Category: Business

Discovery tale: Do you have a Bugatti in the garage?

Rob Morris 0 Comment Business, Ideas, Rants

1937-bugattiThe recent discovery of a classic, rare, and dusty 1937 Bugatti in an old English garage got me thinking.

The Bugatti fits neatly into the popular imagination as a kind of "discovery tale".  Discovery tales are those romantic, hopeful stories about finding some valuable piece of treasure in an unexpected place.

The discovery tale permeates our culture:

  • The Rembrandt (or Picasso) in the attic
  • The winning Lotto ticket
  • The mid-19th-century stock certificate left by a long-lost aunt
  • The pot of gold at the end of the rainbow
  • The gambler who wins the big jackpot in Vegas
  • The starlet discovered in the drugstore
  • The search for El Dorado
  • Cinderella
  • The Antiques Roadshow

These are all stories built around the discovery tale.  Usually, the tales result in untold millions for the "discoverers": the family who found the Bugatti will be getting nearly $4.5 million.

It is a compelling story.  Except that it is totally unrealistic.

Don't get me wrong — I really like these stories, too.  As long as they are treated as fun, fantastical tales.

When the discovery tale becomes a personal strategy for wealth or success, it is a problem.  It is deadly when it becomes a build-it-and-they-will-come business strategy.

It is a problem in two ways.  First, it promotes faith in a highly unlikely outcome.  What do I mean?  Let's be generous and suppose that there are 100,000 Bugattis (or Rembrandts or jackpots or stock certificates) in the world.  Only a fraction of those Lotto tickets are going to be found in any one year (it took nearly 50 years for the family to find the Bugatti – there's a reason that such discoveries are so rare and notable).  Again, let's be generous and assume that 5% of these (5,000 or so) are discovered per year.

At this point, there is literally a one-in-a-million chance that you will be the discoverer of the next Bugatti in 2009.  And that's after being generous with our assumptions.

If you are now tinkering with the assumptions — "Maybe there are really a million Bugattis and there's really a 20% chance of finding one…" — please STOP.  It is nice to hope, but it is destructive to manipulate the odds in order to justify hoping.

The second big problem with discovery tale strategies is that they are passive.  Discovery tales encourage waiting and hoping as a substitute for industry and ingenuity.  People put off getting a better job or starting their own business while they wait for "things" to get better or for their lottery ticket to come in. 

So am I a total cynic?  No.

Everyone has undiscovered treasure.  But you don't find it.  You use it.  Your treasure lies in your hands and between your ears.  You are the garage — go make your rare Bugatti.

[where: United Kingdom]

Why gas prices will go back up

Rob Morris 0 Comment Business, Gas, Predictions

From the Lowell's Corporate Office of Fearless Predictions:

Gasoline will be well above $3 a gallon by June, if not sooner.

The recent and dramatic decline in gas and oil prices has been great news for our wallets and our troubled economy, and the extra cash has provided some much needed relief from the barrage of recent bad news.  Oil is trading under $39 a barrel as I write this (It had topped $140 a barrel this summer).

But it won't last. 

How can I so sure?  I think part of the answer lies in how oil prices collapsed.  So we'll start there.

The Collapse

Three events converged — and then fed one another — to drive oil and gasoline to multi-year lows.  

Supply / Demand.  First, the economic slowdown combined with gas pump sticker shock to cause people to really pull back from using as much oil — fewer and shorter trips.  Meanwhile, petro-regimes were ramping up production, greedily grabbing for historically high petroleum prices.  More oil + Less consumption = Lower prices.

Stronger Dollar.  This summer, really low interest rates had made the dollar incredibly weak in the world market.  Essentially, each dollar bought less of everything from other countries (including oil).  As the US slowdown began to hit other countries in early autumn, and their banks lowered interest rates too, the dollar was suddenly much stronger.  As a result, each dollar now bought much more oil.

