The Mortal Sins Of The Auto Business

Bertel Schmitt
by Bertel Schmitt
the mortal sins of the auto business

Die, sucker!

Automortal Sins will be an infrequent series about the true sins in the auto business. It won’t be the sins which some bloggers regard huge. We won’t blame lapses in styling, branding, we won’t lambast OEMs for abandoning sports cars in favor of appliances. Building the wrong car once in a while is a minor iniquity compared to the huge, most egregious, and definitely mortal sins committed by automakers every day, without the smallest amount of remorse. Here is the first one:

Automortal Sin Service, and to keep it holy

Flouting the importance of customer service is the auto business equivalent of adultery and the coveting of thy neighbor’s wife: It’s bad, it’s potentially deadly, and everybody is doing it. It is not the touchy-feely reasons of good customer relations that make great service all-important for an automaker, it’s hard cash. Service, not cars, is the prime moneymaker in the auto business. Don’t pay attention to service, and you will develop huge pains in your bottom line.

At a big European OEM I had been intimately familiar with, in a good year, the profit contribution of new cars was 33 percent.. Another 33 percent came from parts sales. And yet another 33 percent came from financial services. Customer service in a wider sense brought most of the company’s profit – in a good year. In a bad year, the non-new car profits kept the company alive and paid for the loss in the new car business.

At the dealer level, matters are even more extreme. New cars often are a loss leader for a dealer. How do you think a dealer can offer you a car below his cost and survive? Sure, his true cost may be a little lower than he lets on, but the real reason is in the back: Servicing cars is a goldmine. Dealers earn double on each service job: They can charge $100 or more for an hour. They pay maybe $20 an hour to the mechanic when there is business, and nothing when there is none. They sell you parts with obscene mark-ups. A set of brake pads, or a rotor, for which you pay from $50 on upwards, costs $5 at the factory in China. Little plastic parts that are unique to your car are better than selling drugs or pornography. Nobody else makes them, so your friendly carmaker lists them at sometimes hundreds of dollars, and often they cost pennies to make. If I would be President, and if I would need a new area of responsibility for an unemployed DEA after a lost war on drugs, this would be it.

You probably are thinking now: This may be true where this Kraut is from, but this is America. Nobody is left starving here, even car dealers. According to NADA, that is America’s National Automobile Dealers Association, new car dealers lost money on every new car sale between the year 2006 and 2010. In 2011, the average dealer finally managed to eke out a tiny profit on his new car sales, but only when counting profits from F&I, which finally start flowing. Pure new car sales remain a loss leader.

Ironically enough, a new car dealer makes much more money selling used cars, and he did so in all years except in 2008.

Where the true money is made on a consistent basis is in the service department. NADA says that in 2011, a dealer’s average profit margin on service and parts sales was 46 percent. 46 percent!!! Both to dealer and OEM, service is a lifeline during good and bad times. We know how car sales fluctuated since in the past 20 years. Service and parts sales are relatively steady and hovered at around $80 billion for all NADA dealers since the year 2000.

Of course, once the warranty is over, the fleeced customers tend to flee their dealer as if he has the plague. They end up at Meineke or Pep Boys who look cheap compared to the franchised dealers. Trust me, they still make a lot of money, even if they sell you the $5 brake pad at the cut-rate price of $49.50 instead of $55.

If the franchised dealer could hold the customer a little longer, dealer and OEM would make an excrementload more money. I am able to tell you how much, but I won’t. I had access to these numbers back when. They were confidential – and huge. Just consider this:

The average cost of a service job goes up with age. Keeping a customer in the shop of a franchised dealer means increased service profits, and usually it means a new car sale at the end. Customers who fled to Pep Boys can also be very reluctant to come back to buy a new car. What is done to keep them? Nada.

OEMs spend obscene amounts of money on marketing their new cars, dealers spend wicked amounts of money on advertising theirs, both throw away immense sums on incentives. All to sell a product that brings very little profit, or all too often no profit at all. There is a money printing machine called service, but this is regularly left devoid of ink and paper.

