One industry that has suffered badly at the hands of the latest global recession has been the auto industry. As consumers turned their minds to more pressing financial concerns and credit dried up, sales in every sector of the industry declined sharply.
Even those considered to be amongst the most successful manufacturers in the industry have struggled to maintain their sales, whilst others have found themselves facing the prospect of going out of business altogether. Indeed two of the manufacturers who form part of the "Big Three" in the American auto industry, namely General Motors (GM) and Chrysler, now find themselves subject to Chapter 11 Bankruptcy protection orders that hopefully should, although nothing is guaranteed, enable them to restructure their businesses as going concerns. Nevertheless any restructured organizations that emerge are sure to look very different from those of recent years.
This scenario, especially for GM who were up until the last few years still the world's largest automaker and in spite of their recent difficulties were second only in volume of sales during 2008 to Toyota, is one that nobody inside or outside of the industry could truly have envisaged.
But perhaps not all of the facts and figures or quotes you will have seen in the media relating to the woes of the manufacturers and their dealer networks have been entirely objective because the parties providing that information will probably only have access to, and naturally enough will only want to provide a commentary on, their own particular section or sections of the overall industry. Who was there I could approach who had spent a large part of their working life dealing with manufacturers and dealers on a daily basis and could provide me with both an unbiased critique of the auto industry as a whole and also an insight into the difficulties faced by a small business operating within the industry during the last 12-18 months. I knew just the person.
Jon Syder is the Managing Director of
UK New Cars, an Internet Car Brokerage business of which he was a co-founder in 2002 and of which I was an employee cum director between 2003 and 2007.
Before I share some of the information with you that Jon has provided, it may be worth quickly describing how a car brokerage business will typically operate. There may be subtle differences from country to country and from business to business but essentially what UK New Cars and its competitors will usually do is supply new and previously unregistered vehicles through the franchised dealer network, they will supply any brand which is willing to supply them so have no special relationships with one or a handful of manufacturers, on which they have negotiated a generous discount because of the volume of business they can generate for their suppliers.
To avoid diluting those discounts they will attempt to use a relatively limited panel of suppliers on a regular basis. Their customers are frequently retail users who would not expect to receive the same level of discount as the broker if they went in to a showroom themselves to purchase just one vehicle.
Back to Jon and the first question I had for him was whether his business had noticed a marked decline in sales and if so when that decline began. He confirmed that June 2008 was the month in which things started to deteriorate and they continued to do so for the remainder of the year and in to 2009. In fact sales for the second half of 2008 were a full 72% down on the first half of the year. The good news is that May and June 2009 have shown a significant improvement from this time last year, both in terms of profit per vehicle sold and the percentage of inquiries that have been converted to sales. Interestingly enough many of the manufacturers released figures last week showing that their sales in June 2009 were still some way off the levels of June 2008.
The drop in sales was compounded by the fact that those who did purchase tended to lower any earlier expectations and purchase a vehicle that had a lesser specification and value. An important factor to consider for a business whose profit on a deal is typically based on the value of unit that is sold. Sometimes a drop in actual sales can be managed if those units that are sold are at the upper end of the market. That was not the case here.
Much of the drop in sales at
UK New Cars was as a result of the aggressive pricing policies adopted by the dealers when customers visited their showrooms. As they cut prices to levels that may have previously only been available via a broker, the reasons for a customer to contact a broker suddenly became less and less.
The availability of credit also became an issue as underwriting criteria was tightened up and people who would only months before have had little difficulty obtaining a loan to purchase a vehicle found their application declined. In fact Jon told me that because their main source of credit for their customers was a major UK High Street bank whose difficulties during the financial crisis resulted in their acquisition by one of their competitors, the restructuring of that organization has meant that they no longer offer their products through the broker market. Therefore businesses such as
UK New Cars have had to find alternative sources of finance for those of their customers not wishing to make a cash purchase.
So what of the auto industry in general. How did it become different from that which Jon had known for many years? Firstly he told me that because the decline in the industry was so dramatic, dealers found themselves with vehicles in stock for which they had to pay the manufacturers but for which they were unable to find buyers. As a consequence, they were being forced to sell those vehicles for greatly reduced prices at auction simply to maintain their cash flow.
Unfortunately, for some of the smaller single franchised dealerships, such a course of action has not been enough and they have simply folded. Jon was unable to substantiate actual numbers because in the main he told me that mergers and acquisitions had avoided wholesale closures. And some of Jon's competitors in the broker market had also found that their business model was unable to survive in the transformed market and they too had ceased trading.
Then there are the manufacturers. There is not one manufacturer who seems to have been able to ride the recession, so to speak, but the difficulties of the American Big Three have dominated the headlines. Jon could only comment on their plight from a European perspective but what he said was interesting. He felt that predominantly GM and Chrysler had too often ignored the production of more fuel efficient Eco-friendly cars, to be fair that is largely because cheap gas in the USA means that consumers were less interested in those factors themselves, that non-American manufacturers had so readily embraced.
Vehicles that consume only 17 miles per gallon are clearly not going to be popular in markets where gas is more expensive so those companies that produce them have no real alternative market when US sales decline. Whilst Ford were guilty of the same mistakes to some extent Jon nevertheless described their range of vehicles in Europe as excellent and felt that they could introduce the range to the US market without any great difficulty, should they choose to do so. On that point, the Ford Fiesta is a popular small car in the UK but after nearly a year in the US I only saw my first Fiesta, a collection of them as it happens, last weekend in Downtown Chicago at what I assumed was a promotional event.
On the subject of environmentally friendly cars, Jon and his business partners launched an alternative website in 2007 aimed at the customer wishing to purchase a vehicle of that nature. But Jon conceded that, for most customers, price was the overriding factor and green concerns were still only of secondary importance. And technological advances have reduced the fuel efficiency advantage that diesel engines once had enjoyed so their sales have not necessarily increased in tandem with worries about vast fluctuations in gas prices and the future availability of oil.
Finally, what did Jon think the future might hold for the auto industry as a whole and his company's own small part of it? Predicting the future was something he was understandably keen to avoid but he did note that initial public skepticism with the scheme the UK government introduced to encourage people to trade in their older less fuel efficient models for new vehicles, by offering a cash allowance against their new purchase, has subsided and, supplemented by additional allowances from the manufacturers and dealers, should begin to boost future sales numbers. A similar scheme is in place in the USA so it is possible that coordinated action across the world's major economies may be able to breathe at least some life back into the struggling global auto industry.
For
UK New Cars diversity will be the key to future success as they utilize the considerable knowledge of Internet marketing that exists within their business. They will still continue to sell vehicles directly but they will also concentrate their efforts on developing a new website, or websites, that offers a wider product range than they have to date. Everything from new to used vehicles and from commercial vehicles to the smallest autos on the market. But instead of selling the vehicles themselves they will draw their income from the advertisers on the site who will deal with the customers direct. This "aggregator" platform has from their estimates the potential to attract 7-8 million visits per month. Of course not all of those visits will result in a sale but many businesses would welcome the opportunity to reach only a small percentage of those numbers on a regular basis.
I thanked Jon for his time and reflected on how the auto industry is a shining example of how complacency sets in too easily during the good times and blinds people and organizations to the need to plan for an alternative future. A future that could be radically different from the past and present.
