Does minimal new inventory mean trouble for auto dealerships, or...

[roswelllion]

will they wing it fine on used and service?

They will generally be fine. Certainly some dealers will get hurt but if you look at the US auto industry as 1 large dealer the total volume is still in the range that allows dealers to be profitable. Dealers are quite good at doing 4 things to regulate their profits.
On the expense side
. they experience lower carrying costs [floor plan expense]
. lower advertising and marketing costs
. reduced payroll expense [most auto sales pay heavily commission so no sale = no expense

On the revenue side they increase their gross profit per sale. Many folks might be surprised at low gross profit per vehicle actually is. Quick example below
Average mth 50 sales
GP per unit. $3,500
Total GP $175,000

Today [Ex] 35 sales [30% drop in volume which is much larger than we are experiencing]
GP per unit. $5000 [seems like a large increase in GP but on a $35,000 vehicle that is only raising the price from $35,000 to $36,500]
Total GP $175,000
then add in lower marketing and floor plan expense and it works out fine]

The high line Asian makes have self imposed this for years [Lexus being. best example]
Now if the trend continued for years [5+] the number of cars coming into the shop decreases and causes problem but not for something like this.

It is all about demand not supply. When dealers get in trouble is when their lots are loaded and a sudden slowing of demand occurs. [see 2008 crisis]. So in the example above picture a lot full of cars and demand drops from 50 to 35 as above
.you're carrying costs don't drop because you have a lot full of cars, you're advertising either holds or increases as you try to spur sales, and you're GP per vehicle actually drops as you try to "unload" inventory to match the market demand.

 

[Art]

They will generally be fine. Certainly some dealers will get hurt but if you look at the US auto industry as 1 large dealer the total volume is still in the range that allows dealers to be profitable. Dealers are quite good at doing 4 things to regulate their profits.
On the expense side
. they experience lower carrying costs [floor plan expense]
. lower advertising and marketing costs
. reduced payroll expense [most auto sales pay heavily commission so no sale = no expense

On the revenue side they increase their gross profit per sale. Many folks might be surprised at low gross profit per vehicle actually is. Quick example below
Average mth 50 sales
GP per unit. $3,500
Total GP $175,000

Today [Ex] 35 sales [30% drop in volume which is much larger than we are experiencing]
GP per unit. $5000 [seems like a large increase in GP but on a $35,000 vehicle that is only raising the price from $35,000 to $36,500]
Total GP $175,000
then add in lower marketing and floor plan expense and it works out fine]

The high line Asian makes have self imposed this for years [Lexus being. best example]
Now if the trend continued for years [5+] the number of cars coming into the shop decreases and causes problem but not for something like this.

It is all about demand not supply. When dealers get in trouble is when their lots are loaded and a sudden slowing of demand occurs. [see 2008 crisis]. So in the example above picture a lot full of cars and demand drops from 50 to 35 as above
.you're carrying costs don't drop because you have a lot full of cars, you're advertising either holds or increases as you try to spur sales, and you're GP per vehicle actually drops as you try to "unload" inventory to match the market demand.

Talked to a friend who sells a dozen makes at nearly as many dealerships and he is not happy.

 

[roswelllion]

This will hit the service revenue shortly. You can't lose half your car sales and not see your service revenue untouched. The question is how long that impact will last and how pronounced it will be?

Another issue is that this will accelerate the shift to online and non-traditional purchase channels. Online sellers can better aggregate than a local lot. Online buying isn't for everyone, but the sectors of the population open to it will try it sooner.

The impact on service revenue does occur but takes much longer than you would imagine. I was in the business on the manufacturer side for a high line European who experienced a sales drop over 3-4 years of close to 35% [they have since rebounded nicely] and we feared the loss of new customers will seriously impact profits. There was almost no impact for years 1-3 and only a small one in year 4.
Re. online sales - I have been retired now almost 6 years but I think except for Tesla dealers get paid for online sales as well as regular sales and I believe they can regulate the price as well so little or no impact. Long term dealers would love a larger piece of the business going online. It reduces their expenses. It is really the manufacturers who like lots full of cars because they get paid when they sell it to the dealer.
As an aside it was always the low volume high gross dealer [what they all are currently ]that was the manufacturers headache. We wanted high volume low gross because that way we built and sold more. The math and the risk really favors the dealer to stay small and make a higher than average gross. It is a fine line with competitive pressure being what they are.

 

[RGWhirly]

I have a 2018 vehicle where I owe $17k yet. I could get $42k from Carvana. It is tempting but I bought this vehicle to have for a long long time and drive it until wheels fall off.

 

[WestSideLion]

how does that work? So you are saying a person could buy the car for the residual value on the lease contract and then keep or resale it? I've never leased so I don't know. Also, if buy, you have to have the cash or ability to get the loan.

