On-the-Point

Turn Out the Lights, the Party's Over

February 9, 2017

If you watched Monday Night Football back in the ’70s and ’80s, you know what happened whenever the outcome was inevitable, it was obvious which team had the game clinched, and there was no doubt as to who was going to win the game. That’s when Don Meredith would start singing “Turn out the lights, the party’s over.”

Well, sport fans, it’s official: Car sales are in decline, at least according to the consensus reached by the experts and analysts at the Detroit auto show’s press preview. We are at the top of the sales cycle, they said, the downhill turn of the rollercoaster. Kelley Blue Book’s Eric Ibara predicted you will sell 17.3 million units this year, coming off 17.5 million in 2016. Most analysts seem to be within a few decimal points of the same conclusion.

I don’t have all the staff, statistics or data as the experts, but I know the market will continue to decline until it catches up with saturation. I told you to prepare for the downcycle more than six months ago, when most industry forecasters were still saying “Party on, Garth!” Well, the party might not be over yet, but the lights won’t stay on forever.

Dr. G. Mustafa Mohatarem, chief economist for General Motors, predicted new-vehicle sales declines in the U.S. and Canada will be offset by gains in Mexico this year.
Dr. G. Mustafa Mohatarem, chief economist for General Motors, predicted new-vehicle sales declines in the U.S. and Canada will be offset by gains in Mexico this year.

Saturation Nation

As I said, most of the analysts agreed sales will remain flat or decline, but there are a few contrarians out there. They are actually predicting another record year. Just a guess, but I’d be willing to bet they’re factoring in the Donald Trump White House and the Republican Congress. The stock market was already reacting favorably with record gains even before he took office. Investors were clearly anticipating a more favorable business climate.

Riding the Trump train, UBS analyst Colin Langan is staking his reputation on a bold forecast. He predicted 17.8 million new units will be sold in 2017, about 2% more than last year. Hey, Colin, like the way you’re thinking. I wish it were true. But that ain’t gonna happen.

I am a huge Trump supporter and I fully expect the U.S. economy to see explosive growth and job creation on his watch. But saturation is saturation. Sales have grown every year since 2009. Now they’ll gradually decline. It won’t be overly dramatic.

Of course, General Motors can’t help themselves. I can always count on GM to react to hard facts with sleight-of-hand distraction. They didn’t let me down this time, either.

General Motors’ chief economist, Dr. G. Mustafa Mohatarem, predicts a record year for 2017 North American sales. He believes sales in Mexico will increase enough to offset the decline in the U.S. and Canada. Here’s a prediction for you: For the next year, GM executives will talk in terms of “North American” sales while everyone else is talking about U.S. sales.

Personally, I feel that’s a subtle distraction from the truth. Sales are declining and manufacturers have to stop dumping so many cars into fleet to artificially pump up their numbers.

The worst offender right now is Hyundai. Those of you who read my columns regularly have to be aware that I have always been that brand’s biggest cheerleader. I was advising dealers to buy Hyundai franchises 15 years ago, when their vehicles were still considered second-rate and you’d be lucky to find a bank that would even finance them. At the time, I was banking on the executive magic of Finbarr O’Neill, who I still consider to be one of the greatest executives that ever graced our industry.

Ziegler believes a cycle of overproduction and fleet dumping has created a glut of late-model used vehicles such as the 2015 Hyundai Sonata, which currently books out lower than a comparable Kia Optima.
Ziegler believes a cycle of overproduction and fleet dumping has created a glut of late-model used vehicles such as the 2015 Hyundai Sonata, which currently books out lower than a comparable Kia Optima.

Fast forward to December, when Hyundai’s North American office summarily fired Dave Zuchowski for failing to meet internal sales objectives. I’ve always loved the product and, for the most part, admired their U.S. executives. But the global headquarters remains in South Korea, and that group is nothing short of delusional.

How do I know? Because they have mistreated, disrespected and terminated a parade of talented and effective executives. If Zuchowski can’t stick, I don’t know who can.

Hyundai has been guilty of mass overproduction. They built more than the market could absorb. And just like GM, Fiat Chrysler and others, they dumped a high volume into fleet and rental car service. Now those puppies are coming home and flooding the market.

A dealership general manager recently call me to tell me he was quitting. He said his entire new-car inventory was already punched because the manufacturer had put pressure on the dealership to declare new cars “sold.” So he was forced to sell brand-new units, already titled, as certified pre-owned.

It’s no wonder a two-year-old Kia Optima has a substantial book resale value over the comparable Hyundai Sonata, even though they are basically the same car. Kia does not fleet their cars the way Hyundai does. So the glut of late-model Sonatas is dragging the resale value down and hurting new sales as well.

