J. D. Power recently released the results of their study on owner retention. According to the study Mercedes Benz showed a significant increase in owner loyalty from 2008 at 67%, the highest score since J. D. Power has been measuring retention, and finished in the top spot. Honda, Toyota, Subaru, and Lexus complete the top 5. As I read the results of this study I thought of conversations I’ve had recently with Dealers who own multiple franchises including both Imports and Domestics. Some of these Dealers have had Chrysler and/or GM franchises terminated or have been told their franchise agreements will not be renewed.
It seems there are quite a few lessees bringing their GM or Chrysler vehicles back at termination of a lease that was put on the books 36 - 48 months ago through GMAC or Chrysler Credit. The way this is supposed to work is the lessee returns to the Dealer to turn in their previous lease vehicle and drives away in a same brand comparable vehicle, classic owner retention. Because of GMAC’s many issues, including having to service both Chrysler and GM dealers and their new commitment to “realistic” residuals, lessees who might prefer to stay in a GM or Chrysler vehicle are faced with a radical increase in monthly lease payment. This “lease payment shock” situation has not been happening at Dealers of the top 5 Manufacturers on the J. D. Power retention list, as their OEM captive finance arms have continued to provide consistent lease support of their products.
So what is a returning lease customer to do when faced with a multi hundred dollar increase in their monthly lease payment? Some consumers might just leave with a bad taste in their mouth and go to another Manufacturer’s dealership. At a multi franchise Dealer, someone returning a Suburban, Yukon, Escalade, etc. might find happiness in a new Mercedes Benz, BMW, or Audi SUV at a dealership of the same owner. Someone returning a Cadillac STS might be thrilled to lease a new Lincoln MKS or a new Benz E Class. In my years of watching the Dealer leasing business I have often encountered these “lease payment shock” situations with domestics OEMs but rarely with the Japanese and European imports. It’s easy to see where GM and Chrysler’s market penetration is going. Firing executives can’t make up for a lack of competitive and consistent lease support.
Dealers who hold multiple franchises do so to keep from being totally dependent on a single OEM. This is also the type of Dealer that was targeted for termination by GM and Chrysler. They must want their Dealers to be so dependent on them that they become totally vulnerable to whatever their single OEM’s products and programs happen to be at any point in time. It seems they would prefer their Dealers not to have options when it comes to retaining a consumer who is looking for a replacement lease vehicle.
According to their logic, they want their Dealers to spend more on their facility, at a time when consumers more and more regard their computer monitor as the showroom. A savvy Dealer, or any business person, for that matter, will want to reserve as many options for themselves as possible. If GM and Chrysler can’t support their own products, why should they mind if a Dealer who puts the customer in a brand from another OEM? Perhaps GM and Chrysler think consumers are so loyal to their brand they will opt for a much higher lease payment than before, for a new like brand similar vehicle. Or maybe they know they are “behind the eight ball” but want their Dealers to suffer along with them?
At the very least, it becomes apparent that Manufacturers who manage their business in such a way that facilitates repeat business are far more likely to achieve it than those who don’t.
Saturday, December 19, 2009
It’s Ed and the Board’s GM Now!
Just as President Obama has taken "ownership" of the U. S. economy, Ed Whitacre and the GM Board of Directors have taken "ownership" of GM. Let’s do a quick “body count.” Fritz Henderson, went from “hero” to “resigned” in a matter of weeks. Board Chairman Ed Whitacre recently said of Henderson, "The board gets along with Fritz; he has our unanimous support." After Henderson was "broomed" Whitacre then assumed Henderson’s CEO position in addition to his own Chairman of the Board duties, at least temporarily. At least Alan Mulally, President and CEO of Ford, had time to learn on the job before he found himself in total crisis. And Mulally came from a manufacturing background.
Brent Dewar, recently appointed by Henderson as head of the Chevrolet brand was “dismissed” and replaced by James Caldwell, who recently was head of Chevrolet fleet operations. This might make the people responsible for maintaining GM’s residual values a little nervous. Mike Richards, a recent Bob Lutz recruit after he left Ford, resigned as head of Buick-GMC after eight days. Lutz himself was reassigned and his marketing responsibilities were given to Susan Dochtery. Lutz is still vice chairman and a special advisor to Whitacre. I presume Lutz will be whispering into whichever of Whitacre's ears Steve Girsky isn't. Girsky is a board member and another special advisor to Whitacre, and is regarded by many as the mastermind of the dealer terminations.
Docherty had been tapped by Henderson to replace Mark LaNeve, who recently resigned as North America vice president of marketing and advertising. Ray Young recently announced his resignation as CFO. Mark Reuss, son of ex GM President Loyd Reuss and known as the “father of the Aztek,” is now the new Whitacre appointee as President of North American Operations. After running GM Australia for 18 months, Reuss was recently made vice president of engineering before this most recent appointment. According Whitacre, “Mark and Susan are terrific!” Given Whitacre’s recent endorsement of Henderson, LaNeve, and others, skeptics might be looking for salt shakers. The list of GM execs who have left the company recently is much longer than the names mentioned here. Many were only in their jobs for a very short time. Whitacre and the Board have brought executive “musical chairs” to a new level.
Currently there are many more questions than answers. Whitacre has been unspecific at best in answering questions, as was Lutz at the recent LA Auto Show. Whitacre's public statement about Henderson’s departure was that “we all decided it was time for a change.” This after eight months on the job and the resent endorsement. GM is operating like a privately held company when, in fact, all taxpayers are owners. Churning executives does not breed confidence.
We’d all like some answers to some compelling questions. Some examples? How many of these executive changes were planned? Which of the “retirements” were actually firings? What do the severance packages look like for these people? Are “gag” agreements included and if so, for what price. What specifically caused the sudden rift between Henderson and the Board? Why did the Company reverse Fritz’s decision to sell Opel? Was Fritz blamed for the collapse of the Saab and Saturn deals?
