Everybody thinks they are an auto industry expert.

by Jared Hamilton on Feb 23, 2009

Sorry, but I have to RANT a bit. I just read an article by a VC who totally misunderstands the issues our industry is facing. As usual, I experienced the run of emotions when I read the post, but ended up somewhat fired up. People just dont get it.

I do typically start out intrigued when I see successful business people criticize our industry and offer solutions. I believe we would be wise to look for outside influence in these times of reinvention. Then I chuckle a bit because these brilliant people are often in left field as to our industry's struggles. This particular article argues the wrong reasons why Steve jobs could be the savior of the industry. I contemplate the proposed solutions, fear sets in, then anger becasue this type of ignorance could really do some great damage. There is a good chance congressional leaders and the Obama task force think the same way, or be influenced by these other wise successful people, but in the end if they greatly misunderstand our industry it increases our odds of having a lunatic driver steering the re-engineering of our industry.

Our domestic industry is in a short term slump that people are mistaking as the real pain of the industry. We are in an economic downturn, (yes an unprecedented one) and thus sales are lower and capital is tighter than usual. However lower sales numbers and capital availability are problems not unique to the Detroit 3, they are relative across the board for domestic and import companies. That argument is a short term problem we face, but not the underlying cause of our frailty. I believe today's sales numbers are an acute pain disguising the chronic business model and cost structure problems we have. Most often people argue that the domestics don't build cars that people want to buy; this is a horribly short sighted argument. If people didnt want to by the domestic products, why do they sell? The question should be why can Honda be profitable and not GM when GM outsells Honda hands down? The answer is simple. Honda's cost structures and business models are in line with their business strategy. If the nations sales numbers would climb back up to 15 or 16 million today the domestics would still be in hot water because they are not competitive for the long run.

To alter their cost structures they will have to:

a) Renegotiate with the UAW and reduce/eliminate legacy costs and put the current costs in line with the market. They are carrying too much weight and it looks like negotiations are not moving along too well meaning CH 11 is very likely on the horizon.

b) There are too many dealers. GM and Toyota sell very similar volumes of cars. However GM does it with about 6500 dealers, Toyota does it with less than 1500 dealers. It costs money to service those extra 5000 dealerships, especially considering they do so with duplicate products.

Our industry is seriously bloated with overcapacity, the invisible hand of the free markets will trim that. The situation we dealers face is not pretty. I come from a long family legacy of car dealers so it hurts me at the core to say it, but the facts speak for themselves.The domestic auto industry is antiquated and needs to take two steps back so it can take three steps forward. It will do so with less dealers.

The manufacturers DON'T need all new product engineering. They need new manufacturing and distribution models. That is how they will reinvent so that we can stay ahead. Our industry has some breaking down to do so that we can rebuild.

Many dealerships and dealership employees are fighting for survival in a very literal sense. Dont be a casuality of the restructuring. Each dealer should have his store in order. Each professional should be getting their house in order. You need to be learning new disciplines, honing old skills, and networking all you can. Our industry will NOT go away, but it will change and contract.

Those with the innovative skills and the connectivity to put them to work have a great opportunity as the industry evolves through these exciting, yet scary times. Those resting on their laurels may fall victim to the restructuring of our industry. I hope the Govt can steer the restructuring ship so as to avoid a huge domino effect of collapsing companies. Regardless of how it goes down, work to get ahead of the game now and you will be fine in the long run.

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Comments

by David Book 3 years ago:

I guess Todd Dagres, Founder and General Partner, Spark Capital could care less about Ford? This article is entertaining, interesting and does offer some valid arguments. But, it's so far from the solution it's ridiculous.

There have been a few posts on DrivingSales recently that have promoted Steve Jobs. I have posted some. Mr. Jobs is a creative leader that could probably lend some assistance to the industry. But.. assistance and design and "cool" are only a few things. Our industry needs WAY more than cool.

I grew up in the service station business. Back when that business had thousands and thousands of independent dealers selling the companies fuel and the dealers fan-belts. Largely, dealer groups are gone. Mostly, company outlets remain (places to continue to sell their fuel but no fan-belts). Why did that industry change?

Lots of reasons, but, mostly, competition! Are there any folks left that think our industry can survive with the current distribution method? I mean really, thousands and thousands of dealers (I call them middle men). It would take some serious nerve to stand up and say "dealers won't last" and I don't have enough nerve. I'm not making that suggestion. But, I am suggesting that our industry faces a huge change in the way it moves it products. I don't think anyone has figured this out yet. Don't rule out - no dealers, no auto-malls and no salespeople.

David

by Jared Hamilton 3 years ago:

yea, I think we could really benifit from the Steve Job type influence, no doubt. I just thought that the arguments were short sighted. Facts are the Domestic lose money to build and sell cars. (Is it any wonder they have focused so heavily on trucks and suvs?) If you build sexy cars (no doubt steve would pull this off) but didnt restructure the costs the companies would still be in hot water.

I argued in the comments on techcruch that just focusing on the product would be like taking aspirin for cancer. It may numb the pain but not cure the disease.

In the end i dont think dealerships are going away. At least not now. (Decades and decades down the line... its anyone's guess) But certainly the ranks will thin out some and only the most nimble will survive. Those who do survive will have a much more successful future ahead in our industry. When all this goes down the car biz will still be a great industry to be in, but being ignorant to the changes that are coming our way wont stop them from affecting us. I think the best thing we can do is be honest about the worst case scenario and prepare by honing our skills and networking inside the industry.