Financial Meltdown.  Finally, much of the run-up in oil prices was driven by speculators in oil-based securities in the financial markets.  The speculators drank their own outrageous Kool-Aid as firms like Goldman Sachs predicted $250-a-barrel oil by the end of the year.  As so many financial firms imploded (think Bear Stearns, Lehman Brothers, Washington Mutual, Merrill Lynch, etc.), they unloaded their more-profitable oil holdings in a panic to generate additional cash. 

Any one of these trends would have driven down prices somewhat, but combined, they caused prices to fall to almost one-fourth of their summer highs.

The Coming Spike

There are signs that a couple of these trends are reversing, and that there will be a near-term spike in the price of oil.

Weaker Dollar.  The recent moves by the Federal Reserve to take their funds rate to 0% have not been followed by similar moves by bankers in Europe and Asia.  This has served to significantly weaken the dollar in the global markets.  Each dollar will buy less oil and gas.

Less Oil.  OPEC members, watching their rivers of cash dwindle, have recently indicated that they will curtail production in order to restore higher prices.

Greater Demand.  At the same time, the US and other countries are stoking the economic engines with incredible amounts of 'rocket fuel': The government's huge economic stimulus packages and dramatic financial moves — from 0% interest rates to "infrastructure" projects to direct cash injections into failing firms — will (eventually) ignite, and will help the economy rebound, probably very aggressively.  As the economy takes off, much more oil will be needed to move products and rebuild infrastructure.

Speculation.  I would expect some moderation in the financial speculation — many
speculators just aren't around anymore — so I'd be surprised if the
prices reach the levels of this past summer.  There's also the Kool-Aid factor: Merrill-Lynch recently speculated
that oil prices would drop all the way to $25 a barrel.  They'll likely
be as outrageously wrong as Goldman's $250 prediction…

I'd look for these counter-trends to get traction in early January, and for the economic rebound to begin gaining steam in the April – May timeframe.  By June, these counter-trends will work together to drive oil and gas prices up again.  Netting it all out: I would expect gas prices over $3 per gallon and oil prices over $80 per barrel.

But that's just my crystal ball…  What do you think?  Where will prices be in 6 months?

[where: 111 Mechanic St, Lexington, KY 40507]

The Big 3: Saving the industry

Rob Morris 0 Comment Auto Industry, Business, Dealerships, The Big 3

As the Big 3 executives have returned to Washington asking for emergency funds with gestures that are both symbolic (driving in hybrids and taking $1 salaries) and substantive (slashing the numbers of dealers and brands), the question remains: Should we bail out (or invest in) the auto industry?

In my last Big 3 post, I said that I couldn't support a bailout.  But that was before the execs got flamed for their corporate jets and came back to congress in hybrids with business plans…  What do I think now?

I'm really disappointed. 

While many of the figures in the business plans are truly staggering (GM plans to fire up to 35,000 employees), my reaction to the plans is this:  Not enough. Not nearly enough.  My criticism flows along three lines of thought: 

  1. There appeared to be no cooperation among the Detroit automakers in drafting their plans, especially with regard to an inspiring "moonshot" style project to create a new generation of vehicles.
  2. There was little to address the huge overhang of retiree obligations which created much of Detroit's disadvantage to begin with.  The labor concessions the UAW appears prepared to accept are minuscule by comparison to the ongoing burden the retirees pose.
  3. The measures outlined in the plans — while aggressive on the surface — offered little in terms of real, structural changes to the way the Big 3 operate.

The current proposals still smack of "life support" rather than a true plan for vibrant growth.

But rather than sit back and take easy potshots at the executives, I thought it might be more productive to outline what I had in mind.  So (using my beloved GM as an example), here is my not-so-modest proposal:

Scale Back the Brands.
GM has proposed scaling back or selling their Hummer, Saab, Saturn and (maybe) Pontiac brands — leaving them with Chevrolet, Buick, GMC, and Cadillac.  That is still 2 brands too many.