Afew more questions: Henderson AND LaNeve were the public faces of the dealer terminations who misrepresented GM’s “savings” before Congress. Were they scapegoats sacrificed now that GM needs to rebuild its relationships with dealers? What does Steve Girsky know about anything? Who is the genius who thought it was a good idea to axe hundreds of Cadillac dealers compelling many potential buyers have to drive hundreds of miles for sales and service? How does “high throughput” per dealer make GM profitable? What has been the government Task Force role in the recent executive changes? Where will GM get the money to pay back the European governments that “bridge loaned” Opel while a buyer was being sought? How does GM expect to maintain U. S. market share of 19% after shedding 4 divisions, Saturn, Saab, Hummer, and Pontiac, while also cutting hundreds of dealers who represent the brands that GM kept? The Buick LaCrosse is a great vehicle, but what else does GM have on the way of compelling new vehicles to sell? How do you expect to force the market for VOLT beyond the “early adopters” without huge government subsidies and/or tax credits, especially if the price of fuel stays steady? And how does that work when the government is your owner? Does the government help you compete against Ford, Toyota, Honda, etc. who also employ thousands of Americans? What happened to the innovative diesel engine that was being readied for production? Did postponing that program provide money for fired executive packages and to pay off European governments?
Don’t tell me these new appointees are so great after you praised the last group just before you fired them. You need to give me and a lot of others compelling reasons to buy your stock when IPO time comes around. Gratuitously firing executives for not getting the instant results you desire is reminiscent of the behavior of a petulant owner of a pro sports team. If you’re so smart, why don’t you show them how to do it without destroying your resale values. You’re not building up a reservoir of trust and confidence in potential investors, let alone prospective buyers.
David Ruggles
submitted to Wards Dealer Business for January 2010
Brent Dewar, recently appointed by Henderson as head of the Chevrolet brand was “dismissed” and replaced by James Caldwell, who recently was head of Chevrolet fleet operations. This might make the people responsible for maintaining GM’s residual values a little nervous. Mike Richards, a recent Bob Lutz recruit after he left Ford, resigned as head of Buick-GMC after eight days. Lutz himself was reassigned and his marketing responsibilities were given to Susan Dochtery. Lutz is still vice chairman and a special advisor to Whitacre. I presume Lutz will be whispering into whichever of Whitacre's ears Steve Girsky isn't. Girsky is a board member and another special advisor to Whitacre, and is regarded by many as the mastermind of the dealer terminations.
Docherty had been tapped by Henderson to replace Mark LaNeve, who recently resigned as North America vice president of marketing and advertising. Ray Young recently announced his resignation as CFO. Mark Reuss, son of ex GM President Loyd Reuss and known as the “father of the Aztek,” is now the new Whitacre appointee as President of North American Operations. After running GM Australia for 18 months, Reuss was recently made vice president of engineering before this most recent appointment. According Whitacre, “Mark and Susan are terrific!” Given Whitacre’s recent endorsement of Henderson, LaNeve, and others, skeptics might be looking for salt shakers. The list of GM execs who have left the company recently is much longer than the names mentioned here. Many were only in their jobs for a very short time. Whitacre and the Board have brought executive “musical chairs” to a new level.
Currently there are many more questions than answers. Whitacre has been unspecific at best in answering questions, as was Lutz at the recent LA Auto Show. Whitacre's public statement about Henderson’s departure was that “we all decided it was time for a change.” This after eight months on the job and the resent endorsement. GM is operating like a privately held company when, in fact, all taxpayers are owners. Churning executives does not breed confidence.
We’d all like some answers to some compelling questions. Some examples? How many of these executive changes were planned? Which of the “retirements” were actually firings? What do the severance packages look like for these people? Are “gag” agreements included and if so, for what price. What specifically caused the sudden rift between Henderson and the Board? Why did the Company reverse Fritz’s decision to sell Opel? Was Fritz blamed for the collapse of the Saab and Saturn deals?
Afew more questions: Henderson AND LaNeve were the public faces of the dealer terminations who misrepresented GM’s “savings” before Congress. Were they scapegoats sacrificed now that GM needs to rebuild its relationships with dealers? What does Steve Girsky know about anything? Who is the genius who thought it was a good idea to axe hundreds of Cadillac dealers compelling many potential buyers have to drive hundreds of miles for sales and service? How does “high throughput” per dealer make GM profitable? What has been the government Task Force role in the recent executive changes? Where will GM get the money to pay back the European governments that “bridge loaned” Opel while a buyer was being sought? How does GM expect to maintain U. S. market share of 19% after shedding 4 divisions, Saturn, Saab, Hummer, and Pontiac, while also cutting hundreds of dealers who represent the brands that GM kept? The Buick LaCrosse is a great vehicle, but what else does GM have on the way of compelling new vehicles to sell? How do you expect to force the market for VOLT beyond the “early adopters” without huge government subsidies and/or tax credits, especially if the price of fuel stays steady? And how does that work when the government is your owner? Does the government help you compete against Ford, Toyota, Honda, etc. who also employ thousands of Americans? What happened to the innovative diesel engine that was being readied for production? Did postponing that program provide money for fired executive packages and to pay off European governments?
Don’t tell me these new appointees are so great after you praised the last group just before you fired them. You need to give me and a lot of others compelling reasons to buy your stock when IPO time comes around. Gratuitously firing executives for not getting the instant results you desire is reminiscent of the behavior of a petulant owner of a pro sports team. If you’re so smart, why don’t you show them how to do it without destroying your resale values. You’re not building up a reservoir of trust and confidence in potential investors, let alone prospective buyers.
David Ruggles
submitted to Wards Dealer Business for January 2010
Friday, November 27, 2009
Published in Auto Finance News
Fanning the Flames
By David Ruggles
Recent quotes from high-profile individuals have really kept the pot boiling in recent days. First, Arizona senator and previous presidential candidate John McCain was quoted as saying, “If anybody believes that Chrysler is going to survive, I'd like to meet them." This touched off a firestorm of comments from a variety of people with differing opinions, including congressmen from the state of Michigan. Meanwhile, Michael Steele, chairman of the Republican National Committee, called General Motors Corp.’s $1.2 billion third-quarter loss “further proof that President Obama's economic experiments are wrong for America." All this during a week in which talk abounded about GM’s potential IPO plans and the Dow hit 10,400.