GM committed a lot of nasty sins. Here are two of the most egregious:

  1. To lose control of GMAC. Financial Services were the last true profit center for GM, and they let slip it away .
  2. To kill Mr. Goodwrench, and to replace the icon with meaningless Certified Chevrolet etc. Service.

GM is not alone with the stupidity. When times get tough, most OEMs happily scuttle what little market support they gave to their parts and financial service ventures and use it to prop up their doomed car sales. This can be an especially deadly sin. Especially in tough times, the service money keeps both company and dealers alive. When people stop buying new cars, they spend more for repairs. Something that is sadly all too often ignored in the industry. Look at the blue NADA chart above. Want to feel like a real car executive? Say the chart doesn’t matter. Speaking of Detroit: Ford quietly has been better and more proactive in this department. Maybe because old Henry once said that he would give the Model T away for free if he would be given an exclusive on parts sales.

Ignoring the money made from customer service is one of the most egregious automortal sins in the universe. Why is this sin committed as a matter of daily routine? Nobody knows. As one auto executive told me after a few beers: “We all have sinned and fall short of the glory of God. Barkeep! Two more.”

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2 of 110 comments
  • DC Bruce DC Bruce on Jan 22, 2013

    Interesting thoughts . . . regarding GMAC. It's true that the company got into trouble . . . but not be lending money on cars, but buy succumbing to the real estate mania. General Electric is a great example of a company that makes about half of its money by financing purchasers of its products. They've been doing that for decades. If GMAC had stuck to financing cars, GM would have been in a lot better shape. Regarding the "four-square" thing, the essence of a good deal is one that meets both parties' needs. Since there is more than one variable in buying a car, the "four square" doesn't necessarily mean the customer is getting screwed . . . unless the customer is too feeble to deal with a transaction that involves more than one variable. The cash customer isn't "saving" the interest on a car loan because he's incurring an opportunity cost for putting his cash into a car, instead of another investment. So, if BMW or somebody wants to offer 0.9% interest on a car loan, the smart customer will take that deal and arbitrage the difference between what he can make with that money and what he's paying BMW credit. If he doesn't think he can make 0.9% on his money, after taxes, then he should pay cash. Otherwise, he should borrow. Certainly some people don't have the cash to spend for a car. Those people should shop for the best credit deal. Same thing with trade-in. If you don't like what the dealer is offering, check out what Carmax will pay or sell the car yourself. Which is another reason to keep a car a long time (so it's not worth much). The trade-in will be a smaller share of the entire transaction, so the cost of not selling the car yourself and taking the dealer's lousy offer is less. Finally, there's depreciation. When it was time to replace our principal car in 2008, my wife wanted a Honda Pilot. After pricing 2 year old used Pilots and new ones, the difference was small, so we bought a new one. But that's not the case for all cars. For our second car, which I drive, it makes sense to buy a well-maintained used car with a good reputation for reliability. I don't drive that many miles. With the various pricing tools available on the web, one can get a pretty good idea of "true" depreciation by researching the transaction price on a new car, rather than working off sticker. And, if you buy a used car from a dealer, you can -- with Carfax -- figure out how long the car has been sitting on the dealer's lot. A car that's been sitting on the lot for a while has a lot of negotiating room. In my case, a roadster that had been sitting on the dealer's lot since fall had a lot of negotiating room, when I bought it in January.

  • Exfordtech Exfordtech on Jan 22, 2013

    Yikes. With a quick google for A4 front pads and rotors I found list prices of $150 to $200. I didn't check on factory prices but I'm sure there are aftermarket parts of more than adequate performance I hope even the independent shop shop gives at least a kiss on the cheek before the screwing. Bear in mind they charge list for parts and they pay about 75% to 80% of list. Add probably 1 to 1.5 hours for labor and I'd figure they're making about $200 to $250 on a brake job. Ouch.

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