Being well skilled and well connected is the best form of career security one could have. :-)

by Stan Sher 3 years ago:

It is a funny but also sad topic for me. I am amazed by some people that have never worked out on the front lines before but they go out and try to sell to dealers services or consulting. As an account manager for RedNumbat, the first thing that I do when I talk to an internet director, GM, or even Dealer Principle is my credentials and my experience. I tell them straight up that they probably meet all different kinds of people and it is best to have an intelligent discussion with someone who has been in the same shoes before. I find that once I establish myself and explain myself, these people feel comfortable and will spend the time to listen to me. When I was a manager in a dealership if someone came to me who never sold a car or even ran a department came to me talking car dealer lingo I was so inclined to throw them out. I just have no time to waste especially with phonies. If you are going to tell me how your product will work and help my business increase the bottom line you better be able to back it up with your experiences in the dealership. Too many vendors or factories hire people that never sold a car a day in their life, they teach them about the dealership environment in two days as part of a training curriculum. I am not going to lie, I am friends with some of these people and they are great people, nothing bad about them. However, if you want to work in this industry you need to have a track record regardless of the reputation that you may have at your old stores. There are people that are technology professionals that are computer people and they work with creating CRM/ILM, social networking, or other innovations. They are not car people and they should not be teaching and explaining best practices but they should talk about what their product can do to increase productivity of employees. There are exceptions to every rule.

by Mark Dubis 3 years ago:

Jared, you raise some very good points, and Dave Book brings up the point I always stress to those in my life, that change is the only constant in life. You initiate, adapt and accept change or you die! It’s pretty simple. And what’s the thing we fear the most . . . change. After having near fatal heart attacks patients were told they needed to make some lifestyle and dietary changes. 90% of those patients chose not to change anything. Any idea’s what’s in store for them?

The people at the Detroit Three are not dumb, they saw the issues coming years ago, but recognized it would be a Herculean task to make the kinds of changes necessary to survive in the long term. No one wanted to buck the unions. No one wanted to buck the state franchise laws. No one wanted to figure out how to build small, fun to drive vehicles that were profitable to sell.

Now due to greed and stupidity in our lending practices, incompetent and crooked politicians in Washington, along with government and educational institutions that would rather treat the symptoms of the disease, rather than implement the cure we will be forced to face a few very hard years of adjustment to our personal and business lives. The only remaining question is do any of the players involved have the leadership and fortitude to do whatever it takes to get us back on track? If we are looking to Washington DC for answers, we are doomed.

by Jon Groenig 3 years ago:

Mark, tell us how you really feel:)

by Andrew Gross 3 years ago:

On the matter of what's needed now to unclog inventories of existing new vehicles on-ground at dealerships and factory lots in the US set to put people back to work at US Company owned factories in the US (and elsewhere) ASAP, I propose:

1. Offer direct federal access to funds to franchised new vehicle dealers for the purpose of accelerating loans for qualified consumers and fleet operators.

Franchised new vehicle dealerships sales actualization requirements must also be taken into account in this matter as they are an integral part of the new vehicle sales "food chain."

If traditional funding sources don't want to, or find they simply can't sufficiently underwrite this business, let's seek out and provide motivated lenders who would then be provided access to special funds set aside by the Fed under special circumstances or rules established for this purpose.

2. Accelerate Special Offers for Fleet Operators to cycle their vehicles

This would include all private as well as public fleets not as yet contemplated by the present plan (i.e., non- Federal Fleet vehicles), to ensure fleets replace their vehicles as they would normally cycle them.

These offers should seek to balance alleviating inventories of existing new vehicles on-ground outside auto manufacturer factories and their franchised dealers in the US (and elsewhere), while phasing in offers for more fuel efficient vehicles as the existing inventories of new vehicles are more rationalized. The offers could include everything from accelerated depreciation, cash incentives to guaranteed residual values.

3. Auto Manufacturer and Parts Supplier Shareholders' Guaranteed Value Plan

This proposal would reward long term stockholders of companies who pass similar, so-called stress tests now planned for the banking sector. For this purpose, "long term stockholders" could be defined as those who retain the stock for an agreed-to period of time.

The plan would contemplate developing a formula which would guarantee a certain "floor price" for qualified stock.

The benefits of such a plan would include taking a great deal of uncertainty out of the value of companies who remain in this space by virtue of a larger group of shareholders who, in effect, have been encouraged through this guarantee to hold onto their stock. These companies, in turn, would benefit from access to funds from the stock purchases as well as other financial benefits associated with increased stability.

4. National US Auto Industry "Super Sale"

Designate a short, specific time period where consumers would benefit from the acquisition of a new vehicle through any number of offerings (i.e., large cash incentives, pre-paid maintenance, extended warranties, accelerated tax incentives beyond those passed in the stimulus bill, etc.) all set to, again, unclog existing inventories and get people back to work.

by Jared Hamilton 3 years ago:

Amen Mark! Well said.

Andy - I love the thinking but im not sure price incentives are the best. I like the idea of accelerated depreciation, tax incentives and some of the other creative incentives you brought up. Those could and will help in a good way and are smart concepts. Cash incentives and further discounting would only further erode the brand value of these already sinking brands creating a fire sale atmosphere. Any cuts in pricing needs to be long term to correct the inflated prices in the market- but the short term stuff makes me nervous.

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Everybody thinks they are an auto industry expert.