In the middle of all this, Lee Iacocca weighed in with his opinion. In his mind, “Chrysler has a better chance of survival than does GM, which is just too big.” In my mind, Chrysler’s chance of survival is 50-50 at best, while GM’s chances are much better. But I’m not a politician, so I can speculate publicly. I am, however, rooting for both companies for the good of the country and all the people who depend on the auto industry.
I recall the tone and buzz during the previous Chrysler bailout. After the economy began to turn around and Chrysler became profitable again, Iacocca became so incensed at a comment made by President Ronald Reagan that he paid off the government-guaranteed loans early. This, despite the fact that Chrysler did not receive an interest credit for the early payoff, which represented an unexpected windfall to the taxpayer. Reagan had reportedly whispered in Iacocca’s ear that it was a good thing Jimmy Carter was in the White House, or Chrysler would have been “down the tubes,” or some such comment. In Iacocca’s mind, there was serious satisfaction to be had by paying the government off early — almost as good as spitting in Reagan’s eye. In addition, he got the government out of Chrysler’s business. Taxpayers made out well on the previous auto industry bailout. Not commonly known is the fact that the government imposed an additional $1 million per month administrative fee in addition to collecting interest at the rate of 15.9%. Taxpayers also saved the expense of hundreds of thousands of people on unemployment compensation and the forced assumption of Chrysler’s pension liability on the Federal Pension Guarantee Fund. Unfortunately, the previous Chrysler bailout success was wasted with the DaimlerChrysler “merger of equals” and the ill-fated sale to Cerberus Capital Management LP.
A re-read of Iacocca’s autobiography from 1984 is just as interesting 25 years later as it was at the time, and provides real insight to the events of that era. There are some real similarities with current events in the auto industry. In the book, Iacocca rails at the government Loan Guarantee Board, the Auto Task Force of their day, for making Chrysler sell its corporate jet. He recalls the decision to pay the government guaranteed loans back seven years early, even though it was a risky move at the time and saved no interest. It took the government a month to figure out how to deal with a loan guarantee paid off early, especially one in the amount of $813,487,500. Iacocca won a bet with New York City Mayor Ed Koch — a bushel of apples — over who would pay off its loan guarantees first, New York City or Chrysler. Chrysler had borrowed $1.2 billion for 10 years, but paid it back in full in three. The automaker paid $404 million in interest and $33 million in administrative fees. In addition, the government received $311 million for warrants issued at $13 per share, at a time when Chrysler shares were trading for around $30. This was an additional windfall for the taxpayers in return for a temporary foray into “socialism,” a term heard loudly and often in those days. Iacocca takes some real shots at the Reagan administration and “laissez faire” economics in his book.
Auto industry history is being written again. Auto manufacturers can make money as fast as they can lose it. GM’s and Chrysler’s future is uncertain at best, as is the economy that supports the industry as a whole. Oldsmobile, Plymouth, Eagle, Pontiac, and Saturn are brands that have disappeared or are on their way out. But for those who assert the government can’t do anything right, the previous auto industry bailout had a great outcome for taxpayers. This time around, I hope the “nattering nabobs of negativism,” to quote Spiro Agnew, will be forced to eat crow again.
David Ruggles is a former dealer-owner and consultant with nearly 40 years’ experience in the auto industry. He has conducted an annual seminar on auto dealership issues and processes in Japan since 1993, and helped develop specialty software focused on pre-owned leasing. He can be reached at ruggles@msn.com.
The following was cut for space reasons, and for being overly political for the publication:
It will certainly be interesting if GM can achieve a successful IPO, pay off the government loans, and buy out the government stock holdings at a profit to taxpayers. In the minds of some, there must not be any precedent for the government doing anything successfully. I suspect there are some who might replay Steele’s quote, and those of others who opposed the GM/Chrysler bailouts, back to them repeatedly during a political campaign at some point. But Steele is known for having “foot in mouth” disease, and I’m pretty sure McCain’s future political aspirations do not extend beyond the state of Arizona. As I recall, it was a Republican administration that "bridge loaned" GM and Chrysler with approximately $17 billion dollars in December 2008, after Congress had turned down its own bailout plan.
By David Ruggles
Recent quotes from high-profile individuals have really kept the pot boiling in recent days. First, Arizona senator and previous presidential candidate John McCain was quoted as saying, “If anybody believes that Chrysler is going to survive, I'd like to meet them." This touched off a firestorm of comments from a variety of people with differing opinions, including congressmen from the state of Michigan. Meanwhile, Michael Steele, chairman of the Republican National Committee, called General Motors Corp.’s $1.2 billion third-quarter loss “further proof that President Obama's economic experiments are wrong for America." All this during a week in which talk abounded about GM’s potential IPO plans and the Dow hit 10,400.
In the middle of all this, Lee Iacocca weighed in with his opinion. In his mind, “Chrysler has a better chance of survival than does GM, which is just too big.” In my mind, Chrysler’s chance of survival is 50-50 at best, while GM’s chances are much better. But I’m not a politician, so I can speculate publicly. I am, however, rooting for both companies for the good of the country and all the people who depend on the auto industry.
I recall the tone and buzz during the previous Chrysler bailout. After the economy began to turn around and Chrysler became profitable again, Iacocca became so incensed at a comment made by President Ronald Reagan that he paid off the government-guaranteed loans early. This, despite the fact that Chrysler did not receive an interest credit for the early payoff, which represented an unexpected windfall to the taxpayer. Reagan had reportedly whispered in Iacocca’s ear that it was a good thing Jimmy Carter was in the White House, or Chrysler would have been “down the tubes,” or some such comment. In Iacocca’s mind, there was serious satisfaction to be had by paying the government off early — almost as good as spitting in Reagan’s eye. In addition, he got the government out of Chrysler’s business. Taxpayers made out well on the previous auto industry bailout. Not commonly known is the fact that the government imposed an additional $1 million per month administrative fee in addition to collecting interest at the rate of 15.9%. Taxpayers also saved the expense of hundreds of thousands of people on unemployment compensation and the forced assumption of Chrysler’s pension liability on the Federal Pension Guarantee Fund. Unfortunately, the previous Chrysler bailout success was wasted with the DaimlerChrysler “merger of equals” and the ill-fated sale to Cerberus Capital Management LP.
