There’s a young man named Brian who works at one of the most recognized car dealerships in Northeast Indiana, as the General Sales Manager.
Over the past 9 months, I’ve learned a lot from Brian about changes in his business. His dealership has lost inventory, because G.M. scaled back the number of brands they carry.
Gone is Saturn. Gone is Hummer. Gone is Pontiac.
What’s left? Cadillac, Buick, and GMC Trucks.
And three empty buildings.
Brian has learned how to manage, though. He was recently promoted to GSM for the used cars along with his other duties.
There’s a lesson for all of us. Our old ways of doing business are changing, and often those changes are beyond our control.
How we adapt however, IS in our control.
Check out this story about the auto business and perhaps you’ll get some ideas on what you can do in your business:
Life At 11 Million U.S. Transactions
What To Do When You Lose 6 Million Sales? Shake Things Up, Top To Bottom
So how does the car business cope with the loss of nearly 6 million annual sales in the space of three years? It reinvents itself — top to bottom.
Look around and you see a different auto industry taking shape — a “transformational moment,” says AutoNation Inc. CEO Mike Jackson.
Why are companies that struggled in 16 million sales years doing just fine in a market of 11 million? Because discipline is breaking out all over — at manufacturers, suppliers and dealerships. A pragmatic, tightly controlled approach has evolved from the recession, and the changes touch almost everything.
Incentives are smaller, simpler and more tactical. No-haggle and limited-negotiation pricing are getting a real tryout across the country. And inventories are lean and balanced.
Here’s how that’s playing out in the showroom:
Pete DeLongchamps, head of manufacturer relations at retailer Group 1 Automotive, tells of a neighbor who said he planned to stop by his dealership, trade in his 140,000-mile Chevrolet Suburban SUV and drive out in a new one.
DeLongchamps gently explained the new reality: “The factory’s working 10-hour shifts,” he told his neighbor. “You can’t get Suburbans.”
So the guy ordered one with exactly the equipment he wanted and drove his old Suburban for eight weeks until delivery.
“Instead of walking the lot, we sit with our customers, talk about their needs, place orders and take deposits,” DeLongchamps says.
That anecdote illustrates how the “push” system of building and selling vehicles is fading. Automakers are closely matching production to sales — a dramatic change for the Detroit 3.
That means U.S. inventories are hovering near record lows — 2.1 million cars and trucks on July 1, half of the 4.2 million that were in stock on July 1, 2004.
General Motors Co. — which used to run its factories at any cost, trying to create demand with hefty incentives and high, low-profit fleet sales — now is underproducing hot models. On July 1, Chevrolet had just a 22-day supply of the Equinox crossover, a 31-day supply of the Traverse crossover and a 37-day supply of the Suburban — all well below the pre-crisis norm of 60 days.
GM wants dealers to operate with much lower inventories and turn their stock faster. But one executive says many are having trouble adjusting to the new paradigm and regularly scream for more inventory. The exceptions, he says, tend to be dealers who also have Toyota franchises and understand how to function with fewer vehicles on the lot.
Dennis Egglefield, owner of Egglefield Bros. Ford in Elizabethtown, N.Y., says he is forced to live with lower inventory.
That means he risks not getting Mustangs in time for his spring-summer season or four-wheel-drives before the snow flies. To compensate, the dealership is encouraging regular customers to order in advance and also is trading vehicles more often with surrounding dealerships.
“Our floorplan is down,” he says, “not from necessity but because we can’t get the merchandise. We do a lot more dealer swaps than we used to.”
For manufacturers, leaner inventories mean lower incentives. Average June incentives were down more than $300 from the industry’s peak of $3,165 per vehicle in March 2009, Edmunds.com says.
“There is no faster way to profitability than to cut incentives,” says Dave Cole, chairman of the Center for Automotive Research.
Carmakers — and not just Chapter 11 survivors GM and Chrysler Group — have taken advantage of the crisis to fix structural problems.
Toyota, for example, had too many factories below capacity in 2008. This year it has closed NUMMI in California, consolidated Tundra pickup production in San Antonio and revamped plans at its new Tupelo, Miss., plant. Instead of the Prius hybrid, Toyota will make the high-volume Corolla in Mississippi.
Supplier relationships are changing, too. All three Detroit 3 purchasing bosses — recognizing the difficulty of getting by without the technology and expertise of key partners — have vowed to collaborate more closely with suppliers.
For instance, Chrysler this summer began offering more formal protections to suppliers. Previously, says purchasing boss Dan Knott, “I could pull the trigger at the last minute” and drop a supplier because “I didn’t like the way you look.”
Conversely, some old loyalties are crumbling. Auto advertising was once known for its stability, but a few of the oldest ties between carmakers and agencies — Campbell-Ewald and Chevrolet, for example — were severed this year as automakers struggle to re-establish brands and shake off tired stereotypes.
Dealers’ new approach
Nowhere is the change more profound than at dealerships. Dealers have slashed costs in every corner of their stores to focus on the bottom line. Because of those cuts, many say they’ll be profitable this year no matter what.
The combination of lower sales and shrinking margins has led dealers to experiment with new ways of paying salespeople. The traditional straight commission of 20 percent of gross profit has so squeezed salespeople that dealers fear a wave of departures.
A common switch: Pay a base salary plus commission.
With finance and insurance revenue falling as a result of lower sales, some dealers have cut dedicated F&I staff and let salespeople share some F&I commissions.
Some dealers are pushing their service departments to compete with repair chains such as Jiffy Lube. And they are tinkering with new pricing models, testing variations of no-haggle selling. By the middle of this decade, AutoNation plans to have all of its 200-plus stores using low everyday prices and limited negotiations.
Suppliers that happily used to accept jobs with razor-thin margins just to keep their factories running are concentrating on contracts that are sure winners.
“You can’t just launch 10 different car platforms (and have) four of them be winners and six of them losers,” says BorgWarner CEO Tim Manganello. “That’s a recipe for disaster. You need nine out of 10 winners.”
Behr America CEO Heinz Otto says suppliers are chasing margins above 5 percent of sales. In the past they were OK with 2 or 3 percent, he says.
There’s a dark side to the new emphasis on the bottom line: Many suppliers are moving engineering jobs out of the United States.
“You always have to look at your engineering structure — and how possible is it to use engineering resources that are offshore,” says James Rosseau, CEO of Magneti Marelli USA. “We offshore certain administration functions to reduce costs. I don’t think we’ll revert. The support functions, I believe, are gone.”
With their lower breakevens, parts makers are poised for strong profits at today’s volumes of 11 million to 12 million units annually.
That could be critical. Rebecca Lindland, head of auto research for the Americas at IHS Automotive, says current low sales are not building future demand but instead are working off the excess supply of the past.
“There’s very little pent-up demand,” she says.
Permanent? Or just a blip?
Are these changes permanent, or will they disappear with the first sign that things are back to “normal”?
It’s a crucial question, since analysts say the industry’s long-term health rests on continued discipline.
“We have a greater opportunity to make change that’s permanent,” says Jeff Schuster, head auto forecaster for J.D. Power and Associates.
“But as the sun comes out, it’s easy to let go of some things you have learned.”
(Source: Automotive News, 08/02/10)