On-the-Point

The Barbershop Mirror

November 17, 2014

Infinity is a concept that is almost impossible to wrap your head around. Something that goes on and on and never ends is impossible for the human brain to fully comprehend. Whenever I hear the word “infinity,” I remember the barbershop my dad took us to when we were kids. This was in a time before the unisex boutique hair salons took over. Old Joe’s was a real, honest-to-goodness, small-town barbershop with fish and deer heads mounted on the walls and Playboy magazines on the shelf. (Dad made sure we didn’t touch them.) Old Joe and his protégé, Beau, cut heads while old men sat around talking and playing checkers. You could practically smell the low testosterone.

My favorite part was the mirrors. Old Joe would jack up the chair and there they were: a mirror in front and another on the back wall, reflecting each other’s images in perpetuity. I was fascinated by the effect as the reflections grew smaller and smaller until they seemed to disappear. I knew they would go on forever if I could only see. In those moments, I came as close to understanding infinity as I ever will.

OK, Ziegler, you may say. Interesting story, but where is all this headed? Well, I’m glad you asked.

Here I am, 38 years into my retail automotive career, and many of the images we project and reflect onto this industry are mirror images of the old problems we already should have solved. They say everything is changing. Yet at nearly every dealership I visit, I see young owners, managers and sales professionals refusing to learn the lessons of the generation that came before.

This is not just a dealer problem. It’s an industry problem.

Sales numbers are high and growing, but the author worries that ever-lengthening loan terms — among other issues — could end the post-Recession honeymoon early.
Sales numbers are high and growing, but the author worries that ever-lengthening loan terms — among other issues — could end the post-Recession honeymoon early.

Groundhog Day

Manufacturers and unscrupulous vendors seem doomed to repeat the catastrophic failures their predecessors inflicted on our predecessors. They keep going down the same disastrous pathways in the maze, constantly proving that, if nothing else, stupidity is infinite.

Every unforced error an OEM executive has ever made is doomed to be repeated by the next generation of factory guys and gals that didn’t pay attention. It’s kind of like “Groundhog Day,” except nobody’s laughing.

I’ve written about this before, but now the numbers are completely out of control. Other industry forecasters are predicting a series of record-breaking years ahead. But forces inside and outside the industry could easily quell the euphoria we are all experiencing now.

Remember, nothing is cast in stone. There are more war clouds on the horizon, and they could release a downpour that would drown the economy overnight. That has happened several times in our recent memory. Let’s not get so full of ourselves that we lose sight of good business practices and yield to excesses that would not be sustainable through a rapid, unforeseen downturn.

With the average vehicle staying on the road for more than 11 years, we will reach a point of saturation with only 200 million licensed drivers absorbing 60 million sales a year, new and used.

“Party on, Garth!” say the forecasters. Not so fast, Wayne.

We will continue to see sales increases in the near future, but not forever. Some analysts are saying we’ll see increased sales through 2017 … then flattening out in 2018 … then finally crashing in 2019, possibly to levels below the 14 million new-unit mark. Remember 2006 and 2007? If you were in the business then, you might remember that it crashed long before the recession officially hit at the end of 2008.

That isn’t even my biggest concern. Dealership, finance and OEM executives should consider some startling stats coming from Experian Automotive and Bankrate.com: The average term is now just a couple clicks below 70 months. Forty percent of all car loans are over 60 months. No surprise there, but 25% of all loans are between 73 and 96 months. We’re not selling cars, we’re performing weddings! These people are buried for more than six years before they can even think of trading.

Now, to compound the damage, banks and finance companies are overadvancing. I’m told it takes an average of more than $2,000 per loan to get the upside-down consumers out of their current car loans. That figure is unscientific but I am convinced it’s accurate based on conversations I have had with lending execs. Of course, that amplifies the negative equity on the new loan and extends the upside-down period even further. Infinity indeed.

With the proliferation of zero-down-payment promotions, the consumers have no skin in the game. Skyrocketing repossessions are sure to follow. Lenders are currently holding more than $900 billion in U.S. consumer vehicle loans. Leasing is a short-term remedy, but a surge in leasing only delays the escalating consequences. If it crashes, it will crash hard, and we will all be to blame.

The launch of the fully redesigned 2015 Ford Mustang brought relief to the author, who feared the OEM would attempt to use European styling to expand the American classic’s global appeal.
The launch of the fully redesigned 2015 Ford Mustang brought relief to the author, who feared the OEM would attempt to use European styling to expand the American classic’s global appeal.

The Beatings Will Stop When Morale Improves

Taking a page out of the playbook of some of the German manufacturers, it seems that Mazda is increasingly flogging their dealers over sales volume and J.D. Power surveys.
Yes, Mazda. You heard me right. Excuse me, but those executives should be kissing their dealers’ feet for repeatedly pulling their fat out of the fire and showing them increased numbers despite poor management and bad strategies. Of course, that’s just my personal opinion, based on the fact that I have eyes, ears and a brain.

