Stabilizing Profits for Recession Surviving Auto Dealers

Story first appeared on The Detroit News -

Innovations in retail and outlet upgrades are hot topics for discussion at annual convention

As auto sales have come roaring back from the recession, dealers across the country are seeing profits stabilize and in some cases improve, as many continue to upgrade their buildings and customer waiting areas and amenities.

Many of the nation's 17,540 new car dealers are gathering here this weekend for the annual National Automobile Dealers Association Convention and Expo.

Dealer renovation programs and future innovation will be hot topics among the more than 20,000 dealers, manufacturers and other auto industry officials expected to attend.

"Dealers that are in business today are strong and stable," Terry Burns, executive vice president of the Michigan Automobile Dealers Association, said in an email.

"Many have upgraded their facilities, retooled their service departments, focused on their customer experience and look forward to a great 2013."

In 2012, automakers and their dealers sold about 14.5 million vehicles in the U.S. NADA Chief Economist Paul Taylor expects consumers to buy or lease more than 15.4 million new vehicles this year across the country.

Last year, new-car dealers in Michigan sold 486,372 cars and trucks; that's up 5.6 percent from 460,628 sold in 2011, and up 18.2 percent from 411,342 vehicles sold in 2010. The figures still pale in comparison to what Michigan's dealer body sold in 2007, before the industry collapse and the large reduction of dealerships among the Big Three.

Michigan has about 650 new-car dealers. Burns said he expects a "little contraction" among them this year, due to consolidation of brands.

Nationally, some automakers plan to add new-car dealerships in 2013, including Kia Motors America, which expects to add 10, and Volkswagen Group of America Inc., which plans to add more than 15. In the past year, Chrysler Group LLC's Fiat brand has added about 60 dealerships across the country to grow to 201 locations. Fiat executives have said they would like to add more dealerships in select cities.

Other car companies aren't increasing dealership numbers, but they are helping dealers improve facilities to retain loyal customers and gain new ones.

In a recent interview, Hyundai Motor America President and CEO John Krafcik told NADAFrontPage.com, a website run by the dealer group, that the company does not plan to add to its 820 dealerships. Instead, Krafcik said Hyundai has focused on boosting customer satisfaction; more than 340 dealers have completed renovations.

Automakers from Chrysler to American Honda Motor Co. Inc. and Toyota Motor Sales U.S.A. Inc. have facility upgrade programs. Many of those programs have been in progress for several years.

Volkswagen, which has more than 600 VW dealers and more than 250 Audi dealers, said it plans to complete 45 modernist "White Frame" facilities this year. Some are new construction, others are renovated dealerships. More are in the pipeline for next year. More than 100 Volkswagen dealers are spending $450 million on renovations from 2011 to 2013, while Audi dealers are spending $206 million on renovations from 2009 to 2013.

Doug Fox, owner and president of Ann Arbor Automotive, which includes five Asian brands, renovated his Acura store about seven years ago and his Nissan store five years ago.

"We are in the process of doing an image store for Kia, and we're certainly going to be considering doing one for Hyundai in the next couple of years," he said this week in a phone interview, adding sales at both his Kia and Hyundai franchises each were up about 10 percent in 2012. Fox said he hopes to complete the Kia redesign by the end of the year; Kia will contribute a portion of the cost.

"Certainly, a consumer likes to come into a nice, clean, fresh, contemporary building," Fox said. "And I think in our case, the buildings we're talking about are definitely in need of refurbishment."

More than 70 percent of Ford Motor Co.'s Lincoln Motor Co. dealers in the top 130 U.S. markets have agreed to renovation programs that include creating a "new sales and service experience for future Lincoln owners," Ford spokeswoman Elizabeth Weigandt said in an email.

About 25 percent of dealers in those top markets will have renovated facilities this year, Weigandt said.

General Motors Co. expects almost all Chevrolet, Buick, GMC and Cadillac dealers will have a new look by 2016. The Detroit automaker, which reduced its dealerships over the past year by about 50, said about 92 percent of its 4,355 dealers have agreed to participate in its renovation program.

Russ Shelton's dealership in Rochester Hills is one that has the new look after he spent more than $2 million gutting the facility. He added more square footage to his showroom, new furniture and energy-efficient lighting.

GM is defraying some of the cost, he said.

Shelton, in a phone interview, said he expects sales at Shelton Buick GMC will rise from about 650 to 700 annually to about 1,000 vehicles a year.

"I think 2013 is going to be a good year. All manufacturers are predicting big numbers."

