Factory Intrusion into F&I
Publisher and editor Mike Roscoe conducted this clandestine interview with a prominent GM Dealer. To respond or to recommend a future "Dealer Undercover" segment, write to mroscoe@dealeronline.com.
What's is on your mind, Mr. Dealer?
I think that dealers in this country need to be aware that this fight with the factories may not be over at all. The recent activities on the part of the factories and some of these state legislatures, such as Arizona, prohibiting the manufacturers from direct lending to consumers, indicates what their intentions are in the future. I think that the factories came to the realization that there was just no way that they were going to be able to distribute new cars directly to consumers and that they really do indeed need the dealers to do that. An automobile is an awfully bulky thing to try to sell over the Internet. In terms of selling financing and service contracts, however, the Internet is a perfect medium for the factory to deliver the product. I think their thinking was that they will concede on the cars, but they are going to go after direct financing with consumers over the Internet.
This is going to affect you one place where you make money.
Right. The manufacturers have diminished the new car dealers' margins in the last twenty years from approximately 25% down to 6, 7, 8, 9%. If we don't have the money in the F&I department, we are not profitable. The NADA did a study recently that showed that the average new car dealer makes $237 per car profit. If the F&I income is taken away from the dealers, it is $140 loss.
What do you think their purpose is here? Is their purpose to make more money or is their purpose to further squeeze dealers out?
I believe that the purpose is to make more money. Wall Street is running the car industry these days. I think they are just looking for another profit source.
Don't the factories see that if their dealers can't make money selling and financing cars, they won't be able to continue as dealers?
That's my point.
Why do you think they are missing this?
I think that Wall Street has driven much of their behavior in the last two or three years. I think that only in recent times are they starting to even begin to think about the ramifications of doing permanent damage to their dealer distribution system.
Do you think at this point that they are not really worried about that? If the permanent damage happens, so be it?
I think they are treating us much like the suppliers that they have. I think they are thinking that, any way that they can turn more profit for themselves at the expense of anyone else is OK and everything else will just have to fall in line after that happens. I think that consumers would greatly suffer from this. If the dealers go out of business, I think that consumers will suffer a serious lack of services.
No question, there would be a big drop-off. There are a lot of dealers that I know and who will only sell their manufacturers' products. They will sell the Ford ESP service contracts, they will only use Ford Credit, etc. Aren't the manufacturers taking a big risk if they alienate their best salespeople?
Right. In our state we found that most of the rural dealers, which account for more than half of the dealers in this state, virtually all of the retail financing they do is done through the factory finance arm. Virtually all of the warranties they sell are factory warranties. So if the factories were to advertise to consumers, which is supposedly starting this summer, we are going to see the factories having really strong marketing campaigns to direct people to their web sites. Once this happens, the consumers are going to go directly to web sites and search for cars, and even today, 67% to 75% of people buying new cars are consulting the manufacturers' Web site. Once they arrive at that Web site, they encounter the manufacturer soliciting the F&I business before they even buy a carbefore they even begin to search for a car. They have captured about 40% of the gross profit in any car transaction. Once they bring the people to the Web site, then there is nothing we can do. They shortcut the whole process. They will have inserted themselves between the dealer and the consumer and at that point, they don't need to pay the dealer any mark-up and they are now controlling the deal.
So the dealer is totally cut out?
No, I think dealers would get some money, but I think the factories will have already set up the financing and will simply give the dealer a small fee, like BMW is doing. BMW just recently bought a bank in Utah and they want to pay the BMW dealers a small fee for handling the F&I paper. They are going to start selling the financing paper over the Internet.
What's to keep the F&I man at the dealership from saying, "You don't want that rate or service contract, let me show you a better deal?" There are other companies out there that dealers can do business with. Is the manufacturer not setting up competition for themselves within their loyal dealers who previously had sold only their product? I can't imagine that the dealer is just going to sit back and say "Well, I'll just take $100 on this service contract or this finance contract." They are going to find another way.