I could be wrong, but remember, Mazda’s U.S. sales were on life support a couple years ago. They have demonstrated a remarkable resurgence until recently. Of course, the management team is convinced they are responsible. But Mazda dealers tell me their OEM’s incentive objectives are unrealistic. They can’t hit the numbers because even the higher-volume Mazda dealers can’t get the inventory. Let’s see, we’re going to give you a lofty objective and not enough cars to hit it, then blast you at dealer meetings to be sure you’re demotivated. At least that’s how I interpret what I am hearing. Who do they think they are, Volkswagen? … or maybe Nissan?

José Muñoz, Nissan’s North American chairman, appeared to be caught off-guard when the NADA warned Nissan dealers that they shouldn’t be pressured to give the OEM high scores on dealer surveys. 
José Muñoz, Nissan’s North American chairman, appeared to be caught off-guard when the NADA warned Nissan dealers that they shouldn’t be pressured to give the OEM high scores on dealer surveys. 

Caught Red-Handed

Nissan just reported another 19% increase in sales — that’s month over month and year over year. Nobody can dispute they’re on a roll, and Nissan dealers are making great money. They’ve got product and momentum and competent leadership.
But Nissan’s dealers tell me their OEM has a record of strong-arm tactics. I have written about this for years. They have an army of DOMs (dealer operations managers) who — so I’ve been told — have a thousand ways to retaliate against dealers who stray from the current program, whatever it happens to be.

Never fear, dear readers. The National Automobile Dealers Association is on the case. The NADA conducts a Dealer Attitude Survey twice a year, winter and summer. Participating dealers grade their manufacturers on attitude, conduct and policies. Apparently, NADA analysts found some reason to suspect that Nissan’s field representatives were pressuring dealers to give them high marks and make positive comments, most apparently in the Northeast.

In response, the association fired off a letter to Nissan dealers: “We want you to know that NADA considers any attempt to coerce you into giving responses that you don’t believe in is unacceptable,” the letter stated, in part.

This should come as no surprise. Nissan took a beating in the last round of surveys and they were not interested in losing the rematch. Months ago, José Muñoz, chairman of Nissan North America, revised the oppressive stair-step program that was the cause of many negative responses (Holy Mazda, Batman!) and he vowed to dramatically improve franchise/OEM relations to, in his words “… [make] our dealers happier and more profitable.”

I like Muñoz and I sincerely doubt any type of intimidation campaign was initiated at the corporate level. However, pressure begets pressure, and the culture was corrupted somewhere along the way. If dealers have been coerced or even intimidated into submitting undue praise, Muñoz needs to uncover it, own up to it and put a stop to it — permanently.

In response to the NADA’s bulletin, Nissan execs fired off a letter of their own: “We have cooperated fully with NADA during the survey process, and we understand that the organization will exclude any questionable surveys to ensure that the highest levels of integrity are maintained,” they wrote. “Nissan does not condone manipulation of the NADA survey, and we will take appropriate action against any party that is found to be interfering with this process.”

That last part is interesting, because I know, and they know — and I know they know that I know — the names of suspected parties who may have performed the aforementioned alleged intimidation, coercion or threats. Some of these names may actually be listed at the regional management level. We will know how much teeth was in Nissan’s statement if and when they take appropriate action.

Meanwhile, I would love to see the NADA dealer report cards on Volkswagen. How do they rank in the eyes of their dealers? I have always said Nissan and Volkswagen could use some relationship management improvement with their dealers. The OEMs, or at least certain executives, are working from a position of deeply engrained arrogance.
Stay tuned. I am digging deep on this trending topic. If you know something I don’t, let me know right away.

One more note regarding the factories: Have you seen the new Mustang? It was already long overdue for a redesign a couple years back, when Ford announced that it would be completed in time for the 2015-MY. At that time, there were rumblings that the OEM planned to “update” the styling to match the latest German and Italian designs and give the ’Stang more global appeal.

I was horrified. The Mustang is the last surviving American original. To try to make it look like a Maserati coupe on a budget would have been sacrilege. I am a realist. I know you can’t produce the same car forever. But I was not looking forward to this launch.
Well, the new Mustang is here, and I am impressed. Ford’s designers have created a beautiful, well-engineered car with enough performance and economy to satisfy the gearheads at home and abroad. They may very well have pulled off the impossible and I congratulate the OEM on this bold offering.

A properly run special finance department helps dealers sell more cars and help customers repair their credit, but still-common bad practices could derail subprime lending if dealers don’t act to stop them.
A properly run special finance department helps dealers sell more cars and help customers repair their credit, but still-common bad practices could derail subprime lending if dealers don’t act to stop them.

