from our dealers.”

Sub prime lender Household Automotive Finance Corp. is looking to expand. “We only have 2% of market share,” notes Timothy Condon, the company's chief financial officer. “So there are opportunities for us to grow.”

But he's concerned with high loan-to-value ratios in which “upside down” customers owe more on their current vehicles than what they're worth. “It will affect their ability to trade in their vehicles in the future,” he says.

Meanwhile, subprime giant Americredit looks like it's going to survive after some dark times of late.

“It's made the right moves,” says Jack Tracey, executive director of the National Automotive Finance Assn.

Many lenders are not only tightening credit standards, but looking at creative ways to cut costs out the entire lending process. Technology drives much of that. It's less frustrating for dealers.

“We're at the early stages in the industry of what technology can do for us,” says Condon, who attributes such strives to online platforms that connects dealers to dozens of lenders.

Hyundai is looking at several customer relationship initiatives, says Buckingham. ‘We're tying our customer databases together and segmenting our customers with our dealers,’ he says. “We think we can get better targeting of our markets.”

Condon believes technology is critical to developing better and more standardized credit scoring models. “It's important for subprime companies' pricing because pricing is still very volatile,” he notes.

Also getting attention is e-contracting, the ability to process all of the paperwork online. There are legal and consumer issues to work out before it becomes commonplace, says Marquiss.

Adds Condon, “We'll see the large public groups adopt it first, then everyone else. It will be three-five years before it becomes widespread.”

Despite such advances, Condon warns, “With technology, you can lose touch with your dealers.”