By James A. Ziegler, CSP, HSG,
"The Alpha Dawg"
When you read this article's title, you did a double-take and thought you caught a typo, didn’t you? I thought that was cute myself when I wrote it. When I refer to the new 'new normal,' I'm taking a few pokes at all of the industry experts that, just a few months ago, declared that inventory shortages and manufacturer-measured production would become the new normal.'
All that talk about manufacturers adopting 'the factory direct sales agency model' has faded and disappeared a bit, hasn't it? I suspect that manufacturers that committed to it regret their hasty decisions. But, of course, you didn't hear me saying anything like that—quite the opposite. If you read my previous articles in Dealer Magazine, I've called it right since the beginning.
The 'New Normal' Has Fallen Apart
What's a quarterback to do when the line breaks down and the blitz is coming at you? If you're Patrick Mahomes, you forget about the play you were supposed to run- and scramble. Manufacturers are scrambling because their plays broke down, and inventory is flooding the pipeline. It's not turning out the way they planned it.
In researching this article, after visiting 10 dealership websites, Toyota, Nissan, Chevrolet, Ford, Ram, and Dodge, dealer discounts seem to be averaging around $1,800 to $2,500 on $35,000 cars and trucks. We’re seeing rebates and subsidized interest rates from the manufacturers. The 'new normal' has fallen apart.
The rush to EVs is slowing as the initial demand is leveling out. Everyone who wants an EV seems to have one for the time being, or they're waiting for cheaper models (which are coming soon). My friend, Max Zanan, recently posted a photo on social media of a Costco window sticker on a Mercedes 2023 EQS-580 EV with an MSRP of $135,305 discounted for sale at $126,265, almost a $10,000 discount.
The manufacturers’ game plans began to fall apart with the collapse of Carvana and the failure of their business plan. During the pandemic, Carvana soared and seemed to be the next wave of the future.
Tesla’s high profitability and efficient direct sales model gave the manufacturers what they interpreted as a clear signal that the industry needed to shift to direct online sales.
During the pandemic, the ‘digital retail industry' flourished. But, unfortunately, it was just another wave of the future that never quite made it to the beach.
Many vendors promised us the tools that would emulate Tesla and Carvana, offering the dealers total online transactions and offsite delivery, reducing the dealerships’ lots and showrooms to the size of a postage stamp. Well, that stalled short of the finish line, didn’t it? We all found out that these were great tools to work a deal, and they actually worked in the showroom, shortening the process. However, many customers stopped short of making the deal and still went physically to the showroom to finish the transaction and selection.
The Tesla business model only worked when there was no competition when they were the unicorn. AND Carvana worked well when people were forced to use it during the pandemic when most other dealers were limited or completely restricted in doing business. Aside from being grossly mismanaged, Carvana’s business model began to fall apart as the pandemic faded out.
I was surprised to see former AutoNation CEO Mike Maroone was a major investor in Carvana from the beginning, and he was on Carvana’s board of directors. There were many in traditional retail that got tangled up with these people; regardless of their reputation or past transgressions, they were eager to cash in on overthrowing the traditional dealership model.
While most of the manufacturers rushed toward a direct sales agency model, virtually all of them began producing competitive EVs. There was a major upset in their plans. In a religion that worshipped Carvana and Tesla, it would be devastating if their gods were exposed.
Suddenly Tesla started discounting. At first, it was small, then they took $7,500 off their bestselling Model 3 and Model Y. This followed discounts they had already offered earlier.
The Playing Field Was Leveling
With tax breaks disappearing on EVs, the playing field was leveling. Tesla was no longer a 'unicorn’ with no competition in their previously-niche segment. Essentially every manufacturer began producing competitive EVs, and their inventory was readily available on dealership lots. Customers have choices, and waiting for an online order is no longer necessary.
Frankly, it appears that Elon Musk has moved on from producing cars to planning his trip to Mars.
EVs, Shifting Models & Plans
Ford jumped out front launching an impressive lineup of EVs, cars, trucks, and SUVs. General Motors was in the game, more cautiously than Ford’s All-In strategy of splitting EVs and gas-engine sales into two separate companies.
Stellantis was slow to jump into producing an EV lineup, but they did go all-in on the agency model in Europe, announcing the end of European car dealerships.
Toyota and Hyundai said not us. And they were the winders in this conflict of philosophies. I still can’t figure out where Nissan is in the scheme of things.