A re-read of Iacocca’s autobiography from 1984 is just as interesting 25 years later as it was at the time, and provides real insight to the events of that era. There are some real similarities with current events in the auto industry. In the book, Iacocca rails at the government Loan Guarantee Board, the Auto Task Force of their day, for making Chrysler sell its corporate jet. He recalls the decision to pay the government guaranteed loans back seven years early, even though it was a risky move at the time and saved no interest. It took the government a month to figure out how to deal with a loan guarantee paid off early, especially one in the amount of $813,487,500. Iacocca won a bet with New York City Mayor Ed Koch — a bushel of apples — over who would pay off its loan guarantees first, New York City or Chrysler. Chrysler had borrowed $1.2 billion for 10 years, but paid it back in full in three. The automaker paid $404 million in interest and $33 million in administrative fees. In addition, the government received $311 million for warrants issued at $13 per share, at a time when Chrysler shares were trading for around $30. This was an additional windfall for the taxpayers in return for a temporary foray into “socialism,” a term heard loudly and often in those days. Iacocca takes some real shots at the Reagan administration and “laissez faire” economics in his book.
Auto industry history is being written again. Auto manufacturers can make money as fast as they can lose it. GM’s and Chrysler’s future is uncertain at best, as is the economy that supports the industry as a whole. Oldsmobile, Plymouth, Eagle, Pontiac, and Saturn are brands that have disappeared or are on their way out. But for those who assert the government can’t do anything right, the previous auto industry bailout had a great outcome for taxpayers. This time around, I hope the “nattering nabobs of negativism,” to quote Spiro Agnew, will be forced to eat crow again.
David Ruggles is a former dealer-owner and consultant with nearly 40 years’ experience in the auto industry. He has conducted an annual seminar on auto dealership issues and processes in Japan since 1993, and helped develop specialty software focused on pre-owned leasing. He can be reached at ruggles@msn.com.
The following was cut for space reasons, and for being overly political for the publication:
It will certainly be interesting if GM can achieve a successful IPO, pay off the government loans, and buy out the government stock holdings at a profit to taxpayers. In the minds of some, there must not be any precedent for the government doing anything successfully. I suspect there are some who might replay Steele’s quote, and those of others who opposed the GM/Chrysler bailouts, back to them repeatedly during a political campaign at some point. But Steele is known for having “foot in mouth” disease, and I’m pretty sure McCain’s future political aspirations do not extend beyond the state of Arizona. As I recall, it was a Republican administration that "bridge loaned" GM and Chrysler with approximately $17 billion dollars in December 2008, after Congress had turned down its own bailout plan.
Wednesday, October 28, 2009
Rattner's "Tell All"
I have been trying to resolve a mystery for months. When it was announced that General Motors and Chrysler were terminating dealers as a part of restructuring through bankruptcy, I smelled a rat. So did many who have been around the auto business for a while. Historically it has been a practice of auto manufacturers to add sales points as a method of driving volume and market share. Were we expected to think they no longer cherish these objectives? In a complete turnaround from their histories, they asserted that closing dealerships saved money for the manufacturer. The mystery? Whose idea was it? Who imposed it? I have speculated that it was forced on GM and Chrysler by the government’s Automotive Task Force in its zeal to impose a “Toyota Throughput” model. Both the manufacturers and the Auto Task Force blame the other for the dealer terminations.
Part of the answer came at the recent Auto Finance Summit held in Las Vegas at Red Rock Hotel and Casino. One of the high points was an address to attendees by Rick Wade, a member of the Automotive Task Force. During his address, he never specifically mentioned the decision to cut dealers, but his tone indicated that he thought everyone figured that dealer terminations were necessary to make GM and Chrysler viable. He came across as an enthusiastic, bright, and well-intentioned person who was placed in a position, with the other members of the Task Force, where important decisions had to be made quickly. He was quite pleased, as am I, that GM and Chrysler have been, at least temporarily, “saved.” Before being called to serve, Wade was certainly an auto industry outsider, for better or for worse.
But the real bombshell has been Steve Rattner’s recent article in Fortune magazine, where he reveals all sorts of interesting inside information. Rattner is the now-resigned head of the Automotive Task Force during the Chrysler and GM bankruptcies, the real “car czar.” Some of the information he reveals probably should have stayed “inside” for a while out of common courtesy and discretion. In particular, he shares his personal views on GM management, and Rick Wagoner in particular, in a particularly caustic manner. He reveals the content of private conversations. In his tell-all piece he also acknowledges the challenge of dealing with the N.Y. attorney general’s investigation of his former firm, Quadrangle, while simultaneously heading up the “Team Auto,” as they called themselves. He freely admits that he and his fellow task force members knew little of the auto business.
It is true Team Auto had no real precedent to rely on and faced a critical time schedule. It made me wonder why he was selected to the post in the first place. He must not be expecting to be considered for any important positions in the future as it is unlikely that anyone would speak candidly to him knowing his penchant for being less than discreet.
The Bush administration had “bridged” GM and Chrysler over to the Obama administration with an injection of $17.4 billion in TARP funds in late December 2008. The decision to use a Section 363 bankruptcy strategy to accomplish a quick “cleansing” of liabilities through Chapter 11 has at least temporarily saved the two companies and hundreds of thousands of jobs. For this, I commend Rattner and Team Auto. If things go as planned, GM will IPO in the next couple years and buy out the government’s stock holdings. Chrysler’s situation is much more fragile and depends on Fiat more than anyone should be comfortable with. But GM and Chrysler were saved at a time when their liquidation could have touched off a catastrophic chain of events in the auto industry and the overall economy.