Yes. It's a mild form or arbitrage. I know a couple of people who have made a couple thousand like this. The challenge becomes your point on qualifying to buy the car outright...usually just taking on a bigger monthly payment...and then being able to find another car after you sel

The impact on service revenue does occur but takes much longer than you would imagine. I was in the business on the manufacturer side for a high line European who experienced a sales drop over 3-4 years of close to 35% [they have since rebounded nicely] and we feared the loss of new customers will seriously impact profits. There was almost no impact for years 1-3 and only a small one in year 4.
Re. online sales - I have been retired now almost 6 years but I think except for Tesla dealers get paid for online sales as well as regular sales and I believe they can regulate the price as well so little or no impact. Long term dealers would love a larger piece of the business going online. It reduces their expenses. It is really the manufacturers who like lots full of cars because they get paid when they sell it to the dealer.
As am aside it was always the low volume high gross dealer [what they all are currently ]that was the manufacturers headache. We wanted high volume low gross because that way we built and sold more. The math and the risk really favors the dealer to stay small and make a higher than average gross. It is a fine line with competitive pressure being what they are.

Great comments, thank you.

 

[roswelllion]

Talked to a friend who sells a dozen makes at nearly as many dealerships and he is not happy.

Well, and this is a generalization, dealers expect the manufacturers to do one thing. Get them cars when they need them. When that doesn't happen they aren't happy. If you are good enough friends ask him if his profits have dropped significantly.? My point is when they make money, in their minds it is because they are smart and when they don't it is the manufacturers fault.

 

[roswelllion]

Takes a lot of mark-up to make up for the volume hit and most people will delay purchases if surcharges go too high.

Disagree. See my example

Selling price $35,000
old GP $3,500 @ 50 units of volume = $175,000
New Selling Price $36,500
new GP $5,000 @35 units of volume [30% drop in volume] =$175,000
Same GP
The key is the volume went down 30% and the GP went up 42% BUT transaction price only went up from $35,000 to $36,500 or 4%.

 

[Art]

Well, and this is a generalization, dealers expect the manufacturers to do one thing. Get them cars when they need them. When that doesn't happen they aren't happy. If you are good enough friends ask him if his profits have dropped significantly.? My point is when they make money, in their minds it is because they are smart and when they don't it is the manufacturers fault.

He isn't making as much money. They're able to sell vehicles at list, even with a surcharge, but only up to a certain point. Once they hit that, prospective customers aren't interested, to the extent that there are prospective customers since foot (and internet traffic) is way down

 

[palmettolion]

Agree as to who really knows. Consider what service gets done on a new car for the first year that it's on the road other than oil changes and generally minor warranty work. If you compare that with the new cars sold over the last 5-7 years which continue to return to the dealers for service, the revenue hit might be relatively minor. In fact it's possible that because customers will own their cars longer due to the lack of supply, the cost of service and repairs might generate more revenue for the dealers than oil changes and minor warranty work since older cars have more serious problems.

Time will tell.

Service departments are overwhelmed right now. Can't keep people working, can't get parts nearly as fast (or at all in some cases) and people can't buy their way out of a problem car as easily without breaking the bank. The days of instant gratification have also created a customer that loses their mind when you tell them it'll be 3-4 weeks before their car gets looked at. Apparently waiting your turn is for other people.

"If it's not a mess, it'll do till the mess gets here. "

 

[Art]

Disagree. See my example

Selling price $35,000
old GP $3,500 @ 50 units of volume = $175,000
New Selling Price $36,500
new GP $5,000 @35 units of volume [30% drop in volume] =$175,000
Same GP
The key is the volume went down 30% and the GP went up 42% BUT transaction price only went up from $35,000 to $36,500 or 4%.

Try the same exercise with a 65% decrease in volume.

 

[PAgeologist]

I’ve read that lack of inventory is actually good for the dealerships as they are charging more and their sticker from the dealer has remained the same.

That's what I ran into. They gave me a good price for my 2014 Silverado. But I paid sticker on my new truck. They wouldn't budge.

I figured in 1-2 years when this hopefully all goes away, my truck would be worth a lot less. Plus I know a couple people with 2014 Silverados and they said to expect major transmission problems around 120k. That helped me decide to pull the trigger on a new one.

 

[Lion Son/Husband/Father]

Service departments are overwhelmed right now. Can't keep people working, can't get parts nearly as fast (or at all in some cases) and people can't buy their way out of a problem car as easily without breaking the bank. The days of instant gratification have also created a customer that loses their mind when you tell them it'll be 3-4 weeks before their car gets looked at. Apparently waiting your turn is for other people.

"If it's not a mess, it'll do till the mess gets here. "

On the water it’s way worse. This summer your boat takes a S, you’re swimming til next season.

