AD #1424 – Honda Up… Renault Down, Baidu Doing Autonomy? Don’t Diss Dealer Franchise

July 29th, 2014 at 11:51am

Runtime: 7:20

- Honda Financial Earnings
- Renault Financial Earnings
- Kia Sorento’s Third Generation
- Electronic Parking Brakes for the Masses
- Autonomy? Don’t Mind if Baidu
- Rethinking the Dealer Franchise System

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Welcome to a Autoline Daily where we work to keep you up to speed with what’s happening in the global automotive industry. We’ll show you some new supplier technology, sorry Tesla, we’ll explain the benefits of the dealer franchise system, and look out Google, your Chinese counterpart wants to get into autonomous cars.

HONDA FINANCIAL EARNINGS
We start out today’s news in Japan, where Honda released its latest financial earnings and the numbers all look good. Honda’s sales of cars were up 4% to nearly 900,000 units, it’s motor cycle sales jumped to 2.4 million bikes. That drove up revenue to just over $29 billion. It’s operating profit was up 7% to just under two billion dollars while net profits soared nearly 20% to $1.4 billion. Whenever you see earnings increase faster than sales that shows management is doing a great job running the company.

RENAULT FINANCIAL EARNINGS
Now let’s jump over to Europe where Renault released its earnings for the first half of the year, not for the most recent quarter. And the numbers do not look encouraging. Renault managed to boost sales nearly 5% to 1.3 million vehicles, but its revenue fell 3% to
$26 billion. The one encouraging number is its operating profit which shot up 25% to nearly $980 million. And Renault posted a net profit of $1 billion. But that number isn’t as good as it looks. Renault actually lost $166 million in the first half. But because it owns 43% of Nissan, the Japanese automaker had to turn over part of its profits, nearly a billion dollars to the French automaker. And in Russia, Renault reported that it lost $74 million in its venture with Autovaz.

KIA SORENTO’S THIRD GENERATION
Well that didn’t take long. Kia updated its best-selling SUV the Sorento just over a year ago and now it’s already showing off the all-new 3rd generation. Unlike the last time, the styling will be getting more than just a few tweaks to the front and rear fascias. The overall stance of the vehicle just looks more sporty and muscular than before and it also gets a more upright version of the automaker’s signature grille. It was styled at Kia’s design centers in Korea, Germany and the U.S. The all-new Sorento will first be shown off in Korea at the end of August and then will make its way to this year’s Paris auto show.

E-BRAKES GO DOWNMARKET
Electronic parking brakes are nothing new but there was one segment of the industry where supplier company Continental felt the technology was lacking: entry-level compact cars with drum brakes. Its system uses two actuators with the controller mounted to the drum brake assembly. Continental says it’s more convenient for the user to just have to hit a button rather than pull a lever and it also gives interior designers more freedom. The system will be ready to hit production vehicles by 2017 but we’re not sure if this technology is right for entry-level compact cars. Most people buy them because they are cheap and usually cheap to repair. But the electronic parking brake assembly is most likely more expensive to replace than a parking brake cable if it goes bad and it probably costs more in labor when it comes time to replace the brake shoes.

AUTONOMY? DON’T MIND IF BAIDU
We all know how poor Google’s relationship with China is. In fact, China bans the use of Google Earth, which means Tesla’s navigation system will not work in China. All that gives Google’s main Chinese competitor, a company called Baidu, quite an advantage. And now comes word that, like Google, Baidu is developing its own autonomous vehicle. It will use radar, lasers, cameras and GPS to pilot the vehicle and testing is scheduled to start before the year is out. We’ve been wondering when the Chinese would get into autonomous technology and this will undoubtedly move the technology forward faster.

Speaking of Tesla, it’s suing states to avoid selling its cars through franchised dealers. Coming up next I’ll tell you why the franchise system is better than most people realise.

RETHINKING THE FRANCHISE SYSTEM
The public is enamored with Tesla’s way of selling cars in its own stores. They believe the dealer franchise is archaic and that dealers are unnecessary middlemen who drive up the cost of cars. But I wonder if the public has thought this all through.

Car dealers have pretty thin margins. On average they make about a 2% profit margin. The best ones make about 5%. That’s because dealers have to compete against each other. Do you think dealers would compete so heavily if they were factory-owned? No, the factory would set the price and there would be no negotiations—just like Tesla.

Dealers will happily take your used car as a trade in, no matter what brand it is. They’ll pay you a wholesale price then turn around and retail it in their used car lot. Do you think factory-owned stores would be interested in selling used cars from another car company? Of course not. Do you know how Tesla dealers handling trade-ins? They send you to AutoNation.

