Dealers Protect Their Interests

Dealers at the 2008 National Automobile Dealers Assn. convention in San Francisco vowed to fight excessive regulations; urged auto dealers to listen to them more; heard auto executives praise their efforts; and walked an expo floor filled with more than 600 exhibitors.

New NADA Chief: CAFE Fight Is Just Beginning

The fight over stricter fuel economy and vehicle-emissions standards is just beginning and “it's our fight,” says Annette Sykora, new chairman of the National Automobile Dealers Assn.

“The fight has just begun, because Congress has provided only part of the framework for a national fuel-economy policy,” Sykora says during her first NADA address to dealers.

“There are still a lot of unknowns,” she continues. “There is still a struggle in the courts, on the regulatory front and in some states. The outcome of these battles will affect the kind of cars we sell.”

NADA joined others in the auto industry last year in persuading Congress to adopt comprise legislation that calls for a corporate average fuel economy for cars and trucks of 35 mpg (6.72L/100 km) by 2020. That's a 40% increase over today's standards.

NADA takes pride in that lobbying effort, but Sykora, a Texas dealer and the group's first woman chairman, says there's no time to relax, because “every future decision about fuel economy can directly impact our business.”

Car buyers select vehicles that meet their needs, and they should decide what works and what doesn't, she says. “It's that simple. You can't wave a government wand and make consumers buy a particular type of vehicle.

“We don't want policies that stifle consumer demand. We want to accelerate it. We know our customers want fuel efficiency, but we also know they won't sacrifice safety and functionality — or pay extra.”

The auto industry is an easy target, says Sykora. “The debate in Washington over the past year proves it.”

She credits Congress for providing a good start towards “a rational federal program for fuel economy,” but sees more legal, regulatory and legislative fights ahead.

One such battle is between the U.S. Environmental Protection Agency and the State of California, which wants a waiver to enforce tailpipe-emissions standards that are stricter than the EPA's.

NADA backs the EPA in denying the waiver, but California is pressing its case.

“We have to continue to fight to make sure whatever policies come out don't do more harm than good,” Sykora says. “We can't just get our cars and sell them. We have to recognize we're part of a broader industry.”
— By Steve Finlay

Get Dealer Feedback to Build ‘Gotta-Have’ Cars

Auto makers would build more desirable vehicles if they consulted with their dealers during the early stages of product development.

So says Dale Willey, 2007 chairman of the National Automobile Dealers Assn., speaking to an auditorium full of dealers at a general session that formally opens NADA's 2008 convention.

Willey says auto makers spend millions on focus groups trying to learn what consumers want, yet seldom consult with dealers who hear customers' wants, desires and complaints on a daily basis.

“We hear everything they like and dislike,” he says of customer input ranging from rear doors that are too small to cupholders placed too close to audio-system knobs.

“I'm not saying we have all the answers, and we can't build the vehicles,” Willey says. “But we literally touch the market. The product information we collect is invaluable. And best of all, it's free.

“If more manufacturers tapped into that, they would sell more ‘gotta-have’ vehicles.”

Willey also urges auto companies to treat “all” dealers as partners, “not just a favored few.”

In a perfect world, auto makers and dealers would be true partners in the making and selling of vehicles people want to buy, he says.

But often in the real world, auto makers only see dealers as partners when the companies have “excess inventory or slow-selling vehicles” they're trying to unload.

Willey draws applause when he declares that factory incentives to dealers are inherently unfair if structured in a way that lowers the cost of doing business for some but not others.

Chrysler LLC recently dropped a bonus program that critics said did just that.

“All dealers must compete on a level playing field, and manufacturers are not the best referees,” Willey says.
— By Steve Finlay

Life on Farm Taught Him Valuable Lessons

Growing up on a tobacco farm, Jim Hudson loved to buy old cars, fix them and resell them at a profit.

“The only time I skipped school was to look at a used car on a lot,” recalls the new chairman of the American International Automobile Dealers Assn. and head of Jim Hudson Automotive Group in Columbia, SC.

Hudson owns mostly foreign-brand stores, but as a young man his ambition was to be an Oldsmobile dealer. He fulfilled that goal but, like so many other Olds dealers, he was distressed when General Motors Corp. killed off the brand.

“I know Olds dealers who still aren't over that,” Hudson tells Ward's. “It was like their mothers had died.”

But Hudson is elated at an AIADA meeting where the chairman's gavel is passed to him from John Hawkins, a California dealer praised for diplomatically ending a rash of in-fighting that racked the organization two years ago.

