ARE MANUFACTURERS GETTING READY TO DUMP THEIR DEALERSHIPS?
ARE DEALERSHIPS OBSOLETE? This article is a collection of Ziegler’s opinions and his interpretation of current events as he sees and his conjecture of what it might mean.
The Perfect Storm. It all began during the shut-in, locked down period of the Pandemic. We’ll call it the ‘Amazon Effect’. Consumers discovered they could order products and services, even groceries, online which could be delivered to their homes almost immediately, a generation of instant gratification.
Even though they’ve only captured a small percentage of retail sales, the new players like Carvana, Vroom and Tesla have captured a growing niche within the market, but don’t lose sight of the fact it’s only a small percentage of total sales nationally, to a very elite clientele so far.
In the meantime, several other situations created by the Pandemic occurred. We have a shortage of microprocessor chips and raw materials to build the cars caused by supply chain issues and labor shortages. On top of that, the manufacturers are having to compete with cell phone companies and computer manufacturers, and suppliers in almost every other industry that also need these chips.
These Chips are produced by China and overseas companies that can restrict supply much like the Arab OPEC Oil Embargos of the 70’s. This ‘Chip Shortage’ isn’t going to end even when the supply shortage is over, especially for domestic manufacturers. I predict the chips will be held hostage for political reasons now that we are overly dependent on China.
AND, to make matters even worse, (as if it could get worse) Manufacturers and Politicians are dictating that all cars (vehicles) produced and sold in the United States will be EV by the year 2030. Even though science agrees that would cause the entire power grid in the U.S, to collapse, the lack of charging stations, and the public reluctance to buy them, manufacturers and politicians are forging ahead in spite of reality. It is logistically impossible, environmentally damaging, and there’s no infrastructure to support it.
The Biggest Lie being served up to Dealers, and to the Public, is that the rush to EV cars and trucks is driven by public demand. Recent studies in California (EV headquarters) show that the majority of people that bought EVs traded them within a short amount of time and bought Internal Combustion Engine Cars, mostly because of limited range and charging time, and yes, because of quality issues. Just leave it to say, there’s no public mandate driving a mass conversion from Internal Combustion Engines to Electric Cars. I’m going to say that politicians and the manufacturers have another agenda that will become clear by the time you read this entire article.
The Politics of it caused us to shut down oil pipelines and domestic drilling to the point we’re buying 700,000 barrels of oil a day from Russia financing their European war on Ukraine.
Right or wrong, the manufacturers are continuing to charge ahead toward total EV production across all of their lines and models.
I am predicting, (I’ve been ridiculed heavily for saying this) Yes, I predict that all manufacturers will be producing Electric Vehicles exclusively by 2028, far ahead of the phantom mandate of 2030.
There is NO LAW: Contrary to a popular belief, there is No Law requiring a 2030 deadline for EV production, it is just the politicians and manufacturers saying it. That is important to keep in mind as I build this article, point by point.
“Okay Ziegler, where is all of this leading and what does it have to do with your statement that manufacturers trying to do away with Car Dealers?”
Well, the first time we noticed the manufacturers flexing their muscles was when Dealers started taking advantage of the laws of supply and demand. With very few cars to sell, dealer began selling cars for markups above MSRP.
Personally, I don’t agree with some the outrageous markups of $10,000 or more above MSRP that some Dealers are charging customers. I think that is wrong and will cause longer range problems for dealers and the brand they are selling. Not only will customers feel betrayed and cheated when the chip shortage lets up, but it will give the manufacturers a stronger case when they make a move to eliminate dealerships. If I was a CEO with any of the big public corporations like AutoNation, Penske or Group1, I’d be particularly concerned.
Yes, I strongly disagree with some of these outrageously high markups, but I will defend the dealers’ right to do it. In the Free Market, it’s the Law of Supply and Demand. The manufacturers have very limited legal right to interfere.
Even so, the manufacturers have all began to whine and threaten the Dealers although none of them have apologized for the unconscionably low markups at MSRP. They have collectively cheated the Dealers for decades with low profitability margins above invoice on new units.