Swimming in the Shallow End

When I was in F&I, my specialty was getting the hard-to-get-bought deals on the books. I’ve often said the profits in F&I do not come from selling in the box. It’s all about hanging the paper. My most marketable skill was getting deals approved for people with sketchy credit with the least number of conditions and restrictions from the lenders. You see, there was no subprime lending then. You had to go through traditional sources.

Now, with the renewed proliferation of subprime financing in the car business, certain trends and practices are rearing their heads and threatening our entire industry.

Subprime is up nearly 150% since before the Great Recession put that segment in the tank five years ago. The difference is that it now accounts for more than 25% of all retail car sales. The recession created a large group of credit-challenged customers who used to be prime buyers.

Dealers with experience in special finance know that it should be a stepping-stone to prime credit, not a revolving door of high down payments and repossessions. Unfortunately, even today, I see dealers turning a blind eye toward obvious abuses. It is your responsibility to be sure your employees are doing the right thing.

When your F&I or special finance manager closes a subprime deal, it becomes part of a lending portfolio that is packaged for sale on Wall Street, in Chicago or at a number of smaller brokerages and exchanges. They attract wealthy investors looking for huge returns. An uptick in this activity has led some media sources, most notably The New York Times, to print panicky articles claiming another investment bubble is about to pop. Even if that were true, a subprime finance bubble would pale in comparison to the collapse of the housing market. But why fan the flames? 

By now, I’m sure everyone knows it is a federal crime to falsify a loan application to a bank or lender that is federally insured. In fact, if the stars align just right, it’s a felony. But I know dealership employees are playing fast and loose with these highly regulated transactions.

The most common cheat is to falsify the customer’s income to meet lender guidelines. Excuse me, but how is that a strategy? Units sold to customers who can’t afford them are almost always repossessed. That’s bad for you, the finance company and the customer, whose credit was bad enough already.

I am convinced that finance executives are winking just as hard as the dealership employees on some of these deals. If you’re looking for a true parallel to the housing crisis, look no further.

I personally love high profits. I want to knock a legitimate home run at every opportunity. The catch is there are some out-of-control practices that, once again, are drawing increased scrutiny to our business and can only inspire more regulation. The idea that we have to make a deal at any cost or tactic is hurting us. Sometimes we need to walk away when it doesn’t fit rather than stretch and cheat, knowing full well it’s going to come back on us.

Finally, we need to be conscious of the fact that subprime customers are paying a premium, and they deserve to at least have a reliable ride. Taking a high-dollar profit is one thing. Forcing them to drive the junk units you don’t want is unpardonable. We cannot and will not win if we keep poking the bear. Special finance is a necessary and valid profit center. If you want to hold onto yours, clean up your act.

Ram Tough

Most recently I’ve been writing, blogging and speaking about Chrysler’s Ram pickups and their phenomenal upsurge in sales, quality and market share. The star of the show is the Ram 1500 EcoDiesel. At 28 miles per gallon, it leads the category in fuel economy. They can’t produce enough of them. Demand is high and they sell for premium money.

With power, quality and capacity to spare, Ram trucks are testing the loyalty of Ford and General Motors drivers in increasing numbers. Chrysler claims that 60% of EcoDiesel sales are conquests from Ford and GM. Just yesterday, as I write these words, Chrysler announced a 10% production increase and added shifts. That’s a good start, but I bet they could sell 25% more if they could keep up with demand.

As 2014 draws nearer to a close, I am preparing to wind my schedule down by year’s end. And what a year it was! I will have traveled to more cities, dealerships and events in 2014 than in any year since I started my company in 1986.

One of the highlights has to be September’s Industry Summit, where I held a one-man, all-day Profit Masters seminar. We covered sales, finance, service and everything in between. The crowd, which included about 75 dealers and senior managers, a handful of curious industry execs and two reporters, was energetic, engaged and responsive. We got a lot of work done, answered some burning questions and shared a few laughs. It was gratifying to learn that, after nearly 40 years in the business, I’m still relevant and helping others in their careers.

This month brings the latest incarnation of my Atlanta Super Conference and December marks our 30th wedding anniversary. Deb and will celebrate with a Caribbean Cruise and then a trip to Rome. Of course, I’ll crank it right back up again in January. Every day I’m shufflin’.

Keep those emails and phone calls coming, and don’t forget to find me on Facebook and Twitter. Until next month, “To infinity and beyond!”

Jim Ziegler is president of Ziegler SuperSystems Inc. and one of the industry’s most recognizable experts, trainers and speakers. [email protected]

Comments

  1. 1. Kelly O'Neill [ November 17, 2014 @ 04:39PM ]

    Nicely done Jim as always! Happy Anniversary to you and Deb! hope your trips are awesome!

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