 

[BW Lion]

I know a couple people with 2014 Silverados and they said to expect major transmission problems around 120k. That helped me decide to pull the trigger on a new one.

I highly recommend changing out all of the fluids (transmission, differential, coolant, brake) every 50K miles. The owner's manual says that you can run the tranny fluid up to 100K, but I would not do that.

 

[Tri-Power65]

The days of instant gratification have also created a customer that loses their mind when you tell them it'll be 3-4 weeks before their car gets looked at. Apparently waiting your turn is for other people.

"If it's not a mess, it'll do till the mess gets here. "

Cripes, not being satisfied with a 3-4 week wait to get a car fixed is not an artifact of "the days of instant gratification". The car could be inoperable, and the customer may have no transportation alternative. This problem is further exacerbated by the scarcity of rental cars.

 

[roswelllion]

I have a 2018 vehicle where I owe $17k yet. I could get $42k from Carvana. It is tempting but I bought this vehicle to have for a long long time and drive it until wheels fall off.

That seems extraordinary but just shows how in a shortage gross profits on vehicles really can go up.

 

[palmettolion]

Cripes, not being satisfied with a 3-4 week wait to get a car fixed is not an artifact of "the days of instant gratification". The car could be inoperable, and the customer may have no transportation alternative. This problem is further exacerbated by the scarcity of rental cars.

Cripes, if you're the 4th or 5th person who's said that exact phrase to me today, does that move you up to first in line or are you behind those people too? Just curious how you think it should be done?

 

[roswelllion]

Try the same exercise with a 65% decrease in volume.

Sure, but last i looked this isn't the depression. I just looked at the full year new vehicle sales forecast from Edmonds. It was 14.4 million units. Not great but not the end of the world. 16million is a solid year and 17 million and up is a gangbusters year. So that is anywhere from a 9% to a 15% drop. If your friend is down 65% [or really anything over 25% he has other problems than a global chip shortage.
{ the above numbers include fleet sales which are a huge piece of the volume. As things dry up manufacturers cut fleet sales way before retail sales as retail sales are the most profitable and they do try to stabilize the dealer network. the impact of that is retail sales are probably down less than the numbers above.

 

[Tri-Power65]

Cripes, if you're the 4th or 5th person who's said that exact phrase to me today, does that move you up to first in line or are you behind those people too? Just curious how you think it should be done?

Well, first, I'm sorry you're having such a hard time working the counter. Second, you wouldn't have to put me in your line at all, as I would be off to find a better alternative.

And it just so happens I was in this exact situation a few weeks ago. Son's car started acting up, accompanied by the ol' check engine light. Problem was, he was going back to college in 3 days - 3 hours away via mostly very busy highways. Hyundai dealer said 4 weeks before they could get to it. Thanks, but no thanks. Found a very reputable local shop that diagnosed and fixed the problem the next day.

So, my apologies for needing that job done much quicker than 4 weeks. I guess that makes me an entitled, spoiled brat unwilling to "wait my turn in line" under the terms you dictate. Fortunately, I don't live in a one-stoplight town with no other options. Others may not be as lucky.

 

[palmettolion]

Well, first, I'm sorry you're having such a hard time working the counter. Second, you wouldn't have to put me in your line at all, as I would be off to find a better alternative.

And it just so happens I was in this exact situation a few weeks ago. Son's car started acting up, accompanied by the ol' check engine light. Problem was, he was going back to college in 3 days - 3 hours away via mostly very busy highways. Hyundai dealer said 4 weeks before they could get to it. Thanks, but no thanks. Found a very reputable local shop that diagnosed and fixed the problem the next day.

So, my apologies for needing that job done much quicker than 4 weeks. I guess that makes me an entitled, spoiled brat unwilling to "wait my turn in line" under the terms you dictate. Fortunately, I don't live in a one-stoplight town with no other options. Others may not be as lucky.

I see you skipped right over the question. My point is, I have to break a promise to someone else if I'm going to give you immediate service. I'm sorry, that's not fair. You obviously don't agree. Good luck

Also, not sure why your last paragraph had a quote i didn't say and words I never used. Good job with the insults though.

 

[Tri-Power65]

I see you skipped right over the question. My point is, I have to break a promise to someone else if I'm going to give you immediate service. I'm sorry, that's not fair. You obviously don't agree. Good luck

I understand your point perfectly. Admittedly, I was a bit shocked when the Hyundai dealer told me it would be 4 weeks just to look at the car. I politely declined, knowing I would need to find a faster alternative.

My problem is with generalizing those that can't wait that long for repairs as products of an "instant gratification" system and unwilling to wait their turn in line. Tough situation for those scheduling repairs I'm sure, but some people legitimately can't wait that long.