There was no way Zuchowski could meet or beat Hyundai’s sales objectives, which I believe were somewhere around 65,000 units on the Sonata alone. So they just dumped excess product into the fleets. He was realistic and that was his downfall. The South Koreans have burned through so many great managers, you have to wonder who in the hell would want that job.

Meanwhile, their plants are working around the clock, above full capacity, spitting out cars at a record pace. Dealers are telling me that Hyundai quality is rapidly going to hell in a handbasket. The problem is manifesting in the engines, which the OEM manufacturers themselves. One dealer told me he had 14 units in his shop waiting for full engine replacements.

It could be worse. The replacement engines could fail too. In fact, that’s just what happened to another Hyundai dealer I know. He told me the manufacturer quietly bought those cars back.

President Donald Trump scored a pre-inauguration victory when he appeared to force Bill Ford to abandon plans for increased manufacturing in Mexico, but the facts around their conversation are shrouded in spin.
President Donald Trump scored a pre-inauguration victory when he appeared to force Bill Ford to abandon plans for increased manufacturing in Mexico, but the facts around their conversation are shrouded in spin.

Did Ford Really Fold to the Donald?

The answer is simple: yes and no. Regardless of the truth, it is a huge public relations coup for both sides. Ford made a good business decision and Trump got a win before he even set foot in the White House. I understand they plan to collaborate on a book: “Fifty Shades of Spin.”

I’m a Ford driver and I believe that company is headed in the right direction. But to call a panic move a good business decision in hindsight is, to me, just a big bucket of bullcrap. Let’s face it: Ford, after declaring they wouldn’t fold on this issue, did so at the last minute. When Trump won the election, the spotlight was on.

Now, remember this, Donald had a conversation with Bill Ford. Nobody knows what was discussed, but shortly after, Ford reversed course and decided to scrap their plans for a $1.6 billion project in Mexico and reinvest $700 million in their Flat Rock plants in Michigan.

That doesn’t mean they saved $900 million. Backing out of the Mexico deal also entails buying out supplier contracts and other deals Ford had made there at considerable expense. They can’t just walk away without paying substantial penalties.

Ford’s U.S. sales were off 13% in 2016 and small-car sales are still declining. That makes keeping the production here and converting the plants a sound business decision. Ford’s president, Mark Fields, was quick to point that out in several news conferences.

That all sounds good, but don’t forget that Ford looked pretty bad when Trump threw them into the spotlight and accused them of trying to export jobs. They already knew the statistics and they were going to build the Mexican plant anyway. The statistics didn’t make them suddenly change their mind, nor did Trump’s threats of a 35% tariff to bring those cars home for sale.

I’m not exactly sure what concessions Trump made in his conversation with Ford — or what he said in private conversations with the CEO of Carrier Corp., for that matter. All I know is that it worked. So whether or not you believe Trump turned around Ford’s plan to build that plant in Mexico or not, whatever the case, it worked.

Now, just a few weeks ago, the Donald threatened Toyota with a “border tax” if they go through with a plan to build Corollas south of the border and sell them here. Honda and Nissan already have two plants in Mexico. GM and BMW are building plants there. Who will be President Trump’s next victim?

Mexican plants produced more than 3 million cars last year. About 2.5 million were sold outside Mexico, 77% of which were exported to the United States.

Meanwhile, the Mexican investors, speculators and suppliers who bought up land around the site of the canceled Ford plant are panicking and crying foul. They are saying it’s a major disruption to their economy. Sorry, fellas! Just imagine how upset they’ll be when they find out they have to pay for the wall.

Executives Behind Bars

I’ve said it repeatedly: When manufacturers commit crimes, their executives should be prosecuted and sentenced to hard time. Now it seems my dreams may have come true. Last month, the FBI arrested a Volkswagen executive for crimes committed during the ongoing shameful emissions scandal. Agents apprehended Oliver Schmidt, the former head of VW’s U.S. regulatory compliance office. They picked him up at a Florida airport as he was apparently on his way out of the country.

Schmidt was one of six VW executives charged in U.S. District Court in Detroit. He was the only one arrested because the other five have already returned to Germany. There’s a Fiat’s chance in hell we’ll be able to extradite them.

Here’s the cool part: Schmidt will be held without bail as a flight risk (duh) until his trial. He’s facing a possible life sentence of 169 years in prison if convicted of all 11 felony counts of conspiracy to defraud the federal government and U.S. consumers.

It’s about time. If you’ll recall, I wrote an article last year where I expressed an opinion that the executives behind the ignition scandal at GM and the exploding airbags at Takata knowingly concealed information that could have prevented deaths caused by their defective parts. I believe they committed premeditated murder and should never have skated free.

Well, you can turn off the lights at Takata. The party is over. A federal grand jury has also indicted three former Takata executives on charges related to 16 deaths and multiple injuries. They haven’t been accused of murder or assault. The charges technically are for wire fraud and conspiracy for allegedly convincing automakers to buy faulty parts.

