Article

Thoughts on the New and Used Vehicle Market

June 2009, Auto Dealer Today - WebXclusive

by David Keller, CPA, CFE - Also by this author

We, as new car dealers, don’t have much choice at this time but to sell used vehicles since new car sales are at historic lows with a long way to recovery.

Chrysler and GM have yet to prove how eliminating dealers is going to save them to a profit. They should let the economics of business weed out the dealers who are not profitable. Sooner or later, the non-profitable and under-capitalized dealers won’t be able to make it and they will slide into history. GM and Chrysler should have helped them negotiate the sale of their franchises to the remaining existing dealers. All GM and Chrysler have done is to make those franchises worthless and destroy years of investment by many dealer families. Many communities will suffer greatly due to the loss of the local dealerships.

Maybe GM and Chrysler can make it as “new” companies with concessions from the unions and from the bondholders, who I feel are taking the largest hit in all this. The government is forcing the restructuring and giving the unions a disproportionate share of ownership in the “new” company, as opposed to the bondholders, based on the amount of outstanding debt in the current companies. How is this fair?

Supposedly, it is because the bondholders knew they were taking large risks investing in an automotive company. What about the unions who helped contribute to the high cost of manufacturing with their work restrictions, labor costs and pension benefit packages over the years that we as taxpayers could be responsible for if GM and Chrysler fail? Aren’t they part of this huge problem also? It seems the current government wants to avoid angering the voting population at the expense of institutions that have purchased bonds in good faith from the factories.

Whew! All that is fine and well, but how are we ever going to get bondholders to even consider investing in the automotive industry again? How are we ever going to get anyone to invest in the automotive industry again? How are we ever going to get banks to loan money to the automotive industry again? Now it has become even riskier to buy the factory’s bonds. Who is going to invest? The general public? Forget about it!

Everyone is going to find something less risky to invest their money in for a while. I read in the paper that more and more people are buying CDs. This is good as they are guaranteed a rate of return, albeit low at this time. It is also bad, as the money invested in those CDs is located in banks, which don’t seem to be in the business of loaning money to automotive dealers or many other businesses at this time. It is also bad because, since the money is tied up for months and even years, the funds are not available to invest in stocks to give companies money to fight this economic problem as they restructure and try to keep themselves in existence and retain their employees.

Now, I am not saying I have the answers to this current economic problem, as I have an accounting degree, not an economics degree. There are far greater minds out there that supposedly have the answers to the current situation and think we are going in the right direction. Only time will tell.

Now, back to the used vehicle market. You have to concentrate on this market, along with increasing your service and parts business. You have to market directly to your used vehicle buyers. Start by using your existing customer base from prior new and used sales and service work performed at your store. See when the last time a vehicle buyer was in your store for service. Call them, send postcards, e-mail them, etc. Assign the orphan customers to your existing sales people. By concentrating on your existing customer base, which you know better than the general public, you should be able to increase your business faster than blind advertising in newspapers and radio. I am not saying to disregard general advertising, but right now, based on discussions I have had with my clients, most of it is not having a direct effect on sales volume.

You should study the market reports to see which vehicles are still “back of book” as most finance companies have decreased their advance rates on consumer loans and some are even using Black Book now instead of Kelley Blue Book.

Credit card companies are decreasing the maximum balances for consumers, which can decrease the amounts of down payments on car deals. Additionally, I have had many dealers who are longtime American Express users tell me their credit limit has been so severely decreased, even though they have always paid the balance in full, they have switched to other cards and will not go back to American Express. Again, this appears to be a “knee jerk” reaction to the automotive industry being disdained in the current economy.

I wonder what the market will look like by the time this article is published. Hopefully some of this is behind us and we are rebuilding the damage to the automotive industry. Growing up in this business has been one of the most rewarding aspects for me and my family. Let’s hope it can continue to be so for many dealer families.


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