Hudson says life on the farm taught him lessons that he applies in running his Toyota, Hyundai, Saab, Pontiac and GMC dealerships, as well as two Lexus stores, in three South Carolina cities.

“I learned firsthand that there are no second chances in farming,” he says at the AIADA gathering held in conjunction with the National Automobile Dealers Assn. convention.

“You have to take advantage of every opportunity, every square foot of land and every drop of rain if you are going to make it,” he says. “I apply the same principals I learned in the tobacco fields to my dealerships today.”

Hudson is much admired within the auto industry. He is known as a dealer who coaches sales people to become managers, helps managers get their own dealerships and offers advice to young dealers.

As AIADA chairman over the next year, he'll carry the association's traditional banner of lobbying against legislative protectionism and tariffs against import vehicles.

“There will always be opponents to free trade,” Hudson says. “There will always be politicians who see us as convenient scapegoats to their problems.”

He sees AIADA as “the international dealer's only defense against legislation that will destroy our business.”

Vowing to be the same sort of association chairman as he is car dealer, Hudson says, “I will get the job done.”
— By Steve Finlay

Even Toyota Dealers Are Feeling the Pain

It's bad out there when Toyota dealers complain about slow sales.

That's what is happening, demonstrating even the strongest automotive brands aren't immune to the nation's economic slowdown.

It's a situation that prompts James Lentz, president of Toyota Motor Sales U.S.A. Inc. to try to rally the troops at a convention event.

“When good Toyota dealers say some sales are off 60%, I know things are out of kilter,” he tells a meeting of the American International Automobile Dealers Assn.

But Lentz remains optimistic, saying, “We'll get through this year, and the challenges will make us stronger.”

He cites a growing population and Baby Boomers living and driving longer as reasons for declaring good times are not gone forever.

“By 2011, we'll be selling to five generations at the same time,” he says. “That has never happened before in the U.S,” noting annual U.S. sales could reach 18 million sometime in the next decade.

Meanwhile, Lentz forecasts 2008 sales at 16 million units, a number that is more hopeful than some predictions.

Paul Taylor, NADA's chief economist, earlier told conference attendees he sees sales dropping to 15.7 million units this year, compared with 16.1 million in 2007.

“Not long ago, 16 million units was seen as a great year, not just an industry birthright,” Lentz says.

Given that customer traffic will be “a touch down this year,” he sees it as a perfect time for dealers to streamline processes and speed up the buying experience so it is more convenient.

It's also a good time to focus on the service department, a strong profit center and where customer satisfaction is crucial, Lentz says. “If we make a great impression in the service lane, we increase the chances of a vehicle purchase in the showroom.”

“So hang in there,” he says. “Skies will be clear. Things will be better.”

Listening to those exhortations is Charles Dean, general sales manager at Roseville (CA) Toyota, north of Sacramento. “There was a time when people were lined up asking us to sell them a Toyota,” he says.

But that's changed. The nation's economic slowdown has hit his area hard, particularly the real-estate downturn, leading to softer dealership sales and more customers keeping their cars longer.

Dean wonders if all dealers will make it through the tough times. “The proactive and creative dealers will survive, but there are others who might not,” he says.
— By Steve Finlay

Finance Chiefs: Expect More Incentives in '08

Expect auto makers to put more vehicle incentives on vehicles to help move the metal, a panel of top automotive finance executives says.

“I think we'll see more incentives this year,” Ford Motor Credit Chairman and CEO Michael Bannister says at an American Financial Services Assn. gathering in conjunction with the NADA convention.

He cites reports that General Motors Corp. plans to do what is necessary to maintain sales near last year's 16.1 million-unit level.

For Toyota, “much of the incentive strategy stems from where the vehicle is in its product cycle,” George Borst, president and CEO for Toyota Financial Services, says.

Incentives also are applied in special cases, such as the Toyota Tundra fullsize pickup that competes in a highly competitive market.

Stephen Smith, American Honda Finance Corp.'s senior vice president-financial services, says his company's position is that “all cars should sell themselves,” and there should be no need for incentive programs. Yet, with 2008 shaping up as another tough year, higher incentives “unfortunately (are) to be expected.”

In good news for dealers, panelists say the year will see “business as usual,” meaning their firms are not pulling back or significantly changing their lending policies, despite the problems plaguing the mortgage industry.