They should pour all mainstream car and truck efforts into the Chevy brand and clearly distinguish luxury vehicles with the Cadillac brand.  Just drop the rest.  To paraphrase John Moore, if Pontiac went out of business tomorrow, would any of us really care?  Buick?  GMC?

I can hear the objections: But Pontiac produces iconic performance vehicles like the Firebird and Grand Prix and GTO, right?  Oh, they don't anymore?  I think the nation will be OK without the G6 or the Torrent, as well-made as they might be…  The Buick brand is surprisingly strong in China, but the appropriate Chevy or Cadillac models should be rebadged as appropriate for that market.

Concentrating on two brands would rid GM of the ridiculous 8x duplication they have today in product development and marketing.

(Ford should drop the Mercury brand, and Chrysler should just become "Dodge" and focus exclusively on trucks and minivans.)

Revamp the Dealer Model.
GM's dealer network is broken — too many dealers chasing too few car sales, and doing so in the wrong way.  They've proposed cutting nearly a quarter of their dealers, but they should cut closer to half of them. 

One way to speed the process?  Get rid of dealers who won't accept the following: All dealers must accept a flat pricing model with no typical dealer shell games.  By adopting the major innovation that Saturn offered to the market (and which GM is currently offering through their "Red Tag Event"), GM might be able to offer a competitive difference in the notoriously awful purchase experience.  Doing so may draw buyers back to the showroom.

They'd also begin to align the dealer's interest with that of the customer.  The dealers that still want to use smoke and mirrors to drive their profit?  Get rid of 'em.

Moonshot.
Establish a semi-public National Automotive Technology Institute (or some such entity) with the explicit objective of crafting an inspirational next generation of smarter, more desirable, more fuel-efficient vehicles within the next 3 years. 

Force the Big 3 to contribute their energy and talent to the venture.  Connect the Institute to the best private- and public-sector initiatives on energy, artificial intelligence, and vehicle design. 

Motivate the best and the brightest individuals to develop a true national energy program in which we 1) drastically curtail petroleum use, and thereby 2) stop funding despotic regimes who dislike (or terrorize) America the most: Russia, Venezuela, Iran, and Saudi Arabia.

How to fund this?  Any dollars used to fund continuing operations at the Big 3 must be matched dollar-for-dollar with funds for the Institute.

Scale Down Retirees.
The one problem that there is no real solution for is the retiree obligations.  Both the UAW and Big 3 management colluded for years to create monstrous future pension and health obligations for retirees that both sides knew was untenable. 

They are both to blame.  So they both must pay. 

First, the retirees must accept significant reduction in their benefits.  As painful as that might be, it is better than the alternative of no benefits if the Big 3 go belly up.

Second, the company must meet what remains of its obligations to the retirees.  But everyone knows that they can't afford even a reduced set of obligations.  So, in exchange for a federalization of the retirement programs (as well as in exchange for a cash infusion), the companies must give up a significant chunk of their equity to taxpayers, to ensure that they are an ongoing concern.

As long as they abide by the other elements of this not-so-modest proposal, a public investment in the Big 3 should turn profitable within the decade as Americans (and the rest of the world) come back to attractive, affordable, and fuel-efficient American cars.

Have I been over the top?  Perhaps… But really saving the auto industry will not be accomplished through bland half-measures.

[where: Washington, DC]

Two ways

Rob Morris 0 Comment Business, Rants
There are only two ways to live your life:
One is as if nothing is a miracle;
The other is as if everything is a miracle.
– Albert Einstein

As I see the world through my 2-year-old son's eyes, I'm constantly reminded of the everyday wonders we sometimes take for granted as adults.  I've always liked Einstein's "two ways" quote, and have tried to maintain a child-like amazement at what I encounter in life.

Jaded people (the "nothing is a miracle" people), frankly, bore me to tears.  It is far too easy – and lazy – to pretend that you've been there and done that, and that there is nothing new or wonderful in the world.  Ultimately, that cynical attitude stunts one's ability to grow, learn, and change.  It isolates jaded people from others.

