On-the-Point

Join the Battle of Jericho

The Alpha Dawg sounds a warning as factory incentives, an off-lease tidal wave, and self-driving cars bring the walls of the auto retail industry a-tumblin’ down.

June 1, 2017

Little Jimmy Ziegler was only 7 years old, but I still remember it vividly, as if it were only yesterday. It was Grace Lutheran Church in Jacksonville, Fla. We were performing a reenactment of the biblical story of Joshua at the Battle of Jericho for the entire adult congregation. We were dressed in robes and head dressings made of towels. Our parents thought we were cute and there were a lot of flashbulbs going off in their Kodak Brownie cameras. I was too young to be embarrassed. I remember thinking, “This is so cool!”

Our performance went off without a hitch. We marched around the “city” made out of a packing crate seven times, singing and blowing our plastic horns. “Joshua fought the battle of Jericho … Jericho … Jericho! Joshua fought the battle of Jericho, and the walls came tumblin’ down!” After seven times around, we stopped walking, stopped singing, and started yelling. Someone offstage pulled a string and the cardboard walls of Jericho came tumblin’ down.

Smiling as I write these words, I checked YouTube and found a video of a bunch of modern-day children marching around a cardboard city of Jericho. Sixty-three years later, they are still singing that same old song and blowing their plastic horns.

What made me travel back through time and dredge up that ancient memory of a really forgettable childhood moment? It was that line in the song when we all stopped and sang, “and the walls came tumblin’ down.” I’ve been researching this article for hours and, frankly, all the current news coming out of the car business is downright depressing.

“See you in 10 years!” Ziegler fears extended loan terms are keeping customers in new cars for too long, contributing to an oversaturated market.
“See you in 10 years!” Ziegler fears extended loan terms are keeping customers in new cars for too long, contributing to an oversaturated market.

The One-Two Punch

For months, perhaps a year now, I’ve been screaming that we’re falling back into the abyss. I wrote about it, blogged about it, and spoke about it frequently, often to no avail. This runaway train was speeding toward disaster.

The market is approaching total saturation. Customers are buried in cars they can no longer trade out of with terms that will keep them buried for years to come. And the manufacturers continue to flood the market with cars there are no buyers for.

We’ve all stood by and watched them travel down the same path of increasing subsidies, cheap leases and escalating rebates and incentives. They have stranded an increasing supply of unsold cars on dealers’ lots nationwide. This has led to the largest glut of unsold inventory since 2008.

General Motors leads the pack in irresponsibly flooding the market with excess inventory. GM has led the market with a 17% share year-to-date, but at what price? As they try to sustain the unsustainable, they’ve resorted to higher fleet sales and cheap leases to drive sales with incentives that are now the highest since before the Great Recession.

Now those puppies are coming home and they’re trying to find a way to sell them. They have propped up the market for the short term with a squishy foundation. As predicted, we have arrived at the reckoning.

I recently read an article from Reuters that echoed pieces I wrote four and five months ago. Between now and 2019, they’re saying an additional 12 million late-model, low-mileage, off-lease cars will be dumped into the market.

Of course, we can expect that to further destroy used-car values. The prevailing wisdom among those who are suddenly waking up is that used-car prices will drop dramatically. The excess of cheap, quality units will have an adverse effect on new-car sales as well. This will inevitably cause the manufacturers to raise incentives even higher until the walls finally come tumblin’ down.

This glut is going to hit our already oversaturated industry like a tsunami. It’s the little guys who will suffer the most — the small, independent, family-owned dealerships. Look for the big players, the publicly owned dealerships, to scoop up huge numbers of these destressed units and aggressively market them against new cars.

Currently, in the United States, there are 253 million cars registered to just slightly more than 200 million licensed drivers. The average age of cars on the road is more than 11 years. We’ve sold around 17.6 million new cars annually for the last six years, while 40 to 50 million used cars have changed hands each year.

Even the manufacturers are now admitting this is not sustainable.

In May, New York Gov. Andrew Cuomo (center) announced the state would begin accepting applications from companies wishing to test self-driving cars on public roads. The author says political support for autonomous technology could ultimately lead to a ban on manually operated vehicles. Photo courtesy Gov. Andrew M. Cuomo
In May, New York Gov. Andrew Cuomo (center) announced the state would begin accepting applications from companies wishing to test self-driving cars on public roads. The author says political support for autonomous technology could ultimately lead to a ban on manually operated vehicles. Photo courtesy Gov. Andrew M. Cuomo

The Trillion-Dollar Hoax

In researching this month’s article, whatever direction I turned, I hit a brick wall. In three of four sources I usually rely upon, trends and events were all about one subject: autonomous vehicles. It’s as if suddenly the only newsworthy thing in our industry is who’s doing what with self-driving cars, what vendors and technology companies have teamed up with which manufacturer, and what technological advancements they’re predicting for the future.