“Our underwriting is going to be constant with the policies and patterns we've put in place over the last five years,” Bannister says of Ford Credit. “I've been running this company since 2002. We've amassed a huge database, and we know how customers are going to perform.”

Toyota Financial has tweaked its policies, Borst says. “You have to look at this from both sides of the spectrum. On the lower end, we have improved analytics. So take someone with a 560 FICO (Fair Isaac and Co. credit score), we're tightening down and requiring more verification, which is not a big part of our business.”

At the other end of the spectrum, Toyota is offering 84-month financing for the higher-end customers, he says.

However, Americredit Corp. CEO Daniel Berce says several firms, including his own, are tightening — and even cutting back — their subprime loan originations.

“We (were) more cautious throughout all 2007 in our subprime business,” he says, noting Americredit went from nearly 25% growth in subprime in first-quarter 2007 to significantly cutting back on that segment of its lending late in the year.

Chase Auto Finance CEO Marc Sheinbaum says his company is seeing more subprime applications than normal due to the number of finance firms unwilling to take the risk.

“If you don't know what you're doing, then you can really get your clock cleaned,” he says.
— By Cliff Banks

Recessions Don't Necessarily Hurt Auto Sales

Contrary to popular belief, the U.S. recessions of 1990 and 2001 did not hurt auto sales, says Paul Taylor, chief economist for the National Automobile Dealers Assn.

But while he anticipates a “non-recession” in 2008, Taylor predicts U.S. light-vehicle sales will drop to 15.7 million units, 400,000 fewer deliveries than like-2007.

“There's some sort of symmetry there,” he says of the irony of vehicle sales holding their own during recessions and often falling when none exist.

The 2001 recession notwithstanding, sales did well that year, as auto makers rushed in with economic curatives such as hefty incentives and zero-percent financing.

Taylor predicts modest incentives in 2008, without ruling out a possible spike at some point to spur sales.

“It's possible to avoid a recession in 2008,” he says. “But auto sales will suffer from the spillover of the real-estate difficulties and a credit-induced slowdown on big-ticket items.”

Taylor anticipates the housing industry's widespread slowdown will stretch into 2009, affect about half the U.S. population and “continue to be a drag on new-car sales.”

Higher prices at the pump, along with increased home-energy costs, also will “continue to drain consumer budgets and retard spending,” he says.

Taylor predicts the unemployment rate, which rose to 4.8% in January, will hit 5.3% to 5.4% this year but won't match 2002's peak of 6%.

There is some relatively good economic news for the auto industry.

For example, the nation's home-mortgage debacle has not spilled over to stain the financing of new-car deals, Taylor says. “I've talked to a lot of dealers, and they say they are not really facing obstacles in auto financing.”

Auto-loan underwriting has been “pretty solid,” compared with the looseness of many mortgage underwriters that now are feeling the pain, he adds.

“Many mortgage lenders weren't making the phone calls to make sure borrowers had the jobs and incomes they said they did,” Taylor says. “That's what created the problems.”

Auto loans eventually may cost more to some consumers, “but it will still be possible to get people financed, and that's the key to moving sales forward,” he says.

Lenders burned by the recent rash of mortgage defaults may shift their efforts to or increase their participation in auto financing, Taylor suggests.

“Lending institutions must lend money to make money, and they now have an incentive to lend more in the new- and used-vehicle sectors,” he says.

Meanwhile, Taylor predicts the slow-growing economy will pick up in the year's second half. “The economy continues to function, so it leaves me fairly optimistic that it will improve this year.”
— By Steve Finlay

Franchised Dealers Crowd Used-Car Cousins?

Independent used-car dealers can add to their list of woes the fact that new-car brethren are becoming a bigger competitive threat.

Franchised dealers always have sold used cars, but lately they've stepped up that part of the business because it is offering better profit margins than new-car sales of late.

It's always been tough for independent used-car dealers. And it's getting tougher. “Especially as franchised dealers redouble their used-car efforts,” says auto analyst Tom Kontos, an executive vice president for Adesa Analytical Services.

Used-car sales in the U.S. last year fell 2.7% to 41.4 million units, compared with 2006.

In selling about 14.3 million pre-owned vehicles last year, franchised dealers took a modest hit, sustaining a scant 0.2% decrease.

In contrast, independent used-car dealers saw a 4.6% drop in 2007 sales of just over 13 million units. That ties with 2002 as their worst sales year of the decade, Kontos says.

Private-party, used-car transactions totaled about 14 million, a 3.3% decline.