I was talking (debating, really) with a group of business leaders the other day, and it struck me that there is a nearly identical "two way" attitude division in the business world. 

The Lazy Way
Some companies approach their business with a cold, calculating, flinty-eyed precision.  These companies look at business as a pure numbers game.  They often see their customers, suppliers, and employees as opponents or obstacles or dupes to be taken advantage of in their pursuit of the almighty dollar.

They see every relationship as an opportunity to "take" — in fact, "relationship" is seen as a soft, weak, and silly notion which has no place in business.  This is the case among executives at my last company. 

In their lazy reliance on numbers, such miserly companies manage for the short term, the "quick fix" — "Let's make a mint before the customer (or employee or supplier) gets wise to us!"  Eventually, these companies get so disconnected from customers and employees that the dominant day-to-day focus of the organization is on internal politics and positioning. 

From my experience, I can tell you that such shrinking companies are miserable places to work, and they ultimately suffer long, slow, painful deaths as customers and employees flee in droves.

The Generous Way
Other companies adopt a fundamentally different philosophy and approach to their business.  They approach business with a spirit of generosity.  They see that building long-term relationships with customers, employees, and community creates both financial and human rewards.  While the numbers might inform their choices, these companies make decisions based on doing the right thing.

"Doing the right thing" shifts the focus from the financial numbers to the human equation. Doing the right thing isn't easy.  It can be hard work.  It isn't always profitable.  "Right thing" companies usually grow more slowly than "quick fix" companies (at first).  But they do continue to grow when quick fix companies fade (or implode). They build lasting relationships which sustain them through good times and bad.

The "right thing" companies still pursue profit, but their primary focus is outward: on generous relationships with their customers, their employees, and their communities.  They trust that the profit will follow.

These growing, vibrant, connected companies are engaging and rewarding places to work (and to do business with), and they have long-term employees and customers.

Everything is a Miracle
As the economy weakens, many companies have scrambled back to the quick fix of analyzing cold, hard numbers (and charts and plans) and have abandoned their "soft and fuzzy" relationships with people.  The numbers make them feel safe and precise and comfortable.  But they aren't any of those things…

They might not know it yet, but they are the walking dead. 

The companies who will ultimately thrive in this economy (and who will drive real economic growth) are the ones who continue to connect with their customers, employees, and communities — and who continue to do the right things.

But Albert Einstein could have told you that.  My 2-year-old could have told you that.  It is just that simple.

Driving off a cliff

Rob Morris 0 Comment Auto Industry, Business, The Big 3, Toyota

NovBrandSales
U.S. auto sales drove off of a cliff in November.

The numbers from Autodata show that the industry as a whole is down almost 37% from last November, and GM and Chrysler are especially hurting, with sales down 41% and 47%, respectively.  Toyota fared better than the industry average, but still lost a third of its sales from last year.

Industry sales have been down all year, but the November numbers were especially shocking. 

In this post, we'll look deeper into the numbers to see what they say about the industry and what they say about the market.

Cars and Trucks
One of the things that jumps out about the sales figures is just how dependent the Big 3 are on truck NovTruckSales
sales.  Combined, the Detroit automakers derive two-thirds of their sales from light trucks.  Chrysler sells three times as many trucks as it does cars. 

Toyota, Honda, and Nissan get most of their sales from cars.  In fact, I was surprised to see that the "Japan 3" sell more cars in the U.S. than the Detroit 3.  Toyota has the largest share (21%) of cars in the U.S. market.

So when gas prices topped $4 per gallon earlier this year, the sales of gas-guzzling trucks fell off dramatically.  Because of their dependence on trucks, Detroit suffered far more than the Japanese and European automakers.

Essentially, customers shifted their purchase patterns to cars when gasoline prices became a burden, and that helped Japan at the expense of Detroit.