In the U.S., in an uncharacteristically dealer-friendly move, General Motors (GM) announced they would stick with their dealerships. Even though GM was not going with an agency model, they were still looking at direct sales as the keys to their future, but Mark Reuss announced they were taking a different route that included their dealers. Smart move.
On the other side of town, Jim Farley at Ford was positioning EVs as a total agency model as his plan was phasing out gasoline-powered cars and trucks as museum pieces for our great-grandchildren. It appeared to me that perhaps, Jim had just bumped his head. In the words of the Scottish poet Robert Burns, "The best-laid schemes of mice and men go oft awry, And leave us nothing but grief and pain."
Rush to Reinvent
In Ford Motor Company's rush to reinvent the business, they're buried under a series of plagues and missteps. These were preventable and predictable but caused them to post a $2 billion loss for 2022. They're on track to break that record in 2023. Citing the chip shortage and supply chain issues as the cause, Farley danced away with masterful blame-shifting.
Excuse me, didn't they just shutter the Ford Escape Plant in Louisville... and then extend the closure?
Jim Farley spends every moment- when he isn’t being interviewed or in a photoshoot, putting out fires and apologizing. Launching this lineup of new products and EVs has been a monumental screw-up from the start. For the first time in decades, they are plagued with quality problems.
On March 1, Ford announced to the dealers that they would be replacing ALL OF THE 2.3L ENGINES for the 2023 model year in the production dates in the announcement. Don't sell or deliver them; If some poor schmuck ordered one, they're out of luck. The 'Stop-Sales/Recall' included Explorers built in the notorious Chicago Plant, Rangers and Broncos built in Michigan.
How would you like it if you’d bought a brand-new Ford Explorer earlier this year, and now you had to suffer the inconvenience and uncertainty of having a dealer-replaced engine on your new vehicle? Would you lose total confidence in the manufacturer? If you paid $15,000 over MSRP for a new Bronco, and now the customer’s perception, no matter how experienced and competent your master tech, is that this person at the dealership will replace the engine? What is your CSI with the manufacturer and the dealer going to be? Of course, they'll blame the dealer, and many I know feel the Ford Call Centers have a way of insinuating it’s the dealers’ fault. The Chicago Ford/Lincoln plants continue to be a nightmare. When I was selling Fords in the 80s, the slogan was Quality is job 1.
Engine fires and safety recalls - it seems there’s a new ‘Stop Sale/Recall’ order coming from Ford every time you turn around on Ford’s hottest-selling models, EVs, and gasoline models. There are cars sitting on your lot you can’t sell.
As I predicted, they’re right on script. They can’t produce ordered units on time, not even close, with some customers waiting more than a year, sometimes for ordered units with no special or unusual equipment.
Jim Farley’s plans are turning out far from being genius or visionary - and more resemble the zany madcap exploits of a Mel Brooks movie, similar to "Blazing Saddles" or "Young Frankenstein." His leadership has taken the heat off of General Motors.
Experiencing the Real New- New Normal
Now that we are experiencing the real new 'new normal,' instead of the 'new normal' that never happened, it looks strikingly like the old normal we’ve been operating under for years, doesn’t it?
Inventory is flowing, dealers are negotiating, and there’s little pressure or coercion to force ‘build to order’ on the dealers or the public. We’ve got rebates and manufacturer discounts, and low-interest rates and special leasing programs are returning.
We’re back in the car business, which is a good thing because storm clouds are on the horizon. We’re experiencing a deepening recession, and credit is tightening as interest rates rise.
As the manufacturers dig their way out of situations they’ve created, we’re facing a crisis we all had a hand in creating. According to Experian, severe subprime loan delinquencies now exceed 7.3%, and 60-day delinquencies exceed 6.0%. I predict those numbers, which are historical records, will grow to become historical record defaults and repossessions.
In recent years we’ve routinely sold cars and trucks for as much as $10,000 and $20,000 over MSRP due to inventory shortages. At the same time, manufacturers, especially Ford, GM, and Ram, raised the prices of their EVs, mirroring every government tax break dollar- for dollar. They said it was because of supply cost increases, but I feel it had more to do with the fact they saw the dealers charging more for the vehicles, and the customers were paying it, so they were moving the money to their side of the ledger.