“Independents suffered the most,” Kontos says. “I won't call it a demise, but it's a decline in prospects for them in 2008.”

Yet, profitability margins are better for selling used cars than new vehicles this year, he says.

Going head to head with franchised dealers can put independent auto retailers at a distinct disadvantage.

Franchised dealerships typically are bigger, better funded and run more disciplined operations. New-car dealers also do more vehicle trade-ins, which regularly replenish their used-car inventories.

Additionally, Kontos says franchised dealers enjoy the advantage of participating in auto makers' certified pre-owned vehicle programs that have proven popular with consumers in recent years.

Another advantage he cites is that many car buyers believe a transaction at a franchised dealership offers more peace of mind.

Still, he says, “Independents serve a niche.”

Franchised dealers' pre-owned inventory tends to be newer, about 2 to 5 years old. Independent dealers' stock runs about 3 to 8 years old.

Some franchised dealers have gone so far as to switch new-car facilities into used-car outlets.

For instance, the Baker Auto Group in San Diego, CA, last year returned its franchise to Ford Motor Co. and converted its store into a pre-owned vehicle operation.

“It made a lot of sense for us to do that,” says CEO Michael Baker, noting there are four other Ford stores within a 5-mile (8-km) radius.

The Baker Group retains nine new-car franchises.

Used-vehicle sales peaked in 2001, then began a 4-year decline, NADA Chief Economist Paul Taylor says. “But when the economy does pick up, we'll see stronger sales.”
— By Steve Finlay

General Motors Chief Asks Dealers to Help Usher in New Tech Era, Fight Zealous Regs

General Motors Chairman and CEO Rick Wagoner says the automotive industry is entering a period of technological advancements similar to what was last seen a century ago.

With the industry on the cusp of developing new propulsion technologies, such as alternative-fuels, electric plug-in and hydrogen fuel-cell vehicles, Wagoner calls on OEMs and dealers to help consumers through the transition to advanced technologies.

“We have to work together to develop the technology, bring it to market, educate consumers and sell and service these advanced-propulsion vehicles,” Wagoner says during his NADA convention keynote address, noting it's an “opportunity to change our business for generations to come.”

In doing so, auto makers and their dealer networks will have a hand in reducing the nation's dependence on foreign oil, cutting greenhouse-gas emissions and changing the world for “our children and our children's children,” he says.

To achieve these goals, Wagoner tells attendees here it is critical that auto makers and dealers continue to be active in the legislative process. He singles out dealers for their role in lobbying lawmakers to craft the new corporate average fuel economy legislation mandating 35 mpg (6.7 L/100 km) for new cars and trucks sold in the U.S. by 2020.

Wagoner says achieving the upcoming CAFE standards is possible, but urges dealers to fight against proposals from individual states seeking to set their own fuel-economy standards.

“A number of states, in their zeal to address these issues as completely as possible, are anxious to go beyond the aggressive targets set by the new federal-energy legislation. And we understand this desire,” he says.

“But if we have to focus our efforts on meeting state targets, instead of a single national standard that is already very aggressive and is going to be tough to meet, then we're not going to be able to accomplish everything we otherwise could,” If the industry is to usher in a new technological era, a new fueling infrastructure must be put in place, he says.

Hydrogen refueling stations and electric charging stations will be necessary in the near future. But even now, the lack of E85 pumps is hindering the switch to alternative-fuels vehicles.

“We're doing a lousy job as a nation in making E85 (biofuel) available to our customers,” Wagoner says, noting ethanol stations currently represent less than 1% of the 170,000 gas stations in the U.S.
— By Byron Pope

Franchise Meeting Encourages Ford Dealers

Ford Motor Co. executives and dealers are decidedly optimistic following the auto maker's dealer convention franchise meeting.

The prevailing message from dealers is Ford's new leadership team, led by President and CEO Alan Mulally, is listening to their wants and needs, something past leaders have not done.

“It's a new day,” Kevin Massie, owner of Napa Ford Lincoln Mercury in Napa, CA, tells Ward's. “Alan Mulally has brought in a helluva team and as a dealer, I'm thrilled to see it. We're seeing the light of the new millennium. The light bulb has gone on at Ford, and we're seeing a change.”

Massie says he is especially pleased to see Ford's renewed emphasis on cars. As a California dealer, Massie has seen sales erode at the hands of foreign competitors that offer a full line of smaller, fuel-efficient cars.

