Build and sell cars is still a good business! Not for everyone.

6270183080 75fd4e65d2 Build and sell cars is still a good business! Not for everyone.

Noting the difficulties of Chrysler and GM, the dreaded sale of Opel, the drastic restructuring of many OEMs, but also the ‘extermination’ of thousands of dealers in Italy and around the world – people I meet ask me if it still worth to build and sell cars.

The impressions and the… ‘stomach ache’ of those who are suffering ‘in the trenches of the automotive’ are always significant, but the best thing is to stop and have a look to facts-and-figures.

Build cars it worth! At the Quintegia International Dealer Forum, an influential journalist of AutomotiveNews Europe – using data Alix Partners – has shown that car manufacturers had in 2010 – on average – a 4.2% net margin. The shareholders of the ‘best in class’ OEMs earned a net profit of 6.8%. Better than the others, the group of the Europeans, with an average net margin of 5,0%. The average net profit of the ‘seconds’ – the group Japan-Korea – is ‘only’ 3.4%. Not so bad! In between there are Americans, Chinese and Indians.

 

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Also to sell cars it worth, even if… During a concomitant event organized by Exxon-Mobil, ‘Italia Bilanci.com’ published the data of the budgets of the Italian Dealers in 2010. Interesting: while the average of the private dealers they gain the 0.4% – but more than 50% of them today are loosing money - in our country all the automaker’s owned dealers lose an average of 3.6% – someone dozens of millions (MB subsidiary in 2010, FGA Centers in 2007) – and since 2005 (date of commencement of the survey) they never have gained!

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Although the income statement and the balance sheet of the dealers depend – for a significant proportion (70-80%?) – from strategies by the OEM, it is interesting to compare the results between those ‘born to sell cars’ (like the dealers – some of which from 3 or 4 generations) and those OEMs that have improvised themselves as salesmen, just to ‘cover’ areas considered ‘incomplete’ or ‘difficult’ for their own network.

I have proof that the ‘theory of species evolution’ is reversible! Gee whiz! Really something quite different from what happened in Italy in the 50’s when Alfa Romeo – earning money at that time – invented the first ‘dealers-owned’ in the world – the subsidiaries – not to compete with the dealers and the official network as is used today by the OEMs, but to verify “on-the-field” the validity of commercial actions, quality and maintenance of products. It was also to understand what the network of the dealers was experiencing “downstream” of the factory.

Bigger is better? This same analisys certify that over the last 6 years the size of the dealers has proved essential to the success of dealerships: large groups – preferably multi-brands – have gained more (+0.3 gain) than the small single-brand dealers (- 0.4 average loss). However, we speak of … crumbs.

With many exceptions: large groups ‘shredded’ by multimillion-euro/dollars bankruptcies and small family owned dealers who earn more than 5% of the turnover.

 

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It is not always true that ‘small is ugly ‘! A couple of weeks ago – during a business trip in Paris – I visited the new experimental ‘mini-district-dealers’ of three different OEM: 1 little showroom, 1 car on display, 1 salesperson, 1 mechanic, a small warehouse stocked in time real by a courier. An interactive display on the sidewalk – it is not even needed to enter the store to view the entire range or the used car stock. And in the U.S., after the excitement with the mega-dealers that have lost millions of car sales – and trillions of dollars – the OEMs are returning to reconsider small dealers in family-run, selling 100 cars a year, but scattered everywhere, just where prospects and clients are, with small installations also in the center of large cities.

 

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Looking at these data of the financial statements, is now a little to think that the dealer are now not intended and designed by the OEMs as a true “commercial arm”, but as a sort of “ticket-counter” to be shaken to collect license plates at the end of every month!

Summarizing the data of Italia Bilanci: 1) Over the past six years the investment in the car distribution business has not created value for the shareholders; 2) The reduction of the money cost since 2008, has cushioned the impact of the contraction of operating profitability; 3) The comparison between efficiency and productivity of the ‘best’ and ‘worst in class’, indicates significantly differences – indicating that those who do well their job, makes money! 4) Over the last six years the size of the dealerships has been found essential for success in business; 5) The ‘differentiation’ of the brands portfolio (multi-brand) has brought benefits; 6) The dispersion curve tells us that about 20% of the dealers has a negative profitability less than -1%; while approximately 15% of them travel at levels above 1% (some analysts argue that the percentage of car dealerships in our country that will come out of the scene in the near future is estimated at around 25%).

 

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This is a crucial moment for the automotive industry and for the distribution chain: let’s roll up our sleeves seriously – everyone must do its own task, OEMs and dealers – gosh, this is not a joke for… reality TV show about car dealers!

A dealer that closes loosing money, or is in debt beyond what is reasonable,  is not to be intended as another ‘code’ deleted from the dealer network list, or a new ‘open point’ to be covered, but a defeat of the network strategy of the OEM, where the same brand must reflect deeply!

Maurizio Sala

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6 Comments

  1. Ricardo Oliveira says:

    Maurizio: great article, great data!

    Where do OEMs’ profits come from? Not from Western Europe. This marginal global growth comes from emerging markets, till the demand lasts. OEMs are not able to make decent profits in competitive markets. Especially without governments buying incentives.

    And what about the marginal profit of some European Dealers? It doesn’t come from new car sales or from F&I. It is generated in after sales but not for too long. Independent operators will low average prices in this market.

    Car business is not sustainable nowadays, but change is possible…
    It’s a pity that you cannot join us at our workshop (“Cliente: o dono do nosso negócio”) in 21st FENABRAVE Congress (São Paulo). We will speak about this!

  2. Ricardo, I pointed out the official data of Alix partners and Italia Bilanci with the objective to solicit reactions and comments in the sick automotive environment.

    Yes, I agree with you: change is possible, but everyone must do his part, in the best way! It is useless – and dangerous – to declare that OEMs and dealers has the same objectives or that they has to move in the same direction. No: different rules, different objectives, different way to develop the business.

    Thanks for the invitation to follow your stunning workshop during the XXI Congresso Fenabrave in São Paulo: the same day, same hour, same event I will be a speaker with a interesting workshop with which I will point out data, ideas and commercial opportunities of the Social Media in the Automotive. I look forward to meet at you in São Paulo!

    In any case you pointed out one of the biggest problems: Human Resources inside the show-rooms. Please have a look to these further data you’ll find in the attachment. Enjoy.

    http://www.automotivespace.it/eng/auto/cadillac-man-fantasy-or-reality-some-interesting-data-collected-in-italy-useful-everywhere/

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