The first manufacturer to issue a threat to their Dealers came as Ford Sales VP, Andrew Frick fired a shot and sent Dealers a letter threatening to withhold their allocation if Dealers required additional high deposits and markups on the Lightning EV Truck. Pay close attention here. I will explain later why the manufacturers feel they can get away with threats to withhold ‘Electric Vehicles’ and you’ll see very few threats to withhold allocation of Internal Combustion Engine Vehicles.
Steve Carlisle, GM’s President of North America fired a subdued threat to the Dealers describing the Dealers that markup the vehicles as “A small minority of Bad Actors charging far above MSRP.”
Excuse me Steve, you better look again, almost every General Motors Dealership in the world is selling cars with additional markup, and you know it. When I read that Steve had said it was only a “Small Minority of Bad Actors”, I spewed coffee out of my nose in hysterical laughter. Like, “What’s this Dude been Smoking?”
Following Ford’s lead, GM is threatening dealers with whatever they consider excessive markups that they’ll withhold the hottest, limited production cars and trucks in their lineup, including the Corvette Z06 and EV’s in the production pipeline.
Randy Parker, VP of Sales for Hyundai and Claudia Marquez, COO of Genesis NA issued a joint letter to Dealers with similar threats to withhold select inventory to Hyundai and Genesis.
It’s laughable that the manufacturers keep saying it’s just a small minority of Dealers marking up the vehicles. Don’t be misled, they know that’s Not the truth.
According to Edmunds recent research, buyers paid above sticker price on a record 82 percent of all new vehicles sold in January, Virtually everybody is doing it. As I write this, I visited a dealership just yesterday and every vehicle they had in stock (just a handful), every vehicle had a $10,000 additional markup. Dealers must markup the vehicles to survive with the higher costs of doing business, unconscionably low factory markups and no inventory on their lots. Some amount of additional markup is necessary just to stay in business and survive. The result is record profits and the factory has noticed it.
I have always considered Jim Farley CEO of Ford to be a personal friend. Before he became CEO of Ford, I sort of thought we had bonded. He is an extremely really bright guy and very personable. Until recently, I have said repeatedly that I’ve always considered Ford to be one of the most Dealer-Friendly manufacturers. That opinion may be changing.
The disconnect started when Ford announced that their marketing plan was to go to Build to Order Cars and Trucks. Wait a minute here, the Car Guy in me says that’s a really dumb idea.
We’re talking about a manufacturer that is currently taking five weeks, in most cases longer than that, to deliver an ordered unit. I spoke to a dealer just last week that told me about a Ford Bronco they ordered months ago that still hasn’t arrived when their competing dealer received several Broncos that were similarly equipped, that nobody ordered.
Consumers are into selection on the ground and instant gratification. They want the car they want, and they want it now. I’ve always said inventory sells cars.
Not just Ford, it seems that all of the manufacturers are coming out and restricting production. They’re going All-In and some of them are allocating 40% to 60% of their production to direct sales and some have begun paying salespersons directly for selling Build to Order Sales. Mary Barra at General Motors recently told Dealers not to expect inventory levels to return to previous levels, even after the supply chain shortages end.
But the question remains, “Why are Ford, GM, and other manufacturers going to Build to Order production?” It is disastrous, and that should be obvious to anyone that understands retail automotive sales. There must be more to it than that.
In truth, I believe it’s part of a much larger plan. The answer is their infatuation with Tesla’s model. I hate to say it, excuse me Ford, you are not Tesla.
More than Tesla’s sales and marketing model, the manufacturers’ boards are envious of Tesla’s market valuation.
They’ve seen the record profits Dealers are making with the added markups and they realize that with limited production they can raise MSRPs substantially and move that money to the manufacturers’ side of the ledger. In other words, the factory knows if they can reduce production and create an artificial scarcity, they can raise MSRPs, and the public will pay it.
In the past, manufacturers always believed they had to sell cheap to be profitable. Over-production caused huge rebates, trunk-money for the dealers, and big promotional sales like Toyotathons and Happy Honda Days. They created stair-step and incentive programs to move more units. All of this because they were they needed Market Share. Well guys and gals, the age of chasing Market Share seems to have come to an end to be replaced with profitability … OR has it?