November was different
But what happened in November was fundamentally different from what happened earlier in 2008.  In November, car sales and truck sales both declined at about the same rate.  The truck / car differences we described above disappeared (along with $4 gas).  In November, all of the automakers were hit pretty hard.

So what is going on?

November is different because customers stopped buying vehicles, regardless of whether they were a truck or a car. 

In most of 2008 vehicle purchasing decisions were affected by fuel economy — and the market shifted to buying cars from buying trucks.  In October and November, purchasing decisions were affected by the overall economy — and vehicle buyers disappeared. 

All of this has amounted to a fatal one-two punch for Detroit.  Wobbled by disappearing truck sales when gas prices were high, the knockout punch for the Big 3 came when the overall market dried up.  While the economic downturn has hit all of the automakers, Detroit has crumpled under the weight of its legacy burdens.

As the Big 3 executives go back to Washington (this time driving hybrids instead of riding in company jets) to ask for emergency funds, I'm still wondering: What will change?

Why we specialize in Toyota (and Lexus and Scion)

Rob Morris 0 Comment Auto Industry, Business, Lowell's, Toyota

When Suzanne and I bought Lowell's back in July, a lot of our friends and family wondered why the business focused exclusively on Toyota brands (Toyota, Lexus, and Scion).  There are historical reasons, but there are also significant benefits to our customers.

At first, specializing in one brand seems like a very limiting choice, since only a fraction of the cars on the road are Toyotas.  Why not serve the whole market?

There are three basic reasons we specialize:

  1. It makes us better.  With cars becoming more and more complex, keeping detailed knowledge of the unique properties of all of the brands becomes impossible.  By getting specialized training for Toyota, we're better able to recognize problems unique to Toyota vehicles.
  2. It makes us faster.  Our specialized knowledge lets us diagnose and repair problems faster than a multi-brand repair shop can.  We also stock a variety of original Toyota parts so that we can perform most maintenance or repair in the same day as the vehicle came in.
  3. It makes us more affordable.  Servicing today's more complicated vehicles requires very specific parts and equipment, which is costly to keep across multiple brands.  By focusing exclusively on Toyota, we can keep our inventories smaller and our equipment more up-to-date.  These lower costs help us keep prices lower.

Finally, this combination of better, faster, and more affordable reinforces itself: When we have deeper expertise, we provide superior service faster, which helps us keep costs (ours and yours) lower.

[where: 111 Mechanic St, Lexington, KY 40507]

The Big 3: Thoughts on a bailout

Rob Morris 1 Comment Auto Industry, Business, The Big 3

No matter how far you've gone down the wrong road, turn back.  (Turkish Proverb)

In my last post, I chronicled what I think has caused the collapse of the American auto industry: heavy retiree costs; poor timing; and the current economic slump.

As auto executives went to Capitol Hill with hat in hand (after stepping off of their private jets), the question of the day is: Should we bail out the auto industry?  I'll outline my thoughts on that issue here, and would be interested in what you think.

I feel that I pay taxes to contribute to the general well-being of the community, state, and nation (which, ultimately, will pay me back).  My hope is that those tax dollars are allocated to the beneficial initiatives that one person or business cannot afford alone: things like roads and infrastructure, national defense, police and fire protection, and the like. 

I also hope that some dollars are dedicated to the cooperative "moonshot" projects that make our country, community, and industry great.  These include things as grand as the Marshall Plan to rebuild Europe after World War II or actually going to the moon in the Apollo missions, as well as more pedestrian initiatives like DARPA (the defense research agency which spawned the internet and many other technology advancements) and SEMATECH (the government-sponsored semiconductor industry consortium which helped build huge international advantage for companies like Intel and AMD).

So is bailing out the auto industry (and its suppliers and all of their employees) worthy of such "moonshot" status?  I think that it is… IF…  It is in the national interest to preserve the domestic automakers.  The ripple-effects of the collapse of these companies, the loss of so many jobs, and the subsequent social and economic ramifications could push the overall economy into a state of depression.

