Photo courtesy Warner Bros .

Photo courtesy Warner Bros.

Fasten your chin straps and check your seat belts, car people. The ride is about to begin, and there’s no turning back. Every party has to end sooner or later, and we’re overdue. All the signs have been flashing for months, but too many of us ignored them, and now the reckoning has arrived.

It’s sort of like watching the flaming cattle run past in “Mars Attacks!” or hearing the oboe music from “Jaws.” You can tell some scary crap is about to go down.

You can’t say I didn’t warn you. And after 41 years in the retail car business, it seems the industry has finally caught up with me. All the so-called experts, analysts, and other assorted clowns who were wearing party hats and predicting perpetual record sales a year ago have done an abrupt about-face. Now they are marching in the other direction and sounding the alarm.

Have you recently invested in a multigazillion-dollar, state-of-the-ridiculous modern facility? Did you just hear oboe music? News flash: The factory is not going to eat your loss when the shark shows up. You guys and gals have been bullied into investing by your manufacturers, some of whom skipped in and out of bankruptcy with a government handout.

I never did understand how Rick Wagoner’s General Motors blew through $32 billion in less than a decade and why some people still look at him as if he’s some kind of authority. They were in trouble long before the economy collapsed.

We’re Gonna Need a Bigger Planet

One of my favorite scenes in “Mars Attacks!” is when the Martians run all over the streets of Las Vegas, zapping every human they see with lasers, evaporating them on the spot. Throughout the melee, an alien loudspeaker can be heard blaring “Do not run! We are your friends!”

Well, I just got off of the phone with a friend of mine, a dealer I’ve known for 20 years. Although we seldom agree on everything, he is a guy I can get some great ideas and insights from. We got into a discussion about the sales cycle and I had him run some theoretical numbers through his CRM and auction reports.

We used the 2014 Camry XLE as an example. Let’s be generous and say the consumer bought it in July 2014 and financed $23,000, which would mean no finance add-ons and no negative equity from their trade-in. They got a generous 3.5% APR and a 72-month term. Three years later, that customer still owes more than $12,420 on a car that optimistically books for less than $10,000 and might bring $9,000 at auction.

Realistically, that is a perfect-storm example. Your real-world customer probably owes more than $15,000.

Lenders have stretched terms as far as 84 months, which greatly extends how long these customers are upside down with negative equity and no ability to buy or trade. The other side of the coin is less obvious, but even more devastating: Coupled with overadvanced negative equity, these extended terms increase the car buyer’s debt load, which impacts their credit score more than any criterion other than payment history.

People believe poor credit is the No. 1 factor that causes people’s loans to be rejected. In fact, debt load is the top negative factor in every bank’s scoring system.

Your customers are signing on for 72- and 84-month loans and refinancing negative equity from previous loans into their new loans, which increases their second-generation negative equity. The only solution the captives, banks and finance companies can come up with is to extend the terms even further, throw more money on the hood, and buy deeper and deeper into subprime.

Maybe I’m way off here, but if I learned anything from my 35 years in F&I, it’s that subprime loans are risky. Generally considered to be anyone with a credit score under 600, subprime financing is loaning money to people who have a history of not paying for the things they buy.

I’ve met these people, thousands of them, face-to-face. The majority of people with really bad credit are not innocent victims of circumstances beyond their control. And today, more than 33% of all subprime loans are categorized as “deep subprime,” with scores under 550. That is up from 5% just seven years ago.

In other words, to increase sales, lenders operating with security-backed bonds are reaching deeper and deeper in the highest risk categories. Let me remind you that this is identical to the mortgage industry shenanigans that threw this country into the worst recession since the Great Depression. Do you remember what the brokers told their customers and investors? I think it was something along the lines of “Don’t run! We are your friends!”

Ziegler fears the trend toward overextended terms could prolong the ownership cycle beyond the point where customers can realistically reenter the new-car market.

Ziegler fears the trend toward overextended terms could prolong the ownership cycle beyond the point where customers can realistically reenter the new-car market.