Dealers are consumer-advocates when it comes to doing warranty and recall work because they get paid by the factory to do it. Do you think factory-owned stores would be so consumer friendly? Ha! Warranty and recalls would represent higher cost, not more revenue.

Personally, I have no problem with Tesla wanting to sell its cars in its own stores. I admire Elon Musk’s we’ll-do-it-our-way approach, and besides Tesla is a niche player. The real danger is when Chinese automakers finally to start selling cars in the American market. They could easily decide to side-step franchise laws because Tesla has set the precedent.

That could really wreak havoc in the car market, which would not be good for the car companies, not good for the franchisees, but most importantly it would not be good for consumers. Let’s hope the public wakes up to this before it’s too late.

Anyway that’s what I think ,and that wraps up today’s report. Thanks for watching and join us again tomorrow.

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47 Comments to “AD #1424 – Honda Up… Renault Down, Baidu Doing Autonomy? Don’t Diss Dealer Franchise”

  1. Bradley Says:

    Well I disagree. If the car maker owned all the dealers, then I know for sure that I am paying the same price as everyone else.

    If the car maker wants to raise the price of a car because of warranty/etc. I simply buy a different car. I am not obligated to buy anything.

    If the car maker wants to treat me poorly, I buy a different car.

    Why should buying a car be any different than buying a TV? Microsoft and Apple have also found success in having company owned stores.

  2. G.A.Branigan Says:

    As much as I hate doing the dance when going after a new vehicle,I’m not convinced that dealing directly with the factory is such a good idea.Dealers have ‘wiggle room’ whereas the factory might not.And the trade in part might not work out either unless the factories open up used car lots as well.If a dealership pisses me off,I go to another dealer,but that option won’t be available with a direct factory outlet.Either way,the new car game kinda sux for the customer no matter how it’s done..

  3. HtG Says:

    2-5% Yeah, uh huh

    How much did that car cost the dealer who is floor planned by captive finance? The dealer never bought that car in the first place. What is the markup for brokering the customers’ financing? Are there any incentive programs from the OE beyond the customary holdbacks? Everything goes to the bottom line.

    2-5% of what, John? No bum’s rush for me thanks. Remember, when John Kravcik touts a low margin for dealers, he’s working for TrueCar which is trying to get consumers’ confidence to use its website. And he’s making true statements, indeed.

  4. Jon M Says:

    @ Bradley

    You can go buy a different car if you don’t like the price, but if all of the automakers are raising prices because…well…they can, and then you’re stuck paying inflated prices. But if there is competition among a greater number of dealers the consumer benefits.

    I would also say that buying a car should be dramatically different from buying a TV for much the same reason that taking out a mortgage on a house is much more involved than financing/leasing a car (and we’ve witnessed what happens when mortgages loans are quick and easy): the stakes are much higher. That is, I’m investing much more money in a much more necessary product. I generally pay cash for a TV, and in 10 years–or however long–when it needs replaced, I go pay cash for another one. It’s not that easy for the average person when it comes to a vehicle.

  5. HtG Says:

    OK, one more

    Let’s see what happens when the Chinese OEs start selling cars here for $8-10K, and they’re decent, and there’s no franchisees. Made with cheap mainland sourced infowhatnot. I want to hear the howling about the advantage an OE has over the customer at a traditional dealership. I’ll bet the Chinese stores will even have access to capital for attractive financing rates.

    Someone else is going to be making howling sounds in their congressional reps offices.

  6. HtG Says:

    Beauty of the Free Market, you say?

  7. Lsford1 Says:

    John,

    I disagree with your points about the franchise network issue. Warranty claims are always charged back to the factory. If these are done through a dealer or the OEM directly the cost is always absorbed by the OEM. The dealership is merely a tool that this is done through.

    As for overall cost, those 2% margins are in fact additive to the car overall cost. The consumer could realize a 2-5% savings if they bought direct.

    And for used cars, many dealers that lost their dealerships due to the events of 2008 with the bankruptcies and financial meltdowns have now been forced to switch their business to used cars markets. These are in fact more profitable than new car sales.

    Many dealers will tell you that their used car sales are nearing a 1 to 1 ratio of new to used sales. And the margins are that much better.