So what about my mystery? Who made the decision to terminate dealers? I’m not talking about shutting down Pontiac and Saturn or selling Saab and Hummer. A business case can be made to support these decisions. I’m talking about decimating the Cadillac dealer network and terminating thousands of viable GM franchises across the country. I’m talking about terminating 789 Chrysler, Dodge, and Jeep franchises.
There was a recent article in Automotive News on Jim Press, Chrysler’s now discredited and terminated co-president, which itemizes many apparent contradictions in Press’ career. I distinctly recall Press and GM CEO Fritz Henderson during the Senate committee hearings itemizing the “savings” they would realize by terminating dealers. I didn’t hear anything that smacked of the truth. It is now disclosed that Press had his own private reservations about terminating dealers. Mark LaNeve, the recently deposed head of GM sales, has stated publicly that he is worried about GM’s lack of dealer coverage and its negative impact on sales and market penetration. He expressed concern about GM making orphans of 900,000 GM owners. Then there is the quote from Joe Eberhardt, Chrysler Group’s past senior vice president for sales and marketing: “When a company loses a dealer, its overhead costs stay the same and — at least in the short term — it loses a few hundred car sales. There's no immediate payback." Carl Woodward, a longtime CPA serving auto dealers, also disputes any claims of net savings to auto manufacturers by terminating dealers. In his 6,000-word article for Fortune, Rattner took no credit for the dealer terminations. I wonder why.
published in Auto Finance News
Part of the answer came at the recent Auto Finance Summit held in Las Vegas at Red Rock Hotel and Casino. One of the high points was an address to attendees by Rick Wade, a member of the Automotive Task Force. During his address, he never specifically mentioned the decision to cut dealers, but his tone indicated that he thought everyone figured that dealer terminations were necessary to make GM and Chrysler viable. He came across as an enthusiastic, bright, and well-intentioned person who was placed in a position, with the other members of the Task Force, where important decisions had to be made quickly. He was quite pleased, as am I, that GM and Chrysler have been, at least temporarily, “saved.” Before being called to serve, Wade was certainly an auto industry outsider, for better or for worse.
But the real bombshell has been Steve Rattner’s recent article in Fortune magazine, where he reveals all sorts of interesting inside information. Rattner is the now-resigned head of the Automotive Task Force during the Chrysler and GM bankruptcies, the real “car czar.” Some of the information he reveals probably should have stayed “inside” for a while out of common courtesy and discretion. In particular, he shares his personal views on GM management, and Rick Wagoner in particular, in a particularly caustic manner. He reveals the content of private conversations. In his tell-all piece he also acknowledges the challenge of dealing with the N.Y. attorney general’s investigation of his former firm, Quadrangle, while simultaneously heading up the “Team Auto,” as they called themselves. He freely admits that he and his fellow task force members knew little of the auto business.
It is true Team Auto had no real precedent to rely on and faced a critical time schedule. It made me wonder why he was selected to the post in the first place. He must not be expecting to be considered for any important positions in the future as it is unlikely that anyone would speak candidly to him knowing his penchant for being less than discreet.
The Bush administration had “bridged” GM and Chrysler over to the Obama administration with an injection of $17.4 billion in TARP funds in late December 2008. The decision to use a Section 363 bankruptcy strategy to accomplish a quick “cleansing” of liabilities through Chapter 11 has at least temporarily saved the two companies and hundreds of thousands of jobs. For this, I commend Rattner and Team Auto. If things go as planned, GM will IPO in the next couple years and buy out the government’s stock holdings. Chrysler’s situation is much more fragile and depends on Fiat more than anyone should be comfortable with. But GM and Chrysler were saved at a time when their liquidation could have touched off a catastrophic chain of events in the auto industry and the overall economy.
So what about my mystery? Who made the decision to terminate dealers? I’m not talking about shutting down Pontiac and Saturn or selling Saab and Hummer. A business case can be made to support these decisions. I’m talking about decimating the Cadillac dealer network and terminating thousands of viable GM franchises across the country. I’m talking about terminating 789 Chrysler, Dodge, and Jeep franchises.
There was a recent article in Automotive News on Jim Press, Chrysler’s now discredited and terminated co-president, which itemizes many apparent contradictions in Press’ career. I distinctly recall Press and GM CEO Fritz Henderson during the Senate committee hearings itemizing the “savings” they would realize by terminating dealers. I didn’t hear anything that smacked of the truth. It is now disclosed that Press had his own private reservations about terminating dealers. Mark LaNeve, the recently deposed head of GM sales, has stated publicly that he is worried about GM’s lack of dealer coverage and its negative impact on sales and market penetration. He expressed concern about GM making orphans of 900,000 GM owners. Then there is the quote from Joe Eberhardt, Chrysler Group’s past senior vice president for sales and marketing: “When a company loses a dealer, its overhead costs stay the same and — at least in the short term — it loses a few hundred car sales. There's no immediate payback." Carl Woodward, a longtime CPA serving auto dealers, also disputes any claims of net savings to auto manufacturers by terminating dealers. In his 6,000-word article for Fortune, Rattner took no credit for the dealer terminations. I wonder why.
published in Auto Finance News
Sunday, September 13, 2009
How Do You Measure Quality in the Auto Business?
Am I presumptuous enough to lecture J.D. Power on how to measure quality? Not really. My point is that there is more than one way to calculate vehicle quality. General Motors and Ford are sporting some gaudy J. D. Power rankings these days. Some of their products are ranked as equal to the leading imports. I’m sorry to have to leave Chrysler out of this discussion. It is anyone’s guess where Chrysler’s future quality numbers will end up, given that many important decisions are being made by Fiat. Fiat’s hallmark has not been quality in the past and many dealers, including myself, still have a bitter taste in their mouth from Fiat’s last foray into the U.S. market. But Chrysler/Fiat will be a subject for another day.