A Perfect Storm
These situations created the credit crisis I feel we’re about to experience. Before this is over, it may be the worst since 2008. It will be most devastating to middle-class buyers that previously had impeccable credit. A perfect storm of circumstances, inflation and the cost of living has risen 14% in the last two years. Their only real crime was that they needed to buy a car in the last few years, and they paid way too much, which created an unconscionable upside-down situation they’ll never be able to dig their way out of. I’ve been screaming it and warning everyone that would listen for the last two years.
Not to pick on Ford again, but it is what it is. Somebody was listening. On March 3, Ford applied for a patent on new technology that enables their self-driving cars to repossess themselves.
Calm down folks; you read that correctly. Ford applied for a patent for a series of technologies designed to harass customers that fall behind on their payments. Initially, messages would appear on the screens in the car, on the dash, on cell phones synced to the car, and then turn off the customers’ comfort items like heating and air conditioning, radio, cruise control, refusing to unlock the doors, and cause the radio to emit a series of irritating chirps and whistles to drive the customers crazy until they pay up. If these escalating steps didn’t work to the company’s satisfaction, then the car would simply drive home and repossess itself.
In defense of the 14-page detailed application, Ford spokes mannequin said, "We don't have any plans to deploy this." Of course not silly people, what gave you that impression that they would ever actually use this?
Here’s where it gets really ridiculous. The spokesperson went on to explain that “Companies apply for patents to protect ideas from being used by others, whether or not they actually use the intellectual property themselves.â€
Of course, why didn’t I think of that? Ford applied for a patent on this technology designed to harass customers so they could protect people from other companies using it.
And while we’re talking about the credit crisis that I believe is beginning to escalate, last week American Car Center, which has more than 40 dealerships across 10 states, closed its doors suddenly laying off more than 300 employees. American Car Centers, one of the largest subprime used car dealerships in the country behind Drivetime (owned by the lovable folks that also own Carvana), went out of business with no visible warning to employees and customers.
In the end, American Car Center customers will now be making payments to Westlake financial who picked up the paper. The upcoming credit crisis will affect everyone but hit hardest will be the weakening of the finances of poorer American households. As I’ve written in the past, dealers need to train and shore up their Subprime Finance Departments.
All of the signs are there, and we’ve seen no indicators to signal that it’ll get better before it gets worse.
Is it all gloom and doom? Well, not exactly, but there are things we need to talk about. I’ve had dealers tell me … “We’re not going to participate in any recessions.â€
Okay, sure thing, you're allowed not to participate, but the rest of us will have to stay in the real world and deal with reality. My advice is to get your house in order. If you’ve never endured a recession, the roller coaster is about to leave the station. All of the signs are there. Examine your processes, get rid of bad people, and invest in training. Trim your vendors that aren’t producing a measurable ROI. Lastly, double down on your advertising and marketing, do not hunker down; aggressively go after the market.
One thing I am seeing in the market, talking to dealers, GMs, and GSMs, is that car dealers are going back to blocking and tackling basic car sales 101. With the manufacturers’ erratic business plans changing almost every day, we have to remain profitable and stabilize our dealerships. One thing I'm seeing that surprised me initially is that many dealerships are revising sales and managers' pay plans back to a percentage of gross profit on the deals.
Here we are with per-unit pay plans and one-price, no-haggle dealerships. And now, suddenly, we’re seeing many stores returning to negotiating deals and reverting to gross-based pay plans. One thing you can believe is that a pay plan is a job description. It’s all over the map, and there’s no one-size fits all.
So, returning to the theme so many smug experts have been hammering for the last two years as the pandemic faded into history, there is no new normal.
As I've said before: There will be a return to normal, and the first time a manufacturer starts losing market share, that all of this inventory control will be out the window, and we’ll see a return to rebates and incentives. At the time I said that, it flew in the face of what you were being told and contradicted what the manufacturers and 'Bell Cow Experts' were saying. I keep pointing that out because I am making new predictions here, and what I am saying is not necessarily what we’re being told.
Whatever the manufacturers told us was going to happen is not the way it’s going to turn out. I was “The Voice Crying Out in the Wilderness.†But now, once again, I’ve been vindicated as the voice of sanity. Thanks for reading, I look forward to seeing your comments.
James A. Ziegler, CSP, HSG, of Ziegler SuperSystems, Inc., for 45 years, has been a recognized industry leader, writer, magazine columnist, professional speaker, and super performer following a record-setting sales career as F&I manager/director, and GSM with some of the top automobile dealerships in the country. Jim has worked with more than 15,000 dealerships nationwide, and over 125,000 dealers, managers, and factory executives have attended his automobile dealer management trainings.