Several dealers say Jim Farley, group vice president, marketing and communications, has struck a chord with them, giving them faith the struggling auto maker is heading for a turnaround.

“Jim Farley is a big help to us,” says Lars Frieberg, general manager of Salinas Valley (CA) “Ford's quality has increased. Now we have to get the message to the people, and that's what we're going to work on this year. Farley is encouraging people to have faith and trust Ford.”

Steve Rogers, owner of Steve Rogers Ford in Waterville, OH, says the mood in the meeting was the most upbeat he has seen in years.

“Jim Farley is well accepted and certainly an asset to our team. We're all excited he is here,” he says. “Ford is turning the corner, and we (dealers) feel better about the future now.”

Farley says his job is to listen to dealers and give them what they need to increase profitability. “Dealers are telling us what to do, and at the end of the day it will all make sense,” he says of dealer-inspired actions the auto maker will be taking in the future.

The new marketing chief says he told dealers at the closed-door meeting he plans to unveil a new marketing initiative in the next month or so. He declines to reveal specifics of the plan, saying it's a “family matter,” and when it's unveiled “it will speak for itself.”

Farley says his regional marketing approach, which allocates funding to specific markets, is working. “We're not spending more money, we're just redistributing it,” he says.

Brian Jarrett, owner of five Ford dealerships in central Florida and vice chairman of the Ford Dealer Council, says Ford's quality improvements have resulted in the fewest warranty repairs he has seen in three decades of business.

“In the short term that's a problem,” he says, referring to reduced profits due to the lost repair work. “But in the long term that's what we want.”

The message sent by Ford executives to its dealers clearly resonated.

Says Sam Wright, owner of Quality Ford in Mount Vernon, NY: “What I heard today is very encouraging. I think company is going in the right direction.”
— By Byron Pope

Dealers Concerned About Mercury's Future

Despite assurances to the contrary from Ford Motor Co. executives, some Lincoln-Mercury dealers believe the Mercury brand is in jeopardy.

“Dealers are concerned about Mercury,” says Kip Row, president of Colonial Auto Center in Charlottesville, VA.

“I think they're still going to make them, but they're going to be more of like how Scion is to Toyota (Motor Corp.),” Row tells Ward's following the auto maker's NADA convention dealer franchise meeting. “That's what Mercury will be to Lincoln, more of a niche product.”

Steve Downing, owner of Yuba City Lincoln Mercury in Yuba City, CA, echoes Row.

Ford “didn't tell us anything we haven't heard before,” he says. Executives “just say that they're exploring (Mercury) and looking forward to talking about it in the future. They didn't give us a definitive answer one way or another. It would make anybody nervous.

“Obviously the future is with Lincoln,” Downing adds. “I don't care if they give us a product called XYZ. They can call it Lincoln, Mercury; call it anything. They can call it Edsel again, as long as we can sell it in volume.”

Jim Farley, group vice president-marketing and communications, points to powertrain upgrades in the Mercury Mariner cross/utility vehicle and the upcoming Mercury Milan hybrid as evidence the auto maker has not abandoned the marque.

“I think you're seeing a continuing investment in Mercury and Lincoln for both to grow,” he tells reporters following the franchise meeting.

However, Ford executives do leave the door open for Mercury's eventual demise.

Asked if he could positively say whether Mercury had a future, Mark Fields, president-The Americas, says, “Anything is possible” and so it is “possible the sun will extinguish in the next five days.”

Michael Adamson, vice president of Adamson Motors in Rochester, MN, and a member of the Lincoln-Mercury Dealer Council, believes Mercury will remain viable going forward.

“There is no indication from any of the dealers that Ford is turning their back on Mercury or their dealers,” he says. “They're giving us stuff to sell. We just have to sell it.”

Ford officials do say there no longer are any stand-alone Mercury stores.
— By Byron Pope

Chrysler Looks to Streamline Dealer Ranks

Discussions are under way to determine how much money to earmark for reducing Chrysler LLC's dealer count, Cerberus Management LP Chairman John Snow tells members of the American Financial Services Assn.

Calling Chrysler's efforts to pare its dealer body a “major restructuring going on now,” Snow says it is “absolutely essential to the new Chrysler to have stronger and healthier dealers.

“Dealers are your first line in having a successful auto maker,” he says.

An industry insider suggests a Chrysler dealer consolidation will cost the auto maker more than the $1 billion General Motors Corp. paid out to kill its Oldsmobile brand.