So what might be a better measure of quality than J.D. Power and other quality surveys? I submit that resale value is the most important measure of quality as perceived by consumers and the market in general. Quality is more than fit and finish. Quality includes how well an OEM’s vehicles hold their customer’s money together. In this regard Honda and Toyota have set the mark. Other than their traditionally high fit, finish, and NVH (Noise, Vibration, and Harshness) achievements, they have eschewed large volume fleet sales. They have also disdained direct to consumer rebates. As a consequence, their CPO (Certified Pre-Owned) programs serve to strengthen their strong resale values whereas the Domestics are desperately trying to rehabilitate themselves. Consumers do not appreciate the OEM, with whom they just did business, undermining the value of their new vehicle. They might appreciate the rebate they just received that helped motivate them to buy, but they certainly resent waking up one day and discovering they are thousands of dollars “upside down” in their recently purchased vehicles. Many owners of Domestic vehicles don’t find out how bad their financial situation is when they try to trade their vehicle 36 months or sooner into their finance contract. There is no doubt the resale value issue has a strong impact on whether a consumer is a repeat buyer frm an OEM.
Ubiquity is the Enemy of Cachet
So how do Toyota Camry and Honda Accord, two of the best selling vehicles in the U.S. auto market, maintain their cachet in the face of their large sales volumes? In my mind, its boils down to the fact that you rarely see those vehicles in fleet and rental service. In addition, you don’t see consumer rebates advertised. Just as I was becoming sold on the J. D. Power rating on the Chevy Malibu and the good things said about the car in the press, I observed a couple hundred Malibus decked out as taxis at McCarran Airport here in Las Vegas. At the taxi cab pick up station there was Malibu after Malibu rolling up to pick up passengers. It left a bad taste in my mouth. While there are many Toyotas and Hondas coming back into the market as pre-owned vehicles, they are mostly three year old lease turn ins and natural trade ins, whereas there is a much higher number of Domestics recycling in a year or less. Many of these are daily rental turn ins. This, coupled with direct to consumer rebates outweighs any J. D. Power quality ratings in the mind of consumers..
Resale Value, Residuals, and Leasing
Leasing is in the news again. GM and Chrysler have both announced recently they will re-enter leasing. I still can’t get used to the idea that Chrysler finances and leases through GMAC. Chrysler has been out of leasing since last July when lenders forced them to give up leasing as a condition of granting essential financing. GM’s lack of capital and huge residual losses forced GM to scale back leasing last fall. GM will be leasing through U.S. Bank in 5 northeastern states. Other OEMs have continued to lease through their captive finance arms and independent banks. GM and Chrysler have lost substantial market share as a consequence of their not being in the leasing business for the last months.
What is the lure of leasing to an OEM? They can offer lower monthly payments for shorter terms and achieve a higher degree of repeat business through leasing. In addition, there are depreciation credits available as the title of a lease vehicle is held in the name of the OEM. These depreciation credits come in handy if the OEM is profitable. In addition, trade equity and cash down payment lowers the monthly payment a lot more on short term lease contracts than on long term finance contracts. Cycling the consumer more often leads to increased market share when your competition can’t compete. Lower resale value (residuals) means it costs Domestics to subvent their residuals and money factors to be competitive with Toyota and Honda.
And now we see Ford is pushing their new world class Taurus, bi turbo, direct injection, AWD, etc. as a police cruiser. They already devalued the name Taurus in past years by making it the most common fleet vehicle in history. It appears Detroit has not learned their lesson.
So what might be a better measure of quality than J.D. Power and other quality surveys? I submit that resale value is the most important measure of quality as perceived by consumers and the market in general. Quality is more than fit and finish. Quality includes how well an OEM’s vehicles hold their customer’s money together. In this regard Honda and Toyota have set the mark. Other than their traditionally high fit, finish, and NVH (Noise, Vibration, and Harshness) achievements, they have eschewed large volume fleet sales. They have also disdained direct to consumer rebates. As a consequence, their CPO (Certified Pre-Owned) programs serve to strengthen their strong resale values whereas the Domestics are desperately trying to rehabilitate themselves. Consumers do not appreciate the OEM, with whom they just did business, undermining the value of their new vehicle. They might appreciate the rebate they just received that helped motivate them to buy, but they certainly resent waking up one day and discovering they are thousands of dollars “upside down” in their recently purchased vehicles. Many owners of Domestic vehicles don’t find out how bad their financial situation is when they try to trade their vehicle 36 months or sooner into their finance contract. There is no doubt the resale value issue has a strong impact on whether a consumer is a repeat buyer frm an OEM.
Ubiquity is the Enemy of Cachet
So how do Toyota Camry and Honda Accord, two of the best selling vehicles in the U.S. auto market, maintain their cachet in the face of their large sales volumes? In my mind, its boils down to the fact that you rarely see those vehicles in fleet and rental service. In addition, you don’t see consumer rebates advertised. Just as I was becoming sold on the J. D. Power rating on the Chevy Malibu and the good things said about the car in the press, I observed a couple hundred Malibus decked out as taxis at McCarran Airport here in Las Vegas. At the taxi cab pick up station there was Malibu after Malibu rolling up to pick up passengers. It left a bad taste in my mouth. While there are many Toyotas and Hondas coming back into the market as pre-owned vehicles, they are mostly three year old lease turn ins and natural trade ins, whereas there is a much higher number of Domestics recycling in a year or less. Many of these are daily rental turn ins. This, coupled with direct to consumer rebates outweighs any J. D. Power quality ratings in the mind of consumers..
Resale Value, Residuals, and Leasing
Leasing is in the news again. GM and Chrysler have both announced recently they will re-enter leasing. I still can’t get used to the idea that Chrysler finances and leases through GMAC. Chrysler has been out of leasing since last July when lenders forced them to give up leasing as a condition of granting essential financing. GM’s lack of capital and huge residual losses forced GM to scale back leasing last fall. GM will be leasing through U.S. Bank in 5 northeastern states. Other OEMs have continued to lease through their captive finance arms and independent banks. GM and Chrysler have lost substantial market share as a consequence of their not being in the leasing business for the last months.