There’s only one thing standing in the way of the manufacturers’ grand vision of duplicating Tesla, standing in the way of realizing their dream, is Franchised Dealerships.
Don’t think Ford is the only manufacturer thinking this way, it’s epidemic amongst all manufacturers including General Motors and Stellantis. It’s just that Ford has come out in the open with it and is making the most aggressive moves.
I recently read a blog article by a friend of mine, Ariel Velazquez, on this subject. In his blog Ariel referred to a presentation that Jim Farley, CEO of Ford, made during a call with Ford investors. Knowing what I know, Farley’s presentation to the shareholders was enlightening and filled in some of the blanks for me.
Like I said, it’s out in the open and the manufacturers have taken the gloves off.
Farley opened up making it clear that he will penalize Dealers that go beyond what he said was “reasonable markup”, pricing vehicles above MSRP.
Remember the manufacturers are treading on very shaky legal ground here and they know it. If they cross the line, which I feel they may have done, and they start when they start price-fixing the liabilities could be severe, especially if Dealers hire attorneys or the Federal Trade Commission gets involved. That is why they seem to be choosing their words carefully. The main thing we all need to pay attention to is that most of the threats manufacturers are making to withhold inventory allocations, with the exception of the Corvette Z06, it seems they are threatening to withhold Electric Vehicles. There might be a real reason for that.
So, during his presentation on the Investor’s Call, Farley made it clear that he was going to take a retaliatory action against Dealers with excessive markups above what he called reasonable markups. Notice none of the manufacturers are saying Dealers can’t markup the cars over MSRP, they are just referring to excessive markups. (there’s a reason for that) Among those penalties will be a reduction in the number of new F-150 Lightning vehicles (EVs).
It was laughable when Farley said that that 10% of Dealers in the dealer network charge above the MSRP. Excuse me Jim, I can’t believe you failed at elementary school math, obviously you didn’t read the Edmunds research that says 82% of vehicles are being sold over MSRP. I speak to 100’s of Dealers and Managers every month and the majority of Ford Dealers I know are marking up the cars.
Believe me, Ford and all of the other manufacturers are aware of how much Dealers are charging, and how much they are getting for the cars, and they are figuring out ways to get that profit moved to their side of the ledger. I think it’s more about greed than indignation. Regardless, 10% is a ridiculous number.
BUT then Jim Farley dropped the bomb that shook the walls. Here it comes, he said what I’ve been warning Dealers about for years.
Farley said, “But I will go back to something we said, and I’ve said over and over again, which is, running a successful ICE business and the successful BEV business are not the same. The customers are different. We think that go-to-market is going to have to be different…. The rhythm of the business is different – fundamentally different … On the BEV 9 Battery Electric Vehicles side, this is quite an important topic, because the margins that we want to build in BEV are going to be heavily dependent on a different go-to-market and customer experience.
I won’t go into any more than that, but this is quite an important lesson for us of the franchise system, and the way we will manage going forward”
You can find the entire transcript of that call to investors here … https://news.alphastreet.com/ford-motor-company-f-q4-2021-earnings-call-transcript/
THEN … Just a few days later, Farley came back on a finance call on February 23, Farley, sort of retracting and denying everything he had just said a few days before on the investors’ call …“We have no plans to spin off our electric business or our ICE business.”
He went on to also say … “The first big move is going to be to pull inventory out of the system. Whether it’s dealers or us, no one likes to have finished inventory sitting around, it is ungodly expensive, and our industry has put up with it for far too long,” he said. “We’re now in our biggest market, in the U.S., one-third of our sales are basically order-to-delivery now.”
If you have a problem understanding what he just said, here’s my take on it and my opinions on what that content means.
First of all, in varying degrees, this is every manufacturer, not just Ford. It certainly applies to General Motors, watch the patterns.
I believe they are creating a new Brand that is not subject to franchise laws under the exceptions and carve-outs that apparently all but 17 states have already made for Tesla and, subsequently, for other EV Manufacturers.