When Cerberus first acquired the troubled car manufacturer in mid-2007, Chrysler's relationship with its dealer body was “frayed,” Snow says. “There were too many dealers making too little money.”

Fixing that means fewer, stronger, more profitable retailers, he says.

Chrysler Co-President Jim Press is leading the charge, Snow says. “We're putting the dealers in the lead,” he says. “They are our customers.”

Under the newly announced Project Genesis program, which will cull some models from the lineup in reapportioning the auto maker's vehicles among its three brands, dealers will have “input into what Chrysler builds,” he says.

Snow declines to provide an estimate of what the dealer restructuring might cost but says there will have to be some “sharing of the pain. But that will have to be done as harmoniously as possible.”

Trimming the vehicle lineup likely will force many dealers selling only one or two of the three brands out of business. Under its Alpha Project, Chrysler has been encouraging dealers to consolidate into single stores housing all three of its brands, Dodge, Chrysler and Jeep.

“When we look at our product portfolio and we find out that traditionally we had two stores (Chrysler-Jeep and Dodge) and now we have one, it's crazy to have competing products in the same room,” Chrysler CEO Robert Nardelli told Ward's in a November interview. “I think with the combination of the economics and dynamics of the market, you'll have a little bit of a shakeout. And some of that will be driven by the product portfolio that we offer.”
— By Cliff Banks with Eric Mayne

GM Consolidating Dealerships — One at a Time

General Motors Corp. is working with its dealers on an individual basis to consolidate the number of stores in North America.

Mark LaNeve, GM North America vice president-sales, service and marketing, says he doesn't believe in a big “unilateral“ consolidation program.

“We look at every dealer as an individual,“ he says at the annual NADA conference here.

Some dealers have good real estate; some have their family in the business; some have other franchises, LaNeve says. “So we're trying to match up buyers and sellers to put our dealers in a better position to get a return on investment and a chance to win.”

LaNeve says progress has been made over the last several years to reduce GM's dealer footprint, noting the auto maker has gone from having 7,400 “rooftops“ to 6,800. “That's still a lot.”

GM CEO Richard Wagoner says, “Our goal is to ensure those dealers that choose to leave the industry do so with dignity, and that in every market, we work with our dealers on a franchise footprint that improves their throughput and profitability.”
— By Byron Pope

‘Expecting People To Come’ Isn't Working

Gary Dilts knows something about the unpleasantness of trying to sell a glut of vehicles in a market that's not demanding them.

He also knows the risks of balking at that work assignment.

As the one-time head of sales for the former DaimlerChrysler AG's Chrysler unit, Dilts had the unenviable job of pushing dealers to order more and more unwanted vehicles that the factories were cranking out.

He finally got fed up. He lost his job in 2006 when he reportedly questioned the wisdom of putting supply over demand.

Now a senior vice president for J.D. Power and Associates, Dilts preaches against the sins of flooding the market with excess vehicles just to keep the factories going. There have been a lot of converts lately.

Domestic auto makers, including the reconstituted Chrysler LLC, have been scaling back vehicle production in an attempt to move from a “push” to a “pull” market.

More reforms are pending, Dilts says at a J.D. Power conference held here in conjunction with the National Automobile Dealers Assn. convention.

“In the next 24 months we'll see big changes in the way vehicles are ordered,” he says. “You can't let factories set their own agendas on what to build.”

Otherwise, a lot of unsold vehicles pile up. “Putting vehicles out and expecting people to come isn't working,” Dilts says.

James Press, who joined Chrysler as co-president four months ago, backs up Dilts' point.

Press tells the J.D. Power conference Chrysler got into trouble by setting itself up as a company capable of making four million vehicles a year when in fact “we were only retailing 1.5 million.”

New owners Cerberus Capital Management LP “are not connected with handcuffs to the past,” Press says.

Dilts says auto makers who overproduce and under study markets should “have a lot of blacktop for parking unsold cars on.”

Proper market research before introducing a new vehicle is vital, he says. “You can't just throw $1 billion down the street and hope it works. It must be much more scientific than that.”
— By Steve Finlay

Some Dealers Balk at Auto Makers' “irrational” Construction Demands

Virtually every auto maker comes up with grand plans for bright, modern-looking dealerships, but some dealers question the wisdom and costs of some projects.

Auto makers, particularly the ones that are in good shape, “are putting tremendous pressure on retailers to build new facilities,” says Michael Maroone, president of AutoNation Inc. the nation's largest dealership chain.