 

[LMTLION]

Just bought a Highlander Hybrid for the wife but I had to be super diligent and aggressive in this crazy market. The vehicles are not on the lots despite online showing otherwise. They are all “in transit” so when you see a vehicle newly pop up online you need to contact the dealer quickly and complete the sale. I paid msrp for the first time in my entire life because of the market right now, but I did get an inflated trade-in value for my existing vehicle with 100k miles. I think in the end it all nets out to the same.

 

[Lion84]

On the water it’s way worse. This summer your boat takes a S, you’re swimming til next season.

My office is next to a boat dealership and he has 3 boats on the property and they all looked used - he usually has 100 - been like this for over a year - crazy.

 

[Lion Son/Husband/Father]

I bought my boat 2 august's ago for $36k and could EASILY sell it for same. It would take about 5 minutes.

 

[Obliviax]

My office is next to a boat dealership and he has 3 boats on the property and they all looked used - he usually has 100 - been like this for over a year - crazy.

here, next to lake Erie, boat sales went way up due to the pandemic. like giant TVs, outdoor kitchens and inground pools, people are investing in ways to recreate inside lockdowns. lots of money was saved by not going to concerts, movies, sports events. I know several guys that build outdoor facilities and they have been booked up for months (exacerbated by a lack of labor). But back to boats, last spring people were buying them by the truckload, putting the family in the boat and taking off.

 

[fastlax16]

Sure, but is this similar to selling your house in a hot real estate market? You get top dollar, but unless you're willing to relocate, you have to spend top dollar on another house!

Depends on your needs. Unlike a house, you don’t need a car and people are more likely to downsize vehicles than homes. You don’t need to go apples to apples. working from home during covid has made not needing a car a reality for a lot more people. I know several people who’ve had leases end, carvana or Carmax offered several thousand over their residual and are just going carless til they’re no longer working from home. I also live in a big city where it’s feasible.

Personally, I don’t lease cars but I’ve driven mine less than 1000 miles since putting it back on insurance in late March. I could sell it and not miss it from a use standpoint but I’d be pretty miserable without it and that’s why cars as a hobby is a disease. I’ve been offered more than I paid for it.

 

[Delco Lion]

Did anyone see where Toyota just announced they are cutting production by 40% due to lack of chips? They said this will go on through most of 2022. I have to assume most automobile manufacturers are facing the same issue.

 

[ClarkstonMark]

Did anyone see where Toyota just announced they are cutting production by 40% due to lack of chips? They said this will go on through most of 2022. I have to assume most automobile manufacturers are facing the same issue.

40% is way high. Big 3 no where near that, and they have all found a way to keep producing their high profit vehicles at or near pre Covid levels by cutting production of cars that make little to no profit.

 

[sluggo72]

Why are issues taking place in the supply chain?

The supply chain disruption that the semiconductor industry experienced in 2020 was the result of rapidly-shifting market dynamic related to the COVID-19 pandemic. According to the Semiconductor Industry Association, “The events leading to the current auto chip shortage began during the second quarter of 2020, when automakers understandably reduced production and chip purchases as the virus spread across the globe. Chipmakers, meanwhile, saw surging demand for semiconductors used to enable remote healthcare, work-at-home, and virtual learning, which were needed during the pandemic.”

Because semiconductor production is a complex, detailed operation, massive shifts in semiconductor production cannot be stopped and started immediately. Decisions by auto-manufacturers to slow production, combined with increased demand in work-from-home sectors, led to a perfect storm of mismatched supply and demand, which has yet to fully restabilize.

Another key facet to understanding the semiconductor shortage is the fact that a significant overlap between industries that rely upon the same semiconductor technology, now exists. In other words, multiple separate, distinct industries use the same type of semiconductors, leading to exacerbated dislocations of supply and demand, against the backdrop of the COVID-19 outbreak.

A final point to note is that the automotive industry appears to be experiencing the effects of the semiconductor shortage most acutely. According to Barrons1, this is due to a combination of factors, including increasing semiconductor usage in electric vehicles (EV), chip company reluctance to invest in older technology (i.e. cars), and continued growth in demand from the consumer services sector.

When is the supply chain expected to return to normal?

According to McKinsey, the global auto semiconductor shortage is not expected to resolve itself in the short term. “That is primarily because of the continued increases in volume and sophistication levels of the chips needed to power new technologies, such as advanced driver-assistance systems and autonomous driving.”2

Over the long term, semiconductor buyers will need to closely coordinate with chip makers to ensure more stability in the supply and demand relationship. The same McKinsey report suggests that purchase agreement commitments shift to more binding arrangements, which has not historically been the standard. Additionally, there is a general consensus that more allocation of resources needs to be made to the semiconductor infrastructure, in the form of fabrication facilities, which would boost the production capacity of the industry as a whole.