    I think for small market cars such as tesla and the like, there is not much benefit or loss either way for the consumers. In fact, these high end electric vehicles might be better served to the public by factory sales and maintenance in part to the expensive costs of these components. But this remains to be seen

    Thanks for an interesting discussion

    L-

  8. Brett Says:

    I’m confident that the margin quoted was strictly for new vehicle sales. For the entire dealership, including used vehicle sales, service bays, and warranty work, it’s probably closer to 8% or 10%. I think that the economics of a car dealership are purposely obfuscated to protect the dealer’s interests.

  9. Lsford1 Says:

    @Brett.

    Well stated. These are very true statements

  10. MJB Says:

    @1

    Saying you’ll just go buy another car is nice in theory, but if you’re anything like most car buyers, you’ve already got your eye set on one particular vehicle, maybe two. When you waltz into a showroom, you’re not thinking, “What if I can’t get it.”. you’re thinking, “What if I can’t get it in the color I want it.”

  11. lsford1 Says:

    Made a comment here and it has not shown up? What gives?

  12. MJB Says:

    @7

    Everyone knows the stealership makes their money in the service department. I did dealership design for 8 years and you’d be surprised at how many 30car service bays are hidden behind little 5car showrooms. Cha-ching!!

  13. Chuck Grenci Says:

    Some sanity over in Formula 1; for those that knew (or remembered) that F1 was going to begin using standing starts (after a Safety Car) beginning in 2015, well, that idea has been scrapped (and rightfully so, IMO). Allowing trailing cars to line up behind the leader (after a Safety Car), thus bunching the cars for a restart (is one thing), lining the cars back to the grid for a drag race to the first corner, idiocy. Cooler heads have prevailed.

  14. Phil Says:

    John, If the franchise system is as good as you say it is, shouldn’t there be room in the market for both systems. The factory direct stores would then have to compete with dealers and the market would determine if selling prices should rise or fall. If you kept both options most of the disadvantages you mentioned of the factory direct model would be negated by competing for customers with the dealers.

  15. C-Tech Says:

    Okay John I understand your defense of dealers however it does not hold water when it comes to defending consumers. The 2-5% margin, why is that my problem as a consumer? If you chose to invest in a dealership you know the risk. We know there is more profit in selling the financing, service contracts and accessories. Tesla does take trade-ins? So what, if there was competition for great electric cars, then Tesla will adapt. The one Tesla dealer I have seen does not have room for many cars and if that is the business model they have chosen, then it is to Autonation’s and Craigslist’s gain. Advocate for the consumer? Often it is the OEM forcing the dealer to service a customer’s car after being refused warranty service by the dealer. Why do you think OEM’s have toll free service numbers? If dealers only made their money off new cars, then why is it that so many managed to stay in business selling used cars after their franchises were taken away?

  16. Sean McElroy Says:

    #11 – Sorry about that but if you’re commenting for the first time or under a new name we have to approve it first before it shows up.

  17. John McElroy Says:

    One thing I didn’t get into today is looking at Europe’s franchise system. It’s kind of a hybrid system where automakers can own some company stores, but also have to use the franchise system. Daimler is being crucified by the analyst community because its company stores all lose money, and they’re not very good at selling cars, either. The analysts are telling Daimler to dump its company stores.

  18. Lex Says:

    The Dealership Model and Pricing Structure used by GM’s now defunked Saturn Divison was praised when it was unveiled. I believe most Saturn owners loved the treatment they received during the sales and service process. As Tesla grows it will need to expand using other peoples money i.e. dealer investors.

    I agree with #1 Bradley, If I do not like the product, price or service I will go somewhere else or file a complaint with the OEM. If the OEM “Tesla” hears that one of the company stores is having trouble I bet heads will roll! So your argument holds some water but not enough to total discourage what Elon Musk is doing currently.

    In the case of the Chinese there needs to be some US Protectionism rules setup. However since we are in a global ecomony and market the Chinese have learned it is far easiler to buy an established brand like Volvo and sell new chinese product in North America. So instead of the parts of the vehicle being made in China – Actually everything about the vehicle is Chinese.

    Isn’t that what GM wanted to do? Shut down US auto plants and fire the UAW labor and hire and build vehicles in China with Chinese workers for import into the US? The only problem is if US workers are un or under employed who’s going to buy GM’s vehicle then?

  19. Bradley Says:

    Because of EPA, Safety and the laws of physics…all cars are becoming very similar. Once cars go autonomous…I will care much less about the things I do now in a car.

    There isn’t anything stopping the auto makers from all raising prices now. If they all do it in conspiracy…well that is supposed to be illegal.