“Some of what they want is irrational,” he says. “We need to hold our ground against bad investments.”

Sometimes it goes beyond irrationality, says Tamara Darvish, vice president of the 26-dealership DARCARS Automotive Group in metro Washington D.C.

“Some manufacturers are stupid,” she says.

She, Maroone and other major dealers voice such concerns at a J. D. Power and Associates automotive conference held in conjunction with the NADA convention.

Darvish tells of a bad ongoing experience with an auto maker that had a “cookie-cutter design” for a new construction project it wanted DARCARS to undertake.

“To reconfigure to that design would have left us three feet (.91 meters) short,” she says. “It would be an ordeal for us not to alter the plans a bit, but they kept insisting we had to do it that way.

“We're still battling,” she tells Ward's. “I just received a (franchise) termination notice that I'm not taking seriously. But all over three feet!”

Then there is the expense of such projects that typically cost millions of dollars. Although auto makers often kick in some money, dealers are expected to pay the lion's share.

“The cost of a showroom is through the roof,” Maroone says. “Even a vehicle-storage project can be expensive. In south Florida, I used to buy land for $4 a foot. Now it's $40.”

Maroone is unconvinced elaborate showrooms help sell cars all that much, noting two-thirds of AutoNation customers are online shoppers.

He worries some manufacturers' facility requirements are tied to overly optimistic market-share goals.

“Each manufacturer has its own set of (building) standards, and some are ridiculous,” says Sidney DeBoer, chairman and CEO of Lithia Motors Inc., a publicly owned dealership chain.

Some manufacturers are insensitive to the cost of some projects they expect dealers to bankroll, he says.

Lithia recently spent $40 million on a new BMW dealership. “That's great, it's BMW,” DeBoer says, referring to the brand's high-end image and healthy sales.

But he adds: “I've been through recessions where you couldn't give a BMW away. What happens to your $100,000-a-month rent then?”

Customers want clean, attractive, conveniently located dealerships, says Thomas McLarty III, vice chairman of RLJ-McLarty-Landers Automotive Group.

In providing such facilities, dealers must look at it as an investment rather than just an expense, he says.

That said, he thinks some of the money used to fund expensive new facilities could be better spent elsewhere.

“I'd like more of that capital to go into the customer experience and employee training,” says McLarty, a third-generation dealer who once served as chief of staff for President Bill Clinton, a boyhood friend from Arkansas.

McLarty says dealers must watch their balance sheets, and auto makers must be mindful of dealers' costs as much as their own.

Of dealer-manufacturer relations, he says, “I was brought up in this business as a little boy and my father used to practice that it's a two-way street.”
— By Steve Finlay

Vehicle Leasing Continues Its Comeback

New-vehicle leasing continues to make a comeback, steadily climbing out of its 2003 nadir.

Despite an overall decline in new-vehicle sales, lease originations rose to 2.8 million units in 2007, increasing for the fourth straight year. That is up about 40% from 2003, but well shy of leasing's 3.7-million-unit peak year in 1999.

However today's leasing industry is healthier, relying on less subvention from auto makers and more on putting customers in the right vehicle with terms that meet their needs, says Tom Webb, chief economist of Manheim Consulting and principal author of Manheim's 2008 Used Car Market Report.

“We're not going back to 1999 lease percentages, but back then many people were leasing because they couldn't buy the vehicle,” Webb says.

Many of the 2.4 million off-lease vehicles remarketed last year went through Manheim Auction's lanes. Webb says lessors have greatly improved their end-of-term remarketing processes and do a better job of estimating vehicle residuals.

Consequently, they are not suffering the massive losses of past years when estimated residual values turned out to be far less than actual values.

Webb says leasing's comeback doesn't surprise him.

“It is a great product if a customer wants a regular trade cycle and doesn't want to take on the residual risk,” he says.

He estimates the off-lease vehicle count will hit 2.75 million units in 2009. He expects leasing will?gravitate to its natural level, which he pegs at 25%-28% of new-vehicle deliveries.

Highlights of Manheim's 2008 Used-Car Market Report — which, despite its title, also covers new-vehicle activities — include:

Auction Activity

North American auctions remarketed 9.6 million used vehicles in 2007. Wholesale pricing rose for most of the year before falling in the fourth quarter.

Dealer Profits

Retail used-vehicle sales volume fell for the second straight year, though the average price of $8,186 reached its highest level since 2004. For franchised dealers, their net profit on used vehicles was $257 more than it was on new vehicles.