What is the lure of leasing to an OEM? They can offer lower monthly payments for shorter terms and achieve a higher degree of repeat business through leasing. In addition, there are depreciation credits available as the title of a lease vehicle is held in the name of the OEM. These depreciation credits come in handy if the OEM is profitable. In addition, trade equity and cash down payment lowers the monthly payment a lot more on short term lease contracts than on long term finance contracts. Cycling the consumer more often leads to increased market share when your competition can’t compete. Lower resale value (residuals) means it costs Domestics to subvent their residuals and money factors to be competitive with Toyota and Honda.
And now we see Ford is pushing their new world class Taurus, bi turbo, direct injection, AWD, etc. as a police cruiser. They already devalued the name Taurus in past years by making it the most common fleet vehicle in history. It appears Detroit has not learned their lesson.
Ruggles in Wards, reprinted with permission
Ta-Ta Clunkers; Now What?
Let's hope a dead spot won't follow successful program
By David Ruggles, Ward's Dealer Business, Sep 1, 2009 12:00 PM
Let's hope a dead spot won't follow successful program
By David Ruggles, Ward's Dealer Business, Sep 1, 2009 12:00 PM
Cash for Clunkers has been a surprise success to many, including government.
Hopefully, we won't have a serious dead spot now that Clunkers is kaput. We all know how rebates can be like getting on drugs.
Training consumers not to buy until the next program contributes to a “whip saw” market that makes good consumer satisfaction impossible. It also makes marketing dependent on loading up dealers' inventories and then introducing a program to sell them.
Still, Clunkers was worth it. In my 38 years in the business, this has been only the second time I have seen a federal initiative spark so much sales activity in the new-vehicle business. The first time was when the Nixon administration repealed the excise tax on cars in 1971.
There have been other government initiatives that stimulated sales, but mostly through tax policy. Most recently, the Bush administration provided a substantial tax credit for those purchasing a vehicle over a particular GVW rating.
This was meant to spur the purchase of trucks by ranchers, farmers, plumbers, and other small business people. It also spurred the purchase or lease of Navigators, Escalades, Suburbans, etc. to doctors, consultants, and anyone who could take of advantage of the business write off.
But the tax policy measures didn't have the broad appeal of Cash for Clunkers.
As a consequence, about 707,000 old vehicles have been designated for the crusher. Engines have been destroyed to ensure the clunkers do not find their way back into the system. Initially, this is having an impact on the Buy Here, Pay Here dealers. What the Feds call “clunkers,” they call inventory. Any revival of the program will exacerbate their plight.
Clunkers is not the only factor impacting the pre-owned market. The low seasonably adjusted annual sales rate has generated fewer sales. This means fewer pre-owned vehicles will be available down the road.
A lot fewer rental vehicles have been placed in service. There's a dearth of new leases put on the books. As pre-owned values strengthen, fueled by the inevitable shortage, there will be more people in an equity position than before.
I expect this trend will be tempered by people keeping their vehicles longer. We all know that above-average miles have a major impact on true resale value at auction. But the trend is certainly toward higher pre-owned prices down the road.
Despite the recent rise in pre-owned prices we hear complaints from dealers that some guidebooks' loan values are not reflective of what is really going on in the pre-owned marketplace, so owners who should show equity are shorted by lenders who use those guides in their finance advance calculation.
Another interesting by-product of the strengthening pre-owned market might be the impact of current lease returns to the OEM captives and independent bank lessors.
I am told many lenders took write offs for current and anticipated residual losses. Some of those previously stated losses may turn out to be profits in the current marketplace, which is driven by the pre-owned shortage and low fuel prices.
Pre-owned values can only go so high, but perhaps we have not yet hit the ceiling. Just imagine a world where new vehicles can be sold without rebates or dealer “trunk money.”
A true pull market scenario would strengthen pre-owned values even more and provide even more trade equity for would-be buyers. Might we be able to return to the pre-Joe Garagiola days when the baseball player turned Chrysler TV pitchman said, “Buy a car, get a check” in 1975? My guess is probably not.
The domestic auto makers have trained an entire generation not to purchase unless there is a rebate. In addition, there are just too many competitors all vying for sales. Where will it end up? Nobody knows. Here's hoping those guidebook loan values will catch up with the market. Dealers and consumers need all the legitimate help they can get!
Former auto dealer David Ruggles is president of Advanced Concepts & Techniques. He is at Ruggles@msn.com and 312-925-1863.
Sunday, September 6, 2009
No Smoking Gun? -- Financial Innovation
Mike Smitka
The appellation "luddite" rings nasty, at least to this economist. I am after all an erstwhile student of the history of innovation and am steeped in "IO", the economics of "Industrial Organization." But look as I may, I cannot find evidence—far less make a compelling case—that the recent spate of acclaimed financial innovation is beneficial.
Let me accept at face value the claims of innovation. Now securitization goes back decades, if not more. Bank letters of credit and bill discounting are both forms of credit insurance, and they go back centuries. So I'm skeptical that Wall Street has innovated rather than merely created an impenetrable smoke-screen of complexity.
Mind you, my skepticism is tempered by my own experience in finance, working on Eurodollar syndicate loans to Latin America in the late 1970s, in the first heady days of large-scale international finance since the collapse of such markets in 1914. For those too young to remember, every single one of those loans went bad, taking the economies of a continent with it—and giving regulators the option, which they failed to exercise, to shut down Citibank. Instead forbearance was the game of the day. But at the time they were marketed as safe. First, syndication allowed banks to diversify their risk, since the organizers could sell off the bulk of what were for the time very large loans, while those purchasing it were doing so in bite-sized chunks from different borrowers and different countries. Second, banks could hedge their funding and maturity risk, because while these were long-term loans (one I worked on to a "greenfield" Brazilian steel venture carried a 12-year term) the interest rate was reset every 6 months against LIBOR (the London Interbank Offer Rate). If interest rates bumped up a bit, banks wouldn't face the potential disintermediation that was at the time plaguing savings and loan banks. (Remember your history?—the plague is typically fatal. It's an appropriate adjective.) Banks didn't even need to boost their deposit base, but could borrow in the very same London market, arbitraging their good credit ratings (LIBOR) to lend on to Brazil (LIBOR+25bp at the peak of the bubble). Sound familiar?
