Current Events And Commentary

These objectives may have developed from their understanding of certain important facts and forces at work in the marketplace for automobiles.

Total sales of new cars and trucks have stabilized at approximately 15,000,000 vehicles annually. Foreign automakers have firmly established their continuing presence in the lucrative American market by building their manufacturing facilities in this country. They have created jobs and established a reputation for the quality and reliability of their product. Japanese nameplates, which account for the largest share of so-called "imports", are no longer vulnerable to yen versus dollar valuations (indeed, never were) and are determined to protect but not substantially expand their market share at the expense of American automakers.

All of this has benefited the general public through the innovation and competitive endeavor of American automakers, which led to substantial improvements in the quality and safety of all automobiles. The competition of the "imports" also provided some restraint in the pricing of automobiles by the American automakers.

So, in effect the size of the pie represented by the American automobile marketplace has been established. And, so has the share of the pie available for American automakers been established, provided they continue to market good product. American automakers always had the capacity to design and produce the best vehicles on the road. They only needed the competitive necessity to produce them. The process has also benefited American automakers. Big three profits have skyrocketed over the past five years. Profits from foreign manufacturing ventures have not kept pace. Western European markets are depressed and competitive. Eastern European markets require considerable investment in infrastructure and Asian markets are restrictive of outside investment, including American investment. With regard to Middle Eastern and African markets, as many cars are currently sold in Florida as are sold there.

In the foreseeable future American automakers must look to the American consumer for increases in profit and may even have to economize organizationally. Since robotics has already replaced many blue-collar jobs, the focus of these efforts may be within their executive organizational structure. Witness to this possibility is Jac Nassar, Ford's new president following the advance of Alex Trotman to chairman of the board. Mr. Nassar expects Ford to produce healthy profits this year, not through increased sales, but by cutting out 2 billion dollars of expense.

Maintaining high profits through reduction in expenses is a short-term expediency. What does Mr. Nassar do for his next strategy?

Consider the following occurrence that has evolved into the most blatant effort by an American automaker to gain control of the retail domain: Ford's plans for the Indianapolis market (as reported in Automotive News beginning with the issue of May 12th.).

First, a perspective of the automobile marketplace over the past 20 years, reveals pricing of the family sedan has multiplied 400% in that time. Manufacturing efficiency should not have produced this large an increase in prices. The same size television set produced 20 years ago sells for half its original price. It certainly wasn't because dealers were intent on achieving higher profits, though the intention of achieving higher profits is not frowned upon within our successful system of free enterprise. The ingredient of free competition always balances the equation. Someone else sells for less or gives more value for the dollar and gets the business.

In this case, where the average dealer has become the national pariah on the retail scene, the dealer's percentage of profit earned from the consumer's car buying dollars has steadily decreased. This has been due to steady erosion of dealer margins, caused by increased cost of maintaining higher inventories (nearly twice that of 20 years ago), and to the associated additional costs of doing business imposed by the manufacturer. As a result, dealer profits from new car sales have been at breakeven over the past seven years and in 1995 the average dealer lost $22 per new car sold.

In addition, dealers have been beset by the public availability to dealer costs of automobiles purchased from the automakers (in what other business is this done?) and are now confronted by retail cartels seeking to upstage their remaining areas of profitably in used car sales and services. Many of the 22,400 dealer organizations that still exist are in vulnerable financial condition because these steady forces of attrition are at work against them.

There is another fact of interest to anyone attempting to evaluate the motives and objectives of the participants. The heads of major business organizations no longer represent family interests. In family business the leading executives could maintain their positions through good and bad times. Their average longevity was 24 years and they ran business while in their 70's and 80's. Today's major executive life span is less than five years. Mr. Amelio at Apple Computers did or did not make his contribution within 17 months.

Today's professional management is more and more concerned with short-term objectives. That means big bonuses as well. The next guy can pick up the pieces, e.g., Mr. Amelio during his term at Apple.

With important exceptions, second and third generation dealer management can also be accused of shortsightedness. Even today, the average dealer may not recognize the causes of his travails. The situation itself is dire. Dealer management is primarily focused on making the very next sale. The hardest working of these sincerely dedicated individuals put in 60-70 hour weeks. Others with less dedication to the business, put in 20-30 hour weeks and give their main attention to outside investments or the good life. Both types of dealer management have not focused on the causes of their problems but instead deal with the symptoms.

Now, enters into the marketplace the educated consumer. Today, they represent 10% of the market. Tomorrow, more. Dealer organizations generally face up to this, blunderbuss in hand or take the easy way out and sell their businesses to Republic Industries, et al.

Mr. Wayne Huzienga (Republic Industries), who can detect opportunities, and Mr. Jac Nassar, who knows the automobile business and can also detect an opportunity, are both focused on the retail domain.

Today's dealer organizations are indeed vulnerable and the fewer of them the more precarious their position becomes.

But what are the advantages of assaulting the steadily deteriorating retail domain? If the customer can be deluded by one price "no haggle" shopping, e.g., the Saturn phenomena, larger profits are possible from the consumer even without increasing the MSRP (manufacturers suggested retail price) of automobiles. That alone could result in the consumer paying an additional $2000 for a Ford Taurus. Three times what the dealer profits from today's Ford Taurus sale. So, if Jac Nassar could control retail pricing by restricting the number of dealers in a given market (e.g., Saturn) everybody would pay the "no haggle" price for an automobile and Ford's profit could increase $2000 per unit. Raising the dealer's price, in stages of course, by that amount would do this.

Over the short term, even the lower sales of the Ford Taurus would be overcome by the higher profit per unit gained from the dealer. The dealers would be satisfied because initially, they would receive a larger profit from each car sold. But to execute this strategy effectively, you have to artificially restrict competition, e.g., Ford's attempt to reduce the number of dealers in the Indianapolis market to 5 or 7 from 22.

This plan won't work for other reasons, but that's another subject. It also won't work if Republic Industries continues to acquire dealers. That's because Wayne Huzienga cannot be dealt with as Jac Nassar proposes to deal with the average Ford dealer. So, if Mr. Nassar needs another device after this year to maintain Ford profits, he must act now while Mr. Huzienga controls 120 dealers and before he controls 1000 or more. Mr. Huzienga 's plan won't work either, but that's also another story.

The problem is that dealers who have given their total effort to building a business and a reputation will be out of business while Ford's plan attempts to succeed. Consumers and dealers will both pay for Ford's experiment whether it fails or is successful.

Free competition is after all in the interest of everyone. The price of an automobile reaches a natural level acceptable to the buyer and the seller. Inefficient dealers are eliminated naturally.

What can the average dealer do to survive the crosscurrents of change that beset the automobile marketplace? One thing for certain, he has to adapt to the changing requirements for doing business. Can it be done? Most certainly, yes. Can it be done effectively, before Mr. Nassar embarks Ford on a course contrary to its interests and with a negligible possibility of success? Also, yes. Will it be done? If I were a Ford stockholder, I'd hope so. Or they can look forward to bringing someone like Mr. Amelio on board for a short time, several years from now, if Mr. Nassar runs out of devices.

Ultimately, of course, there is the scepter of government intervention. They're inclined to be protective of the free enterprise system. Government intervention stopped the Staples/Office Depot merger which was regarded as restraining competition and likely to result in higher prices for the consumer. If that was true in the case of Staples, it would be even more the case for the consumer wishing to buy or lease a Ford in Indianapolis, Salt Lake City, or the other "over-stored" markets where Ford intends to artificially reduce the number of its dealer franchises. Contrary to Mr. Nassar's protestations.

Roy Pologe, President Autoserv America, LLC

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