Rental Fleets

New-vehicle sales into rental fleets declined by 8% to 1.9 million as domestic auto makers decreased their unit numbers. Domestic auto company's market share in rental fleets dropped from 80.8% in 2006 to 73.3% in 2007. “That is one market-share decline the domestics wanted,” says Webb.

Non-rental Fleets

New-vehicle sales increased for the fourth straight year, with foreign brands and fuel-efficient models increasing in popularity.

Financing

Average auto-loan maturities continue to lengthen, and auto financing at attractive rates remained despite turmoil in the broader credit market, such as subprime mortgages.

Repossessions

They rose by 10% in 2007, reaching their highest level (1.51 million) since 2003. “It's logical to assume they will be up this year,” Webb says, citing an economic slowdown. “The economy has an impact on repossessions and we would really see an impact if unemployment rises.” More upscale vehicles that have been repossessed are showing up in auction lanes of late, he says.
— By Steve Finlay

Time Magazine Honors Third-Generation Dealer

Time Magazine's Dealer of the Year is third-generation dealer Timothy J. Smith, president of Bob Smith BMW/Mini, Calabasas, CA.

Smith began working at his father's store as a teen. He later began selling new cars with his two brothers at Bob Smith Volkswagen/Porsche in Hollywood.

Smith and his dealership support many causes. He cites his service as a trustee for the Catholic Education Foundation as his most meaningful civic contribution.

“Instead of going to gangs, our recipients go to college,” he says.

Runners up for Time's dealer of the year are Harry Brown of Jacksonville, NC; Franklin Downing Jr. of Williamsville, N.Y.; and Mark Olinyk of Plover, WI.

Ford Hails Dealers for Community Service

Twelve dealers whose community service ranges from helping the ill to aiding children in need are this year's winners of Ford Motor Co.'s Salute to Dealers awards. They were chosen from more than 6,000 dealers across the U.S. and Canada and represent five Ford brands: Ford, Lincoln, Mercury, Mazda and Volvo. The honorees “epitomize the spirit of corporate citizenship,” says Edsel Ford II, Ford Board member and great-grandson of Henry Ford. The winners are:

A panel of judges picked winners from a field of 65 dealers nominated by regional representatives. This year's judges are: Edsel Ford II; Jim Vella, president, Ford Fund; Steve Finlay, editor, Ward's Dealer Business; Rick Titus of Drivers Talk Radio; and Sam Pack of Sam Pack Automotive Group.
— By Ward's Staff

Chrysler Goal: Restore Dealer Trust, Profitability

Chrysler, Dodge and Jeep brand dealers were a sore bunch two years ago when the former DaimlerChrysler AG's Chrysler unit continued to force unrequested inventory on them.

The new, privately owned Chrysler LLC is trying to correct the sins of the past and patch up the auto maker's relations with its dealers.

James Press, four months on the job as co-president of Chrysler, says his first goal is to restore dealer trust and profitability.

“We're going to have a more effective dealer body and take the war out of the relationship,” Press says at a J.D. Power and Associates conference, part of the NADA convention.

Press says Chrysler has eliminated the so-called “sales bank,” a shadow inventory program of unsold vehicles that came to light after Ward's detected discrepancies in the auto maker's monthly sales, inventories and production totals.

“We've taken 100,000 cars out of dealer inventory,” he says. “That's $500,000 a day in floor-plan costs.”

Chrysler also has ended a controversial dealer-incentive program that financially rewarded retailers for hitting volume sales targets. Critics claimed it favored some dealers over others, creating an uneven playing field.

Asked how much Chrysler wants to reduce dealership ranks over the next five years, Press says, “There are no numbers. We're going to sit down in each market and figure it out, looking at all the variables.”

Chrysler is using a map with “circles showing where we should have dealer representation and dots showing where we do,” Press says. Impending “right-sizing” of dealership numbers “is not being done for us, it's being done for dealer profitability,” he says.

Press also says the auto maker won't reduce store numbers by buying dealers out en masse. “We are not in a position to get a checkbook out and start writing big checks. We could do that, but they'd bounce. The money isn't there to do that.”

Rather, consolidation will be done as “a collaborative effort with dealers” that Press calls “our customers.” He praises dealers for their ability to handle change.

“Dealers can adapt so much faster than manufacturers,” Press says. “They feel the moisture when it rains and the dry heat when it doesn't.”
— By Steve Finlay