New York Gov. Andrew Cuomo just announced his state is now allowing autonomous cars to be tested on public streets. It’s as if there is no page to turn or no place to click anywhere in our business that isn’t all about the autonomous car frenzy.

So, once again, I have to ask the question: “Why are so many people throwing billions of dollars at autonomous cars?”

There is no public mandate or outcry for self-driving cars. As a matter of fact, every survey I’ve seen says the public is afraid of them. Most people — by a wide margin — do not want autonomous cars and probably would not buy them unless they were forced to.

That’s when it struck me! I realized exactly what this is all about. I read an article that talked about “how we are going to have to educate the public and ‘sell people’ on the autonomous car concept.”

In other words, the autonomous car advocates are not operating under the illusion that the public wants these cars. They know they are going to have to sell us on why we need them.

The manufacturers have run out of customers and they know it. North America is saturated with cars. These guys (and gals) have officially run out of tricks. But what if they could make every car in the world obsolete? What if they could begin replacing and retiring the 253 million units on the road in this country alone?

Phase One: Start telling people they’re doing it all in the name of public safety. Phase Two: Convince some politician (probably from California) to put forward legislation requiring that every one of those dangerous, obsolete, manually operated cars be outlawed and scrapped. Sound a little too far-fetched? Give it 10 years, and remember who predicted it.

Why do you think Google and Apple and all of the technology companies are aboard? You can’t turn a page or click a link without reading about a new partnership of tech and manufacturing. If — notice I didn’t say “when” — this comes to pass, there will be trillions of dollars of new infrastructure required to support it. There is going to be a huge burden on the taxpayers to build smart roads with smart traffic signals to communicate with the autonomous cars and control traffic and destinations.

The tech companies are looking beyond the cars to building the support technology required to manage a huge fleet of millions of these cars on the roads all at once. Hell, just a few Teslas on autopilot already killed and injured their drivers. Now, picture coordinating millions of these cars all at the same time.

What the manufacturers and the tech companies know for a fact is that autonomous and operator-driven cars cannot coexist on the highways. So the secret plot is to eventually make traditional cars obsolete, and then illegal. That 700-horsepower Dodge Challenger Hellcat will be a museum piece if these clowns have their way.

It’s sort of like when these crooked companies say they are doing something to enhance “the customer experience,” when in reality it is a smokescreen to siphon more money out of the business. When I hear a vendor or a manufacturer start talking about “customer experience” I know beyond a shadow of a doubt that somebody is about to get screwed, and it’s probably the dealer. The same principle applies when these people start telling us about the “safety” of the new autonomous cars.

Here we are marching around outside of Jericho blowing our little plastic horns, and you can already see the walls starting to shake.

One sure sign of the car business apocalypse is a disturbing report from Bloomberg that loan fraud is running rampant. Lenders are already writing off more than $6 billion in bogus loans annually. It’s called powerbooking: misrepresenting the customer’s income or misstating the equipment on the credit application. More than 1% of all car loans today originated from bogus, fraudulent and doctored applications. That’s more than what crashed the mortgage industry in 2008. 

I’m going to go there now. Some of you are about to get upset with what I am about to write here: It’s not the customer’s fault.

You read that right. It’s not your customers who are falsifying these credit applications. It’s your salespeople and managers. Regardless of exposure, and the fact that it is now a federal crime, it has become epidemic in dealerships everywhere.

I am seeing some dealerships routinely jack up the credit apps to get deals past the lenders and approved. I’m talking about adding income they don’t make and jobs they don’t really have.

Putting bogus information on a credit application has become a sophisticated art form in too many dealerships. We have people who are experts in serving up misinformation to the banks and finance companies in a form that will actually get by their credit checks. The pressure on the sales department is so high, and today’s customers are so stretched, that fraudulent applications are approaching critical mass.

Fake News Alert

The headline said 70% of AutoNation sales associates opted for the new “millennial-­friendly” pay plan. Now, we have our own automotive version of fake news. I asked around, and several of my friends gave me my own copy. It’s a combination of tenure, on-the-job rewards, service contract spiffs, CSI spiffs, a base salary, and an escalating series of mini-deal rewards per unit sale. Having studied it carefully, I have come to the opinion that this pay plan really, really sucks.