When they do, they will not need Dealerships. BUT, during the time they transition out of ICE Vehicle sales, they need to do something not to overly alarm the dealers, especially with the NADA convention meetings coming up.
That is the vision, regardless of the fact they have screwed up every time they attempted to do retail sales. Ford, and every other manufacturer is incredibly inept at selling and marketing car sales.
They are spinning off EVs, which are known as BEVs, or Battery Electric Vehicles, as a separate manufacturer. Dealers will be left selling ICE Vehicles, Internal Combustion Engines.
THEN: On March 1st and 2nd articles appeared everywhere that Ford announced they are spinning off their Electric Vehicle Business and separating it from their Internal Combustion Engine Business.
Wait a damn minute there Roscoe? Didn’t Farley just announce, like just a week before that, that Ford was Not going to do that?
I could swear that I read in the transcript that Farley said …“We have no plans to spin off our electric business or our ICE business.”
I just Googled Up this phrase, “We have too many people, we have too much investment, we have too much complexity and we don’t have expertise in transitioning our assets,” Farley said. “(But) we have no plans to spin off our electric business or our ICE business.”, and apparently on February 23rd and 24th I found five other journalists who also misheard his statement and put in national publications that he said that.
In other words, apparently Farley said it and then he took it back and said it wasn’t so and then they announced that it was true all along.
Was he just trying to calm the dealers down until they could huddle up and come up with a gameplan to announce it after he had slipped up and announced it in the stockholders’ meeting a few weeks before? Did Farley mess up and let the cat out of the bag and now they need to stall, so he announced they weren’t going to do that? I don’t know the answer, but I am sure he wasn’t lying to the dealers. Right? I don’t think Google is lying all of these times I found that transcript.
“But wait a minute here Ziegler. Didn’t you say that Ford is phasing out ICE vehicles?”
“You got it Sherlock. If Ford and all of the other OEMs phase out Internal Combustion Engine Vehicles, then the Dealers are left with nothing to sell because Electric Vehicles will be sold online by the New Ford II, or whatever they name it. They can make Bronco and Lightning as their own brands if they chose to.”
As Jim Farley so carefully explained with guarded wording in the investor’s call, they need a Different Go-To-Market Strategy. No doubt, they think they can duplicate Tesla and Rivian, Lucid, Fisker and all of the new manufacturers coming into the market with a Tesla-like model.
I Love to Have a Video Debate Live With Jim Farley about these issues or even a personal phone call to discuss it.
Tesla paved the way, and as of now only 17 states prohibit the sales of vehicles direct by the manufacturer, or at least have made special carve-outs, or even granted them an exception and made them a franchised dealer. The exception to the franchise laws protection is that the manufacturers can say the car is sold on the website.
Truthfully once it’s in motion, there would be little problem in defeating the remaining 17 states’ protective franchise laws. The NADA Limped off of the battlefield a decade ago on these issues and I believe they will sit this one out as the NADA itself becomes obsolete. No need for a Dealers’ Association if there are no Dealers.
So, as of right now, Digital Retailing, total transaction done on the website, home delivery, and technology-enabled sales have made direct to the consumer of Electric Vehicles by the manufacturer without a Dealer in-between into a possible and feasible reality.
Most states have made this sales model of Electric Vehicles (BEVs) an exception to franchise laws, it is completely legal in most states already with only 17 holding out. If the Manufacturers make BEVs their own brands, then they are not subject to the traditional state franchise laws. All the manufacturers have to do is create BEVs as separate brands and market through digital retailing on the websites, which it appears they are doing.
That’s the bad news. Would you like to hear the good news? The good news is twofold, maybe threefold.
First of all, the entire fascination with Electric Vehicles will collapse miserably as we reach saturation. One thing we know is that no matter whichever political party is in power, that will change, and it will change again.
Currently, the United States has temporarily given up all energy independence. We’ve stopped drilling and shut down the pipelines that the previous administration had opened up. If that reverses and politics change and we go back to petrol-fuel production, then that need diminishes.