Fiat's Boss Believes He Can Raise Chrysler From The Dead
Story from The Economist

IT IS just as well that high-stakes industrial poker is a game familiar to Sergio Marchionne, the chief executive of Fiat Group. In 2005 he laid the foundations for Fiat’s spectacular recovery by extracting $2 billion from General Motors (GM) as the price for removing a put option that would have forced GM to buy the then-ailing Italian car firm. But even by his standards the next few days will be a daunting test of nerve and stamina from which only two outcomes are possible. Either Mr Marchionne will end up in control of Chrysler, the smallest of Detroit’s Big Three—or he will have quit the table, consigning the sickly carmaker to almost certain bankruptcy. Everything hinges on the negotiations taking place between Mr Marchionne, America’s Treasury, Chrysler’s current management, the unions and secured debt-holders.

Mr Marchionne is confident that a deal can be done that keeps Chrysler out of the bankruptcy courts, but he recognises that a lot can still go wrong. There are signs that the unions, particularly in Canada, where much of Chrysler’s manufacturing capacity is based, feel they have already conceded enough. The senior lenders, which include JPMorgan Chase and Citigroup, are going back and forth with the Treasury over how much of a “haircut” they will have to take on the $6.8 billion they are owed, and whether they will get a compensating equity stake. The Treasury itself will take some convincing to release the $6 billion it has promised in exchange for a credible recovery plan. Although Mr Marchionne has wowed the administration’s auto task-force with his forceful personality and blunt style, officials still fear that even with Fiat’s help, Chrysler may be too far gone to be turned around.

Why does Mr Marchionne believe he can salvage something from a firm that the rest of the industry sees as a basket-case—and which has defied the best efforts first of rich, successful Daimler and later of Cerberus Capital Partners, a sharp-elbowed private-equity group that acquired an 80% stake in Chrysler from the Germans two years ago? Quite simply, because he has done it before. When the Agnellis, Fiat’s dominant shareholder, turned to Mr Marchionne, a corporate troubleshooter who was running another company in which they had an interest, they knew that Fiat’s car business, representing half the group’s turnover, was dying. Poorly led, bleeding cash, heavily indebted and saddled with ancient factories, stroppy unions and outdated products, Fiat had become synonymous with failure at every level.

Italian-born but raised in Canada, where he qualified as both a lawyer and an accountant, Mr Marchionne conforms to none of the caricatures of either country. Instead of sharp suits and elegant circumlocutions, he favours shapeless sweaters and brutal (expletive-laden) frankness; instead of patient consensus-building, he bulldozes his way through, burying corporate politics and flattening dysfunctional hierarchies as he goes.

Mr Marchionne’s approach to Chrysler, if a deal can be done, is likely to be similar to what he did on arrival at Fiat in 2004. “The single most important thing was to dismantle the organisational structure of Fiat,” he recalls. “We tore it apart in 60 days, removing a large number of leaders who had been there a long time and who represented an operating style that lay outside any proper understanding of market dynamics.” In their place Mr Marchionne brought in a younger generation of executives who could respond to his demand for accountability, openness and rapid communication. Two key requirements that everyone had to understand were the need for speed and an end to the crippling political battles that resulted in scarce capital being wasted on little or no standardisation of parts and a ridiculous number of platforms (19 in 2006 will become six by 2012). The time taken to bring new cars from “design freeze” to production was reduced from 26 to 18 months, and a succession of handsome new models followed, capped by the launch in 2007 of the Fiat 500, the cool, retro-styled city car that embodied Fiat’s renaissance.

When a Fiat-Chrysler alliance was first mooted a few months ago, the idea was that in exchange for access to its small-car platforms and fuel-efficient powertrain technology, the Italians would receive a 35% stake in Chrysler. Now, although its initial stake will be scaled back to 20% and cannot reach more than 49% until Chrysler has repaid all the money lent to it by the taxpayer, Fiat will be much more firmly in the driving seat. If the deal is done next week, Mr Marchionne will be named chief executive and a new board of mainly independent directors will be recruited by Fiat and the Treasury.
The need for speed

The model chosen to run Chrysler will be like the one used by Carlos Ghosn when Renault formed its alliance with Nissan. Mr Marchionne will split his time between the two firms, while a hit squad of Fiat managers (some of whom are already crawling over Chrysler) will force through changes and develop synergies between the two organisations. The Italians have been shocked by how bloated Chrysler’s management still is—there are nearly ten times as many people in external communications as there are at Fiat—and the plodding, committee-bound decision-making process. “If this thing comes off”, says a Fiat senior executive, “they’re really in for a shock.”