Maybe the factory will control the lead and maybe part of the condition of receiving a lead from the factory is that you are willing to honor the financing arrangement that they have already made.
So you are thinking that before the manufacturer would send an Internet lead to the dealer, the dealer would have to commit to using the factory financing and the factory service contracts? Even though I don't think many service contracts would get sold over the Internet, if it is a condition of receiving the lead, the factories aren't going to lose anything. They are just going to cherry-pick.
Right. I think that the dealers will be afraid to not have those Internet leads because I think what may happen in the near future is that if this many people are consulting the Internet, the factory Web sites, prior to the purchase of a car, this inserts the factory in the process ahead of the dealer.
But if it is just for getting information, that is not necessarily negative, is it?
No, but if the factory knows who this person is and they control this lead, they can manipulate the dealer to a great extent.
What turns the person who is just looking to compare vehicles into a lead?
What if the manufacturer starts pricing finance terms? The manufacturer starts pricing the car? The individual says, "I'll take it." Then the factory says, "OK you can buy it over here at this dealership," as opposed to that dealership over there which is not willing to go along with their arrangements in terms of conceding to use only the captive financing for a nominal fee.
Boy, it is just gets worse and worse.
It is interesting because I don't think we had to be concerned with this type of encroachment on our businesses three years ago. None of us thought these thoughts.
You focused on your business.
Sure. I think in the last two years that the factory has shown exactly what they are interested in and that is their profit at anyone's expense, including their dealers.
What if they only gave the lead to the dealer who serves the geographical market that that consumer resides in?
I think that that is fair.
What do we need to do to make that happen?
Well, Arizona has done that.
Tell me about it.
In some states they have enacted laws that state that the factory is compelled to give the dealer that lead in his area responsibility. All states need to do that. Every dealer is held responsible for a particular area of responsibility. How can the factory not turn over the name or information relating to an individual in that dealer's area of responsibility, if they are going to indeed hold them responsible for sales in that specific area?
It would be unconscionable not to do that. If the manufacturer is giving the lead to the dealer in whose area of responsibility that person resides and if in that case there is some fee involved or some payment to the dealer for facilitating the purchase of the factory financing and/or service contract and if the dealer is free to market anybody's service contracts, or financing, then what's the problem?
What?
If the dealer who had that territory gets the lead and if they get a fee from the factory for selling the financing and service contract, but the dealer is free to sell anybody's financing or service contracts without any repercussions, then what is wrong with that situation?
Because they have already priced their GMAC financing to them without the dealer mark-up in it, so now maybe the dealers can't be competitive with that financing.
Don't you think somebody would come along and be competitive?
Forty % of the gross profit in a new car deal is finance income. In some dealerships, it is even much higher. Let's say the average gross profit in a vehicle today is $1,400 So you are at $560 per car gross profit from F&I. Now the factory says we will give you $100 to do this paperwork.
You just lost $460.
Exactly. I just lost $460 and you ask what's wrong with that? Let me put it this way. If you take that kind of profit out of the deal, you are going to have to find another lender that is going to be able to beat that deal. I'm not sure that there is one.
That brings up a question. In many of these issues that we discuss in Dealer Undercover, the dealers, at least the points that we argue, seem to have the moral authority or the moral high ground. What's going to happen when, in effect, consumers are going to save money from this factory intrusion? They are going to get better rates from the manufacturers now that the dealers' mark-up isn't in there, so how do you fight that when what you are saying is we want everybody to pay more so that the dealers can make money on financing? The public is not interested in how little you make on a new car. They already think that you are making too much. How do you take this to a state legislature or how do you take this to the people and say, "We want you to pay more on your financing for vehicles so that we dealers can make more money?"