  20. HtG Says:

    I cannot resist

    If a dealer is getting financing from the OE for its floor plan, the dealer is paying an interest fee for the loan. That is the dealer’s cost for the car being sold to the customer.

    Now, who can do math? Assume $26-50K average unit invoice costs, assume 3% cost of OE loan/12months=65-125 per month cost of a car to the dealer.

    Am I smoking some of that Colorado Kid ganga?

  21. Buzzerd Says:

    Let’s look at other industries where you deal direct with the company- Telecom- there’s a joy but only to be out done by…. Insurance companies. Apple has certainly done well but they even realize you need more stores than they can supply. How about the gas company or electricity supplier? Don’t have to talk to them much when there is a problem it usually isn’t fun. How about when you buy items from big box stores and you have to deal with the manufacturer for warranty ? I think everyone loves that one.

  22. Buzzerd Says:

    HtG- I think most dealers don’t have to pay for inventory for a set amount of time- say 90days. Which is why you should be able to get a better deal on a car you ordered compared to the one that has been sitting for a while.

  23. Buzzerd Says:

    Lex- GM wanted to do what? I would call B.S. on that story.

  24. John McElroy Says:

    Dealers do buy their cars from the factory. They almost always get the financing from the car company that made the car. And that’s why dealers want to sell those cars ASAP. The longer it sits, the less profit they make. A general rule of thumb is that once a car sits for more than three months, the dealer can pretty much kiss his profit away.

  25. Barry M. Green Says:

    The one point you seem to missing is there are very few independent dealerships today and most
    are owned by companies as large as the automakers
    themselves. So why not try a new approach i.e. Elon Musk.

  26. w l simpson Says:

    Re : EVs All you motorheads might enjoy prowling this site. Much to be learned about today’s EV assembly procedures. lots of pages
    http://www.plugincars.com/revolutionary-sustainable-construction-bmws-i3-electric-car-127866.html

  27. HtG Says:

    Are we also going to consider the marketing support OEs give to regional dealer groups? Who is paying for those ads on the local news? Not even talking about NFL ads.

    How do we adjust dealer margins for such OE subsidies? But I commend the PR folks for getting people to think in simple terms of ‘dealer profits around 2%.’ Bidness is bidness.

  28. G.A.Branigan Says:

    @ 24,John: I believe what your saying,but that brings up a question that I haven’t been able to get an answer too: My local GM dealership has the winder stickers on each vehicle which is normal,but what would make them have an additional sticker attached to it that charges another 2 to 3 grand? There are no additional dealer added options etc,it’s just a dealer ‘extra’ markup.When I asked a salesman about that he just said,’oh,don’t worry about that’.BTW,these markups were on ALL of their new chevy and gmc pickups.

  29. Buzzerd Says:

    Barry- that certainly isn’t the case around here.

  30. Bradley Says:

    I think John’s take indirectly states the ideal solution.

    New cars should be sold by the manufacturer. Car dealers as we know them today sell used cars.

    This would put them in competition a little.

  31. Bradley Says:

    #29

    Very few independent dealers here in Iowa. You have to really search to find one that isn’t part of a larger mothership.

  32. Kit Gerhart Says:

    I actually saw a Tesla S on the road today, on I-95 a little north of Daytona. It turned off shortly after passing me. Maybe he needed a charge.

  33. Dave Forslund Says:

    Hi John,
    RE: car distribution channels

    I sometimes like your commentary and sometimes I wish you would just stick to telling the news without your opinion….and that is what it really is….an opinion backed by observations.

    When there were more local car dealers, the question was: do you buy a car because you like the dealer (DEALER LOYALITY)..or..do you buy from the dealer because he has the car you like?
    (CAR MFG LOYALITY)
    Today, with fewer dealers, people tend to shop for the car they seem to want and are not concerned where or which dealer they buy from. PRICE more than the product or service appears to be a BIG deciding factor.

    Manufacturers and dealers like this new system because with fewer dealers there is less competitive price haggling, and dealers can make more profit per car. SO YOUR REASONING FOR BEING ABLE TO GET BETTER PRICING FROM A DEALER, IS LESS TRUE TODAY AS IT WAS PRIOR TO YR 2000 WHEN THERE WERE MORE DEALERS. (Japanese makes are an example of how fewer dealers, sell more cars at a higher profit and make more money.)