First of all, the copy I have is for a highline AutoNation dealership. I do not know if they have the same plan for every dealership or region. It starts out with a base salary that resembles minimum wage. Then the mini-deals kick in, starting at $100 per unit sold for the first nine units. It escalates per unit in $50 increments, up to $500 a unit on the 25th car sold. People who have been with the dealership five years or more get an additional $50 a car, and there is another $50 a car if they get a service contract on that unit. They can also receive another $50 if the customer returns an “elite” CSI report.

So let’s do the math. A salesperson who sells 15 units a month on this pay plan will earn $2,100, plus minimum wage. If they have been on the job for five years, and if they sell the service contract and luck their way into a sparkling CSI survey on every single unit, they will make somewhere around $4,200.

Anyone posting 15 units a month would earn somewhere around $10,000 in most normal dealerships with normal pay plans. Of course, most car salespeople average closer to eight units a month. But exceptional salespeople will settle for nothing less than 25. How would they fare under AutoNation’s new plan?

I ran the math out and I tried to be fair, giving the benefit to the AutoNation plan every time I was unsure. It appears to me that, if a salesperson with more than five years on the job had a 25-unit month, they would make, by my estimates — including minimum wage and all bonuses — $11,097.

I can tell you from experience that, first of all, maybe one out of 100 is going to hit that level. Secondly, 25 units hitting all bonus levels in most normal dealerships would pay somewhere north of $20,000 in most cases, on most pay plans. In my opinion, this pay plan is a big, stinking pile of poo.

The article I read presented it as if it was something that made the millennials ecstatic because it had a lot of great time off in the schedule. If 70% of the employees chose this plan over traditional commissions so they could get time off, I shudder to envision the quality of the sales force.

The author says Wall Street investors have been kind to Carvana, but analysts have been flat-out mean since the online retailer’s underwhelming IPO. 
The author says Wall Street investors have been kind to Carvana, but analysts have been flat-out mean since the online retailer’s underwhelming IPO. 

That Did Suck

OK, let’s be clear before you read this: I don’t like Carvana. I don’t like the company. I don’t like the concept. I don’t like the people. I don’t like their ancestors. I don’t like their neighbors. I don’t even like their pets.

Their entire business model is based on bashing car people and telling consumers how we “suck.” (Their words, not mine.) They set up this goofy vending machine concept and they run commercials with a cast of dancing morons strutting around like idiots and singing “That didn’t suck!” Their mission is to bash dealers and car people. The misguided Carvana business model is aimed at millennials, who aren’t showing up for their party in massive numbers.

They had their big debut on Wall Street and their IPO really sucked. Almost immediately after being released, Carvana stock dropped 10%. Since then, it has bounced up and down, but no fireworks. It didn’t shoot off the top of the graph as these arrogant disruptors envisioned. Now that does suck.

The analysts have not been kind to Carvana. Just read what the Wall Street insiders are saying about these alleged clowns. According to Forbes, Carvana lost $93.1 million in 2016 on $365.1 million in revenue. One of my favorite articles had the headline, “Carvana: Cash Burn and Lack of Operating Leverage Rightfully Scare Investors.”

There are one-liners all over the internet about Carvana bleeding money out of every artery as they attempt to disrupt the car business. They deserve every rotten insult the analysts are slinging.

According to The Wall Street Journal, Carvana reported $153 million in cumulative losses since it was founded in 2012. They keep repeating the same tired, worn-out refrain: “We’re giving the customers what they want.” Well, excuse me, I’m just a high school graduate from the Westside of Jacksonville, but I can tell you that’s a load. They’ve racked up $153 million in losses and they went to Wall Street to get more.

You know why this is failing? The answer is math. Carvana will be a faded memory as they drift further into obscurity as another footnote in business history.

Of course, Carvana’s executives blamed their piss-poor launch on the car business. The company’s IPO comes amid mounting evidence that the six-year recovery in the U.S. auto industry may be losing steam. There’s something to be said about a company that triples their revenues while tripling their losses. Groucho Marx once said, “If we don’t sell too many of these, we might break even.”

Until next time, find me on Facebook and keep those emails and phone calls coming. You can sing along with me: “Joshua fought the battle of Jericho, and the walls came tumblin’ down!”

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