That is an interesting perspective, but I think that from the dealers' perspective, it's about the relationship between the dealer and the manufacturer. The manufacturers put the dealers in business 80 years ago. The manufacturers designed a franchise system 80 years ago because they didn't have enough money to distribute their own vehicles. They have contractually obligated us to distribute only their cars through these dealerships. We have invested millions of dollars on their behalf to distribute their products. They set up this distribution system. My point is that they control the margins on the new cars as well. We are economic captives of the manufacturers. If the manufacturers have the power to arbitrarily reduce the margins, then they can arbitrarily drive the dealers out of business. If they capture every profit center of the dealer's, who they put into business in good faith, then it is wrong. You can say, "What is wrong with the consumer paying less?" Well, there is nothing wrong, but the manufacturer is controlling all of these profit centers. If they squeeze us here and squeeze us there and squeeze us out of business, that is wrong. In the long run, the consumer will be the biggest loser.
Tell me why.
Because if you drive the dealers out of business with this short-cited prospective that you can save the consumer a few bucks here and a few bucks there, to the point where you drive dealers out of business, then the consumers will have to dial a 1-800 number in Detroit to get their Malibu fixed. That doesn't serve anybody. It is also an enormous injustice to the dealers who invested their lives, everything they own, on behalf of these manufacturers. The point is that the states ADAs all need to get to work hard creating legislation to protect the dealers and our investments.
What about the non-factory competitors who are going to be selling financing on the Internet? How can you enact legislation that disallows them from competing?
The factories and the dealers are partners who went into business together years ago. The factory enlisted the dealer to sell its products to consumers through the dealers. For the factory to start picking and choosing which products they are going to sell to the dealers and which ones they aren't, at this point in the game, is unconscionable. Who would have invested these millions of dollars and their entire lives knowing at some point that the return can't cover the amount invested? Once they have us invested up to our necks in their products and we have signed an agreement to exclusively distribute their products through our dealerships, then they can start cranking down the pressure on us, financially. Who would ever invest in these stupid things if there is no possible way of making a return on it?
What have you got left? Used cars.
Yea, but they could take away the financing on used cars too. They have all of our customer lists. They could contact every customer we ever sold a car to over the last however many years for which they have records. They could contact them and say look, stop doing your financing through the dealer. Come directly to us. These outside lending institutions don't have those books.
Well, we have seen that happen in leasing. We have seen Volkswagen contacting lease customers whose lease is about to expire, trying to talk them into buying their leased car. The whole premise for the dealer pushing leasing was to get them coming in every two or three years to trade in for a new one. But down the road, the factory saw that was a loser for them because their residuals were off and now they send out letters directly to customers saying, "Buy the car you are in." Unfortunately, most of the dealers aren't staying in contact with their customers and they don't even know it.
Also, I think that we should look at how profitable are these factories today. Do they really need this extra profit? Look at our warranty rates. Warranty repairs for most dealers is not profitable.
You have to raise your consumer rates to cover it.
You have to raise consumer rates to cover it. They can't just keep squeezing us out. Now they want to take away F&I? You can't keep squeezing this thing and have us be able to hire good people, market their products take care of consumers, inventory their products, have nice facilities, have efficient operationshave got to make some gross profit somewhere. They do. Look what they are making per car on the NADA analysis. They make, net profit, $1,724.00 a car. We make $237.00. Do they need more? I don't think so.
Hopefully, the result of this will be that dealers read it and get in touch with their ATAEs. All they need is one state for them to get a foothold and it would be a tough battle in state legislatures when the factories would make the argument that they are going to be saving consumers a lot of money and the only argument that dealers have is the need to protect their investment. In a court of public opinion, I think that's a no-brainer. So it has to be handled expeditiously before it gets to be an open fightbefore the factories are doing this successfully in one state and can use that as a springboard to go to others.
Yes, I think so. I also think that the factories have an obligation to the dealers to allow us to make a profit. Once we have invested the money, we are their captives. These non-negotiable five-year dealer agreements, what are we supposed to do with these things? Once you have invested the money, the bank doesn't care what your dealer agreement says, the bank wants their money every month.