But….

While I think that preserving the American auto industry is a potentially noble pursuit (worthy of my tax dollars) and I think that it could contribute to the well-being of my country and community, I haven't heard a plan to preserve the industry. 

I don't think a bailout is warranted until 3 basic questions are answered:

  1. What is going to change?  Before we can devote tax dollars to companies which are burning cash at record speed, we need to know what is going to change…  None of the executives or labor leaders have offered any ideas on why a big pile of money will change their pattern of losing it.  A government bailout won't help until the companies do business differently.  And the Big 3 haven't talked about doing business differently.
  2. Where are the cars?  Where are the market-changing cars that the market wants?  Until Detroit has innovative and desirable vehicles which people will buy, they won't be economically viable.  The Big 3 executives have offered lots of promises, but not much evidence that such vehicles are ready to go.  And there is no talk of an inspiring "moonshot" project to make Detroit vehicles worth buying again.
  3. What happens to the retirees?  Detroit is struggling in part because of its massive pension and insurance obligations — much of it for retirees.  How are they going to restructure those obligations without a) unloading them on taxpayers, or b) depriving the retirees of promised benefits?  So far, I've heard nothing productive in this regard.

A bailout will fail if all it does is prop up an already-failing industry.  Until the companies and the congress talk about permanently and productively changing the way the industry operates, a bailout just staves off the inevitable. 

Detroit has been on the wrong road for 35 years or more, and they're running out of fuel.  We shouldn't give them more gas until they change where they're headed…

[where: Detroit, MI]

The Big 3: Why they are failing

Rob Morris 0 Comment Auto Industry, Business, The Big 3

I grew up outside of Detroit, and most of my family still lives up in Michigan.  My grandfather enrolled in General Motors Institute (now Kettering University) on the GI Bill after fighting in World War II, and eventually became an executive with GM.  Many of my aunts and uncles still work in or around the auto industry.  Growing up, my family only owned GM vehicles: My first car was a 1971 Oldsmobile Cutlass which I drove to 200,000 miles.  My second vehicle was a 1971 Firebird, which I still have.

I love GM (even though I'm committed to Toyota now).  And I love Detroit (and all of their pro sports teams – Even the 0-10 Lions.)

So it deeply saddens me to have watched the slow, inexorable slide of the American auto industry as it now approaches complete collapse and its executives beg for bailouts from Washington.  It is a tragedy not only for the formerly-huge companies, but for all of the employees and suppliers and employees of suppliers in Michigan and across the country.

There are probably hundreds of factors in the Big 3's decline.  Here are three which I think are most important:

  • Pension, Insurance, and Retirement: Throughout their history, the automakers increased pension and retirement benefits for their employees to avoid boosting wages.  This allowed the companies to skip the short-term pain of paying more for labor, but the long-term effect was disastrous: Many employees had 20- or 25-year careers with generous 40-year retirements paid by the company.  Multiply this by tens of thousands of retirees, and the financial obligation weighs heavily on each car sold.  GM reports that health care obligations alone cost them over $1600 per vehicle.  Toyota's costs are closer to $200 per vehicle.
  • Wrong Vehicles, Wrong Time: Something happened to the cars Detroit produced around 1973.  The vehicles got bigger, less powerful, and less well-built — all just as the energy crisis started to hit.  For the past 35 years, American automakers have had a horrible sense of how customer needs changed.  Their responses have typically been "too little, too late".  In the 70's they missed the need for fuel-efficient cars.  In the 80's and 90's, they skimped on quality as Honda and Toyota offered the world's most popular models.  In this decade, they poured all of their new-product efforts into the highly-profitable SUV and big truck segments.  Then gas hit $3 and $4 a gallon.  Detroit then scrambled to show it planned high-MPG "green" vehicles (like the Chevy Volt) by 2010 to 2012, while Toyota and Honda had well-proven and popular technology in the marketplace.
  • The Soft Economy: As the overall economy has weakened, people are buying fewer cars.  The freeze-up in financing has compounded the automakers' ability to entice customers to buy their vehicles.  As sales across the industry have fallen off, the Big 3 are in the weakest competitive position.