Anyway, what are the claims made for securitization, credit default insurance and the like? The fall into two main camps, that these innovations lowered the cost of finance, and that they provided finance to borrowers who for one reason or another lacked access.
If we look at the macroeconomy, did firms go on an investment boom? No, to the extent that we'd label the last decade of growth "robust" (which requires ignoring what happened to wages), then the sources were consumption and exports. If all of these new products lowered the cost to borrowers, it's not there in the data, or at least not enough to show up without resorting to fancy econometrics.
How about access? Well, sure, lots of new borrowers got money up front, but we have incontrovertible evidence that those who received sub-prime "mortgages" couldn't handle the payments. (Not that a "3/27" ever made sense as a loan; such "mortgages" were never anything more than a bet that real estate prices would continue to appreciate). Now we're starting to see other sorts of borrowers. The most prominent right now is credit card debt, but commercial real estate loans are starting to go bad. Losses on local and state government debt, another area of innovation, will surely follow. So improved access turned out to be a short-run illusion. And this shouldn't be a surprise: back in antiquity, in the 1990s, it wasn't as though banks enjoyed zero rates of default on their portfolios. They took their chances, but generally were able to pay for their mistakes, rather than needing bailouts.
Innovation in finance ought instead to be looked upon as fool's gold, which can only be sold to the naive. (And remember the age of those "in the game"—naïve was apropos.) The essence of banking, and of finance in general, is the proper measurement of risks. We've had claims of a "new world" in finance since the days of the South Sea Bubble. But underlying cash flow analysis isn't a matter of rocket science, it's a matter of wisdom. Who knows what the risk characteristics are of a new product?—initially, no one. And how do you regulate it? Too little and too late. New products arise in the shadows, because finance is a very mature product, and there just isn't anything new under the sun.
To conclude: there is a smoking gun. It's too soon to tell, however, whether a conviction of involuntary manslaughter will follow. For those wielding the gun committed crimes against multiple economies, killed their employers and robbed the wealth of millions of unsophisticated citizens. But the outcome will likely be a mistrial: the defendant has bought off a lot of potential judges and jurors and remains able to buy expert witnesses sufficient to shout down the prosecution.
Let me accept at face value the claims of innovation. Now securitization goes back decades, if not more. Bank letters of credit and bill discounting are both forms of credit insurance, and they go back centuries. So I'm skeptical that Wall Street has innovated rather than merely created an impenetrable smoke-screen of complexity.
Mind you, my skepticism is tempered by my own experience in finance, working on Eurodollar syndicate loans to Latin America in the late 1970s, in the first heady days of large-scale international finance since the collapse of such markets in 1914. For those too young to remember, every single one of those loans went bad, taking the economies of a continent with it—and giving regulators the option, which they failed to exercise, to shut down Citibank. Instead forbearance was the game of the day. But at the time they were marketed as safe. First, syndication allowed banks to diversify their risk, since the organizers could sell off the bulk of what were for the time very large loans, while those purchasing it were doing so in bite-sized chunks from different borrowers and different countries. Second, banks could hedge their funding and maturity risk, because while these were long-term loans (one I worked on to a "greenfield" Brazilian steel venture carried a 12-year term) the interest rate was reset every 6 months against LIBOR (the London Interbank Offer Rate). If interest rates bumped up a bit, banks wouldn't face the potential disintermediation that was at the time plaguing savings and loan banks. (Remember your history?—the plague is typically fatal. It's an appropriate adjective.) Banks didn't even need to boost their deposit base, but could borrow in the very same London market, arbitraging their good credit ratings (LIBOR) to lend on to Brazil (LIBOR+25bp at the peak of the bubble). Sound familiar?
Anyway, what are the claims made for securitization, credit default insurance and the like? The fall into two main camps, that these innovations lowered the cost of finance, and that they provided finance to borrowers who for one reason or another lacked access.
If we look at the macroeconomy, did firms go on an investment boom? No, to the extent that we'd label the last decade of growth "robust" (which requires ignoring what happened to wages), then the sources were consumption and exports. If all of these new products lowered the cost to borrowers, it's not there in the data, or at least not enough to show up without resorting to fancy econometrics.
How about access? Well, sure, lots of new borrowers got money up front, but we have incontrovertible evidence that those who received sub-prime "mortgages" couldn't handle the payments. (Not that a "3/27" ever made sense as a loan; such "mortgages" were never anything more than a bet that real estate prices would continue to appreciate). Now we're starting to see other sorts of borrowers. The most prominent right now is credit card debt, but commercial real estate loans are starting to go bad. Losses on local and state government debt, another area of innovation, will surely follow. So improved access turned out to be a short-run illusion. And this shouldn't be a surprise: back in antiquity, in the 1990s, it wasn't as though banks enjoyed zero rates of default on their portfolios. They took their chances, but generally were able to pay for their mistakes, rather than needing bailouts.
Innovation in finance ought instead to be looked upon as fool's gold, which can only be sold to the naive. (And remember the age of those "in the game"—naïve was apropos.) The essence of banking, and of finance in general, is the proper measurement of risks. We've had claims of a "new world" in finance since the days of the South Sea Bubble. But underlying cash flow analysis isn't a matter of rocket science, it's a matter of wisdom. Who knows what the risk characteristics are of a new product?—initially, no one. And how do you regulate it? Too little and too late. New products arise in the shadows, because finance is a very mature product, and there just isn't anything new under the sun.
To conclude: there is a smoking gun. It's too soon to tell, however, whether a conviction of involuntary manslaughter will follow. For those wielding the gun committed crimes against multiple economies, killed their employers and robbed the wealth of millions of unsophisticated citizens. But the outcome will likely be a mistrial: the defendant has bought off a lot of potential judges and jurors and remains able to buy expert witnesses sufficient to shout down the prosecution.
Subscribe to:
Posts (Atom)