Yet Mr Marchionne’s confidence that Chrysler can be saved using the same medicine that revived Fiat still does not fully explain why he is willing to risk trying to pull off an unlikely second miracle. Doesn’t he risk damaging his reputation and stretching Fiat’s thin management resources to breaking point? The answer is that he believes the car industry’s crisis will lead to consolidation and that Fiat, for all its recent success, is less than half the size it needs to be to survive in the future. And though he might not be ready to admit it, he has done pretty much all he can with Fiat in its present form—and there is a good deal more excitement and satisfaction in being the hunter rather than the hunted.

Chrysler, Fiat: Back from the Brink?
Story from Business Week

An agreement with big banks may keep Chrysler out of bankruptcy court, but several smaller debt holders remain to be wooed

Italian automaker Fiat (FIA.MI) moved much closer to a deal with Chrysler on Apr. 28 that will blend the two companies' operations and likely keep Chrysler out of bankruptcy court.

The breakthrough came when a committee representing bank and private equity lenders that hold 75% of Chrysler's $6.9 billion in debt agreed with the White House auto industry task force and Chrysler owner Cerberus Capital Partners to take just $2 billion of what it's owed, along with 5% of the company's equity.

The automaker is still not safe from Chapter 11, though. A group of smaller banks that collectively hold 25% of the debt also need to be brought into line. The White House is looking for at least 90% participation by the lending banks before providing more government financing that will keep the automaker out of bankruptcy. Unless the White House extends its deadline, the wooing process needs to conclude by Apr. 30.

One executive working with the debt holders says that smaller banks are complaining that the big banks, who were recipients of Troubled Asset Relief Program (TARP) bailout funds, succumbed to political pressure, striking a weaker deal than what they had been negotiating for.
Better Terms for the UAW?

On Mar. 30, President Obama said his task force concluded that Chrysler could not continue as an independent entity, and that the U.S. Treasury would not extend any more loans to Chrysler past that Apr. 30 deadline unless it struck a deal with another automaker, its unions, and lenders, and showed financial viability.

Debt holders have been complaining that the United Auto Workers were getting much better terms from the White House, and they have been holding out for a better deal. On Sunday, the UAW struck an agreement that gives the union's Voluntary Employee Benefit Assn. (VEBA) health-care trust fund $4.5 billion in Chrysler stock, or about 55% of the fund's total financial backing. A VEBA representative will also hold a seat on Chrysler's board of directors.

A Treasury official indicated that the ongoing negotiations definitely boosted the odds in favor of Chrysler steering clear of bankruptcy court. "The agreement from Chrysler's principal banks is an exceptional accomplishment in line with the President's firm commitment that all stakeholders sacrifice to make this deal succeed," the official said.

While Obama Administration officials have talked tough about forcing both Chrysler and General Motors (GM) into bankruptcy in the last month, there is also a desire to avoid it. "Actual Chapter 11 brings a lot of unknowns for how the consumer will react," says independent marketing consultant Dennis Keene. "Especially now, having hit what we think is the bottom of sales and consumer confidence, Chapter 11 would be a setback for everyone."
Benefits Lost

The UAW has agreed to cuts in wages, overtime pay opportunities, vacation days, and to the elimination of the so-called Jobs Bank, which continued to pay workers after they were terminated. Retirees will also lose their dental and vision insurance coverage. UAW President Ron Gettelfinger couldn't be reached for comment on Apr. 28. But in a letter to members he said, "We fought to maintain our wages, our health care, and our jobs. … In the face of adversity, we secured new product guarantees, and we negotiated new opportunities for UAW involvement in future business decisions."

Part of the agreements call for Fiat to build a small car in the U.S. with union workers. They also specify engines that will be made available to Chrysler and built in the U.S., assuring that some future Chrysler models will continue to be built domestically.

"The UAW is under a great deal of pressure, but the deal they struck was very necessary," said Canadian Auto Workers President Ken Lewenza. The CAW cut a deal with Chrysler last weekend. "The unions have done a great deal to make this deal happen."
Envisioning a New Chrysler

What Chrysler looks like after Fiat begins retooling the company remains to be seen. The Jeep brand is widely considered to be the most valuable asset. Part of the plan calls for Fiat to distribute Jeep models through its European and South American network, which could quickly enhance the company's sales.

The two companies also have been exploring whether they can take some existing Fiat vehicles and rapidly modify them to be sold as Dodges and Chryslers in the U.S.

Of course, all those plans depend on Chrysler, its banks, and the White House crossing the finish line.