    THE MARKET WILL DETERMINE WHERE PEOPLE WILL BUY A CAR. WITH THE INTERNET, BUYING AND MARKETING HABITS ARE UNDERGOING CHANGES. IN THE END, CAR DEALERS WILL EVENTUALLY GO THE WAY OF THE SHOPPING MALLS. (They will exist, but much fewer in number.) THIS IS ALSO POSSIBLE BECAUSE CARS ARE INPROVING ON THEIR NEED AND FREQUENCY FOR SERVICE…WHICH IS NOW A PROFITALBE AREA FOR DEALERS. 100,000 MILE INTERVALS ARE CERTAINLY A FUTURE POSSIBILITY.

    I have a great regard for both you and your son, and enjoy your show. However, I bet he differs with you on dealer or mfg direct distribution. It will be generational change.

    Tesla, like in other areas as well, is a leader in automobile changes.

    I am age 77, and I feel (MY OPINION) after 120 years of dealer distribution, there is a need for a change in the way people buy cars…and many dealers have brought this on themselves. Middlemen are expensive when they serve little or no function. In some ways, they are an agrivating part of the car buying process.

    Thanks for reading “my opion.”
    Dave Forslund

  34. Kit Gerhart Says:

    33, Will I SHOUT THAT MUCH in 9 years, when I am 77?

  35. J47 Says:

    John,
    I understand your points in regard to Tesla’s direct sales. However aren’t you the one that always preaches “let the market decide”
    I look forward to your show daily, thank you.
    J47

  36. RonE Says:

    Kit, When you’re 77 you can shout, scream (Caps w/bold print), or do whatever you want. You will have earned that privilege.

  37. HtG Says:

    I’d like to hear Kit do some shouting.

  38. Kit Gerhart Says:

    36, I guess I don’t get that excited very often.

  39. Dave Forslund Says:

    Sorry Kit.
    I don’t email enough to know that caps equals shouting. I just used them for emphasis, but I guess that is the same as shouting.
    SORRY!
    Dave

  40. Kit Gerhart Says:

    39, No problem. After posting my comment, I’d rather not have posted it, but couldn’t delete it.

  41. Brett Says:

    #32

    Kit,

    There’s a couple Tesla Model S is the Daytona area. At least one dark blue one and an “anthracite” (or whatever they’re calling dark gray metallic these days).

    There’s a Supercharger station just off the Dunlawton exit for Port Orange south of I-4 on I-95.

    If it was a local, they were probably running up to the US1 exit in Ormond Beach or to Palm Coast.

    There’s some money ’round these parts. :)

  42. Kit Gerhart Says:

    41, The one I saw was white. I don’t remember the exit it took.

  43. Brett Says:

    I think I’ve seen a white one, too, now that you mention it.

  44. RumNCoke Says:

    Well, now that we have discovered the Chinese are doing a full court press to hack into government research facilities, it is no wonder that they are experimenting with leading edge technology.

    Talk about your Frankenstein monster. A Chinese vehicle that looks sorta like an F-150 using bits of stolen Google tech and steel from recycled washing machines. No thanks.

  45. Dave Head Says:

    ASK AN OWNER OF A DISCONTINUED CAR LIKE SAAB HOW THEY LIKE DEALERS. The ad that John McElroy was quoting claimed, “Dealers still provide service when a car company disappears,” but that simply isn’t true.

  46. Enn Norak Says:

    I want to be able to price a vehicle on the factory website at net dealer cost with full disclosure as to holdbacks, factory to dealer incentives etc. I would then add a reasonable fixed amount to cover the dealer’s overhead and profit.

    An alternative is to have the retail customer build the vehicle on the factory website with full pricing disclosure and then designate a dealer who will deliver the vehicle and earn a small commission from the factory at a fully disclosed fixed rate no greater than 5% but probably closer to 3%.

    I have been buying cars at “cost plus” for decades and I want to eliminate the work involved in finding an honest dealer who will sell to me on that basis. The auto industry needs to make it easier and not harder for me to do business with it.

  47. Dave Head Says:

    WHY IS IT NECESSARY TO MAKE DIRECT SELLING ILLEGAL? If buying through dealers is as “wonderful” as John McElroy claims, and the new pro-dealer advertising claims, why would they fear direct sales from Tesla?

    Dealer shopping sounds like rainbows & kittens, so they shouldn’t feel the need to outlaw Tesla direct sales….. all the customers would flock to dealers with joy & happiness!

    Right?

    (silence)

    I guess the dealers realize their stores are not all that great to visit (actually, it’s hellish), and that’s why they fear direct sales. Also why they push politicians to outlaw the practice (in a dictorial fashion) instead of allowing the free market (customer) decide for themselves.

    Fie on taking-away our freedom of choice.