No Sales, No Profits

There is no shortage of consumers trying to buy cars and trucks, but there is an increasing number of deals we just can’t put together. Even with the finance sources stretched as far as they can go, even with the manufacturers throwing stupid amounts of money on the hood, and even with dealers loading up the trades and taking short deals, there isn’t a dealer in this business who isn’t already losing a lot of deals every month because we just can’t get there. And it will only get worse.

“OK, Ziegler,” said one of my young dealer friends, a recent NADA Academy graduate. “Leasing is the answer.” To which I replied, “Au contraire, Buttercup.”

I really hate to disappoint you, but leasing is a major part of the problem. Throughout the history of automotive retail, leasing has always been the great short-term solution for turning deals when all else fails. Unfortunately, leasing is not sustainable. In truth, it’s just a way for manufacturers and captive finance companies to defer losses. On paper, the captive owns the unit, so it appears on their ledgers as an asset, which looks good to investors. Now they can hide the losses until the lease terms come due. They then have to dump them on their dealers by hook, crook or intimidation.

To make leasing work, the captive has to subsidize the leases to stay competitive. There is not a manufacturer in our industry who will voluntarily reduce production to realistic levels to adjust to true demand. These fools continually overproduce and glut the market with units that have no place to go. They jam up leases and fleet sales to postpone the inevitable reckoning. They jack up the residuals to compete with the other equally clue-impaired manufacturers in a race to see who can put the stupidest money on their cars.

Then here comes the manufacturer dumping an abundance of lease returns and fleet buybacks into an already glutted market. When these overresidualized puppies come home, the dealers have to eat the losses. It’s a perfect plan for the manufacturers, but it’s a Ponzi scheme that eventually catches up with all of us, and that time appears to be at hand.

A writer I follow in The Detroit News said we should expect 3.6 million off-lease units to hit the market in 2017. In case you missed it, that’s an industry record. Leases today are averaging 36-month terms, so that means the cars we’re flooding the market with this year are going to be — you guessed it — 2014 models.

The oboe music is playing right now and the shark is circling nearby. According to MarketWatch, car sales were down 10.6% in March, truck sales were up 5.2%, and dealers were sitting on new cars for more than 70 days. AutoData Corp. just adjusted the seasonally adjusted annual rate (SAAR) to 16.2 million units. That’s falling back from the 17 million-plus units you sold last year. The roller coaster is already starting on the downhill track.

Car buyers love next-generation connectivity and safety tech, but standardizing once-optional features helps drive up MSRPs and the cost of financing.

Car buyers love next-generation connectivity and safety tech, but standardizing once-optional features helps drive up MSRPs and the cost of financing.

Cars Are Too Expensive

Here we are in 2017, where the average new car sells for $34,077, according to the folks at Edmunds. That’s crazy when you consider that a 1997 Cadillac Deville with a lot of options had an MSRP of $36,995. In 1997, a Camry LE, reasonably equipped, had an MSRP of $19,928. The cost of living has not increased 58% in 20 years, but the price of cars has seriously outdistanced inflation.

And, of course, the market has shifted with the low fuel prices. Consumers are not wanting to buy modestly equipped cars and trucks; we’re all buying pricier SUVs and “Cowboy Cadillacs,” those tricked-out pickups that are especially popular in Texas.

That’s where the other shoe drops. In the last five years, manufacturer options becoming standard and government regulations have greatly increased the price of cars. And now we are seeing manufacturers in a race to make cars safer and completely autonomous. How much do we think that’s going to add to the price?

Rear cameras, front cameras, radar sensors, lane keeper technology, GPS navigation, remote locks and keyless ignition, power liftgates, voice-activated controls, Bluetooth connections, automatic emergency braking, automated parking, automatic wipers, computerized diagnostics and smart-car in-dash driver alerts — all that technology is expensive. And prices will only climb higher as they invent new things we haven’t even thought of yet.