These factors, when combined, account for the implosion of the automakers.  As 1) Detroit has failed to deliver what the market needs, and 2) the overall market shrinks — resulting in a 45% sales drop in just one year for GM — the industry can't afford to pay for the massive obligations represented by its retirees.

So that's my Cliff Notes version of what's wrong with the Big 3.  In my next post, I'll explore whether a bailout of the industry makes sense.

(P.S. If you are interested in an extended discussion on GM's pension obligations, check out Roger Lowenstein's While America Aged, which devotes about a third of the book to how GM got into this situation.)

[where: Detroit, MI]

Dealership Economics, Part III: Toyota

Rob Morris 0 Comment Auto Industry, Business, Dealerships, Toyota

Toyota-logoIn the first two installments of Dealership Economics, we talked about why the car sales process is so vague and about the importance of the service department to the dealership's business.  In this post, we'll look at what the dealership company's financial statements say about Toyota's position in the auto industry.  

With the financial crisis at GM, Ford, and Chrysler (more on this in an upcoming post) making front-page news every day, you might wonder about the implications for Toyota in this economic downturn.  Toyota has definitely been hurt by the recent slump (see here and here), although it is not in the disastrous financial shape that Detroit's automakers are in.

So how will Toyota fare relative to the industry?  We can learn a lot when we go back to the dealership company we looked at in our other posts.

When we look at the numbers, two things jump out right away.  The first is that the Big 3 automakers' share — in both number of cars and dollar amounts — has eroded dramatically in just one year.  In just one year, the Big 3 has shrunk from over 35% of this company's car sales to under 30%.  Even if the economy were stable (which it obviously is not), such loss in share indicates that Detroit isn't making cars that people want.

The second number which jumps out is Toyota's share.  Even as the economy is deteriorating and car sales are slumping, Toyota grew its share of sales to 21%.  So, while the industry is getting weaker in a weak economy, Toyota's position within the industry is getting stronger…

So, what does this mean for the long term?  When the economy recovers, Toyota is in the best position to lead the automotive industry.  In addition, the long-term bets that Toyota made years ago (hybrids, flexible manufacturing, etc.) have helped sustain it through these difficult times.  In the end, Toyota will emerge as the dominant player in the auto industry.

Dealership Economics, Part II: Service

Rob Morris 0 Comment Auto Industry, Business, Dealerships

In Part I of Dealership Economics, we looked at the financial reasons the car sales process is so perplexing.  In this (shorter) post, we'll look at where the service department fits in to the business.

ServiceWhen someone buys a new car, there is a widely-held myth that they are required to return to the dealer for service to keep their warranty valid.  In fact, you can service your car elsewhere, and the warranty still holds — and there is a section of your owner's manual which should state this fact.  But the superstition persists, and is often reinforced (or, at least, not refuted) during the sales process…. Why is this?

I think it goes back to the economics of the dealership.  As I looked over the financial statements of the dealership company, I saw one set of statistics which really jumped out at me:

  • 85% of a dealer's sales is generated from car sales (58% from new cars, 24% used cars, and the rest from finance, insurance, and "other").
  • The remaining 15% of sales comes from the service department.

That might not be so surprising… But here's where it gets interesting:

  • The service department generates almost half (45%) of the dealer's profit

The cars are expensive, but contribute relatively little profit to the business.  The service department is relatively small, but generates huge profits for the dealer…

It is to the dealer's benefit to maintain the warranty myth, and keep as much of that service business to themselves as possible. 

If you have a relatively new Toyota, Lexus, or Scion, and would like to service it at Lowell's, you shouldn't let concerns about the warranty hold you back.