The defendants are not Americans, don’t live here, and are not in custody. They probably never will be. And that’s a shame, because even though the company has paid $1 billion in penalties, justice won’t be served until someone is held responsible for those deaths.

You may have heard VW has been effectively thrown out of South Korea. After suspending sales of Volkswagens, they arrested, charged and sentenced a Volkswagen executive working there to 18 months in prison. The charges were for facilitating and fabricating fake documents on emissions and noise levels of VW products sold in violation of South Korean emissions laws.

They have also filed criminal charges against other VW executives, including Johannes Thammer, managing director of Audi Volkswagen Korea. You have to assume he is already back home in the fatherland. Anyone want to bet on the odds of him visiting South Korea again soon?

Officials there also raided VW’s corporate offices and seized documents. Shortly thereafter, they added a fine of $31 million for false advertising to the previous fine of $14.9 million. In the U.S., the scandal has already cost Volkswagen about $23 billion. The total penalty might go as high as $50 billion worldwide before all is said and done.

I have great sympathy for the customers and the dealers who have genuinely suffered and will never be made whole. But I have no sympathy for the executives who arrogantly deceived and criminally engineered devices to get around the laws and cheat. People who do criminal things should pay criminal penalties.

A new subscription service allows New Yorkers to drive any Cadillac they want for $1,500 a month — not including parking.
A new subscription service allows New Yorkers to drive any Cadillac they want for $1,500 a month — not including parking.

Didn’t We Arrive in a Limo?

Debbie and I just finished up Internet Battle Plan 21 in Atlanta. It was spectacular, thank you for asking! We stayed at the hotel in downtown Atlanta and took several dealer clients out for dinner offsite. Both nights we dined out, I knew we’d be drinking, so we took Uber from the hotel to the restaurant and back.

I resisted Uber for a long time. I always preferred limos and taxis. But I downloaded the app and tried the service, and I quickly learned it’s an efficient way to get a quick ride in a clean car. And it’s a hell of a lot less expensive than any other livery.

So you can’t accuse me of being afraid of new technology disrupting old paradigms and blowing up the way we used to do things. In this industry, you can’t be. But I am scratching my head at Cadillac’s latest foray into the marketing schemes of its president, Johan de Nysschen.

Disclaimer: I don’t like this guy. I think he’s another arrogant clueless manufacturer executive taking his company — and his dealers — in the wrong direction. He’s trying to move Cadillac upstream and sacrificing most of its existing customer base. That’s my opinion and perception of him and his marketing ability based on the fact I can comprehend common sense beyond a fourth-grade level. Of course, that’s just my opinion. I might be wrong.

Now, Cadillac is offering a subscription service for $1,500 a month in New York City. Starting Feb. 1, drivers in the metropolitan New York area will have unlimited use of any Cadillac car or SUV for a flat monthly fee. Let me explain how they will say it will work and why I’m skeptical.

They’re calling this program “The Book.” The idea is that consumers will like the program because they can drive any Cadillac they want and switch cars at whim. You want an Escalade? Just pick up your smartphone, hit the app, and a concierge will deliver it to you. If, after a week, you want to switch to a CT6 or even a V-Series performance car, you got it. You don’t have to pay for insurance, title or registration. You don’t even have to sign a lease. You can switch cars up to 18 times a year and there are no mileage restrictions.

Sounds great, right?

Here’s the problem. I have friends in New York. They take cabs, limos, subways and Uber. Most of them don’t even own a car and wouldn’t drive it in the city if they did. It’s not because they’ve been waiting for a $1,500 subscription service to come along. They just don’t have anywhere to park. You might as well double that price, because you’re going to have to rent a space to stash that Cadillac you don’t own.

If I were in charge of this program, New York would be the last place I would launch it. But I’m not, and Johan is riding high at the moment. His division is up 11% worldwide, thanks mostly to a 46% increase in sales in China, which accounts for 26% of Cadillac’s global volume. (U.S. sales declined by 3%.)

Johan modeled his service on pilot programs his former employer, Audi, conducted in Berlin and San Francisco in 2014. How successful were they? You will have to tell me. I honestly do not know. But the fact we haven’t heard much about them is probably telling.

We will have to let history be the ultimate judge. Meanwhile, you Cadillac dealers will just have to wait and see. If you have a dog in the fight, or just an opinion on the matter, let me know what you think. The lights are still on at the Ziegler place, so let’s party on while we can.

Comments

  1. 1. Joe Henry [ February 13, 2017 @ 01:35PM ]

    Jim, just as a note, I went on Cadillac's website and registered for the $1500 go and blow information 30+ days ago. Never heard a word from them or even from a dealer (which I would think Caddy would at least t.o. my contact info to a dealer). So much for lead follow-up.

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