Maybe we could get the banks and finance companies to increase the terms to 144 months. Then they’d only be upside down for nine years or so. Or fleet them out or lease them with 90% residuals and make the dealers take the buybacks and lease returns as part of some bogus Shop Click Drive programs. They’ll do whatever it takes to evade reality.

When Vendors Attack-ack-ack-ack-ack

They just can’t help themselves. For years, they’ve been planning the invasion from the vast reaches of cyberspace. Now they’re running amok, zapping dealers left and right, all the while shouting, “Don’t run! We are your friends!”

Five years ago, it was Scott Painter of TrueCar fame telling anyone who would listen how he was going to bring down the car business. Well, the industry struck back like a swarm of hornets and brought his plan to its knees. The board at TrueCar came back with a more dealer-friendly solution, showed Painter the door, and hired Chip Perry as the CEO and dealership ambassador to restore trust and confidence.

Some people say I was the one who led the charge against TrueCar, an accusation I wink at and totally deny. I was just Paul Revere, warning the colonists of the impending danger. Since then, I have not only made up with TrueCar, I’ve actually helped them in their efforts to achieve balance between their stockholders, consumers, and dealers. Painter once sat across from me at dinner and said, “You cost my company $78 million,” to which I replied, “Actually, we let you up!”

Now, reading an article in an industry news publication last week, I was horrified to see the third-party lead providers all piping up and laying out their plans to take over the industry — again.

Do car dealers have to take action? I would never suggest a boycott, but I will say each of you has to make up your own mind as to what course of action you will take individually when it becomes apparent that third parties are intent on stealing your business. Maybe we can educate and persuade them this is the wrong path. It didn’t work last time, but it’s worth a shot. Maybe they’re not as brain dead as their rhetoric suggests.

The two articles I read had similar content. The theme was CEOs and top executives of lead provider companies bragging about how they were right on the immediate verge of a totally online transaction. The gist was they can totally negotiate and transact a complete car deal — at least I assume they meant finance and contract; the articles mentioned online contracting. They’ve been scheming for years to take the business away from the dealers, and now they are so close they can talk about it openly.

The plan is to totally bypass the dealers. “You don’t need a website, Mr. Dealer, because we’ll do the entire deal on our sites. We will make you nothing more than a warehouse for cars until we can get those pesky franchises laws changed and totally eliminate dealerships. Elon Musk is our savior and Carvana is our hero.”

The CEOs of all of the major lead services were featured with comments and plans, and hints about future plans, as well as varying degrees of allowing the dealers to remain in the deal somewhere.

Oops, did I say they were lead providers? Excuse me, some of them are such a poor value and overpriced nonperformers that they have started calling themselves an “advertising resource” because they could no longer justify their outrageous pricing with lack of tangible sales. Then they resorted to allegedly bogus “attribution” and “influence reports” showing they were responsible for your own website’s sales, in an effort to justify the prices.

By the time they dazzle you with this bull, you are supposed to believe that 30 of your sales are attributed to their services because they had “influence.” Then they’ll show you the same IP address they showed to the 30 other dealers they charged.

Now the plan is to actually sell the customers the cars. Each one of these companies cited various degrees of chicanery as to how many crumbs they’ll throw the dealers. Several of them said they will sell the car and the F&I and deliver a check to the dealership. Hey, thanks, guys!

I’ve been speaking and writing about all this for years. TrueCar learned quickly that was a war they didn’t want to fight. Now the plot thickens, exactly as I predicted. The companies I’m talking about don’t want to be your “partners,” as so many of them claim. Rather, they want to steal your gross and reduce you to a delivery warehouse while they siphon off the last meager shreds of profitability you have.

I am presenting all of this as my personal opinions, and I welcome counterpoints of view, even from the alleged perceived scoundrels I described in the preceding text. But be warned: I will judge you by your actions, not your words.

About the author
Jim Ziegler

Jim Ziegler

President and CEO of Ziegler SuperSystems

Jim Ziegler ranks among the industry's most recognized and honored trainers, consultants, authors, speakers, and forecasters.

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