Those of us who have been in the industry for any amount of time will remember what happened to Car Sales back on January 16th, 2001. That is the day the United States and Allies started bombing Baghdad. The day that war started, car sales ground to a screeching halt. Overnight car sales dried up and stayed that way all of the way until the end of the year. With war breaking out in Europe, I have to ask is this the time to try something like this?
Another issue playing into this scenario is where is the power coming from? As I mentioned previously, the national power grid would totally collapse if they actually achieved exclusive BEV production by 2030. (which is ridiculous) We don’t have the infrastructure, the raw materials, and the mechanics of the transition, not to mention political infighting.
AND the manufacturers cannot even handle Build to Order now with a limited number of sales. What will happen when they try to make it standard process? Dealers reading this, think about how screwed up all manufacturer’s ordering systems are. They can’t build and deliver a custom ordered car on time, none of them. The consumers aren’t going to stand for it, they want it now.
It has always been the Dealers with the massive amounts of inventory on the ground that sold the cars. Selection sells cars because most consumers do not actually buy the car that they thought they were going to buy when they left home. Manufacturers don’t get it, and they never will.
Can you imagine the manufacturers trying to deal with credit-challenged customers or even with indecisive customers? It is the Dealers’ expertise in working the deals and working the credit that gets a large percentage of the deals approved and delivered.
Unlike Tesla that has a higher end clientele, a significant number of Ford buyers have credit issues. These deals have to be worked with a high degree of expertise. Under their vision, these deals will be lost.
I saw photos online of the visionary Lincoln Boutique showroom of the future with the one car showroom (that car is not for sale, just a display). Your virtual test drive at the boutique showroom of the future is theoretically with an Oculus VR Virtual Reality Headset while you sit in a seat that vibrates and simulates road conditions. The key vision is that customers must still buy the car totally online, or so they say.
The final reason I am predicting monumental failure for multiple reasons is Market Share. If there’s anything the manufacturer executives fear is not winning the market share game.
Careers have ended abruptly when the board kicked out top executives that lost market share to the competitors. It would be a sad day in Dearborn if Stellantis took a huge victory in market share because Ram truck sales theoretically wiped-out F-150 sales when their top executives were fooling around with Build to Order nonsense.
I think Ford and GM will lead the way as the other manufacturers hold back initially waiting to see what happens, most notably Stellantis and the Korean Brands. If GM and Ford stay on course with their Build to Order Strategy you can count on Stellantis and the Korean Brands to have dominant market share if they don’t immediately participate. They will inherit the sales title. Let’s face it, Ram builds a good truck regardless of Ford F150 and Silverado claiming they have better quality. Build to Order is going to hand the truck sales title market share to Ram. Jeep sales will skyrocket, especially with the new Grand Wagoneer which is selling at $108,000 (wow). Genesis will become a true luxury contender; a title Cadillac gave up years ago. I could go on and on, but I think I made my point. Build to Order will last only as long as until the board comes down on top executives.
Mike Tyson’s famous quote was “Everyone Has a Plan Until They Get Punched in the Mouth”.
The last time Ford attempted to own and operate dealerships was under the leadership of CEO Jacques Nasser in the late 90s when Ford bought a number of Dealerships and attempted to operate them in several major cities. They called it the Ford Auto Collection. Of course, in less than 3 years it crashed and failed and, not coincidentally, Bill Ford’s first executive action in 2001 was to fire Jacques Nasser. Shortly after, Jacques was seen walking down the beach in Australia mumbling to himself. Since then, he’s gotten some board positions and gotten involved with other companies but nowhere near the level he had with Ford. That’s my negative personal opinion of Jacques’ leadership vision and his executive decisions anyway.
In the end, I have no faith in any manufacturers’ vision to eliminate the franchised Dealers, but it’s going to be painful for everybody.
This has been the recurring theme with every manufacturer as every new generation of OEM management comes into power with the realization that they are so much smarter than the Dealers.
AND, as always, I predict history will repeat itself as the manufacturers come crawling back to the Dealers on bloody knees asking us to fix the mess they’ve created. This will be one of those times.
Here are several Video panel discussions of these issues that I led.
JIM ZIEGLER #AlphaDawg
