AUTOMOTIVE WEEKLY

Auto Team America Update

6/14/2019
AUTOMOTIVE WEEKLY

AUTO TEAM AMERICA UPDATE

Three times a year members of our Automotive Group attend meetings with Auto Team America to discuss the latest trends and events in the Automotive Dealership section. For more information on the points below or other inquiries contact Conven Tang in our Edmonton office.

Industry

  • Slow start to the year with January and February being the most challenging. Dealers that have diversified operations (subprime, special financing, and insurance products) are doing well. Q1 results show that profitability is down this year by 0.7%.
  • Projected units sales for 2019 expected to be the same as 2018 at 17 million units for North America.
  • Industry changes in the next few years to include ride share/subscription services, popularity of electric vehicles, population growth, millennials starting families, and decline in public transit ridership.
  • US Tax agencies are investigating reinsurance programs for implications to taxable income.
  • Multiples remain steady with no significant changes in blue sky.
    • 3 types of sellers in the market
      • Aging dealers with no succession plan
      • Dealers with only a few small dealerships
      • Dealers that believe industry changes will start to reduce blue sky value
        • Trends affecting valuations now include the type, size, and rate of the floorplan financing contract, other operations, and tax jurisdiction. Definitely more sellers than buyers at this time given the above as well as an influx of rooftops that public companies are divesting due to performance issues.
        • Automate coming out with 12 digit account fields to accommodate dealership groups with multiple stores. This would allow for region, store and manufacturer reporting.
        • Reynolds and Reynolds, feeling that they have a superior product, have not budged on pricing. Likely to lose some rooftops to CDK and other DMS providers. CDK may take a hit when GM eliminates exclusivity contract.

Dealer Finance

  • GM Financial has been aggressive in the market to obtain floorplan financing contracts. Offering rates lower than major banks.
  • Captives are putting a cap on floorplan financing leaving dealers to look for alternative sources. In some cases, used vehicles are being financed through banks. In other cases, financing of high valued inventory at the lower rate if different institutions are used.
  • Lenders are relaxing their covenants for those dealers that have put down collateral, provided guarantees or have subscribed to multiple products.

Manufacturers

  • Inventory levels are higher at year-end compared to the previous year. However, interest credits and program payments are much lower and are being paid slowly.
  • Very little activity regarding terminations. However, manufacturers have been sending out performance standard letters. No actions are taken yet, just put the dealer on notice. This now becomes a method used by manufacturers to get a new owner into the market.
  • Revision of operating areas for dealerships based on driving distance rather than the direct distance from a map. This will require some work to accurately determine goals and incentives based on the new operating area of the dealership. In addition, dealers will need to take into account travel time due to barriers such as highways, bridges and drive time.
  • FCA and Mercedes Benz are most active regarding add points. FCA has increased its involvement in this regard to help choose future Maserati and Alfa dealers.
  • VW starting to push back now that the diesel scandal is behind them. For example, VW did not approve a deal involving multiple rooftops and manufacturers because they were not happy with the amount of blue sky allocated to the VW dealership.
  • Manufacturers such as Honda, Acura, and Mazda are looking at pre and post-acquisition procedures to determine if profitability is maintained or improved with new owners.
  • Mazda being more aggressive on its image program. They are willing to provide concessions and special agreements to some dealers.

Operations

  • OEMs are making the process for rate adjustment requests for parts and labor more and more difficult. In extreme cases, dealers are suing the manufacturer to have these requests approved.
  • Increase in manufacturer audits for claw-back of program/rebate/incentive money. Some claw-backs are due to forms being filled out incorrectly or that are incomplete.
  • Tesla's operations continue to be a battle between the manufacturer and state laws. For instance, Connecticut did not allow Tesla to set up a gallery in the state and Tesla is suing S. Carolina for institutional restrictions to do business.
  • Manufacturers are making it harder for warranty claims to be accepted. Dealers are told that the submissions are incorrect, but will not tell them how to fix it.

FIAT CHRYSLER, RENAULT WEAKENED AFTER FAILED MERGER TALKS

The abandoned merger talks between Fiat Chrysler Automobiles NV and France’s Renault SA renew questions about how both car companies will fare in a rapidly-transforming industry that favors manufacturers with deep pockets and technical expertise. The proposed merger deal that fell apart this week amid opposition from the French government already faced high regulatory and political hurdles. But, investors were encouraged by the deal’s prospects, believing a tie-up of these two smaller car firms would give them the global heft and financial means to compete in an industry dominated by Toyota Motor Corp., Volkswagen AG, and other auto-making giants.

Source: The Wall Street Journal

TOYOTA SPEEDS UP ELECTRIC VEHICLE SCHEDULE AS DEMAND HEATS UP

Toyota Motor Corp. aims to get half of its global sales from electrified vehicles by 2025, five years ahead of schedule, and will tap Chinese battery makers to meet the accelerated global shift to electricity-powered cars. The change illustrates the breakneck growth in the electric vehicle (EV) market, which is transforming the auto industry and is also an acknowledgment by Japan’s top car maker that it may not be able to meet the demand for batteries on its own. Toyota is now faced with higher-than-expected demand for cars that use batteries, rather than gasoline, Executive Vice President Shigeki Terashi told a briefing on Friday.

Source: Reuters

FIAT CHRYSLER CEO BACK TO SQUARE ONE FOLLOWING RENAULT DEAL COLLAPSE

While Mr. Manley has repeatedly said Fiat Chrysler can thrive on its own, the company has numerous hurdles to overcome, the biggest of which is generating enough cash to invest in new technologies such as electric cars, as global auto sales cool. In 2018, Fiat Chrysler posted a 3% rise in net income to €3.6 billion ($4.1 billion) as revenue advanced 4% to €115 billion. Profit and revenue fell in the first quarter of this year. Mr. Manley also must fix Fiat Chrysler’s money-losing operations in China and Europe, build a stronger pipeline of new models, and improve sales for its underperforming luxury brands, Maserati and Alfa Romeo, analysts say.

Source: The Wall Street Journal

NISSAN HITS OUT AT RENAULT, LEAVING ALLIANCE ON SHAKY GROUND

The decades-old alliance of Renault SA and Nissan Motor Co. descended into open enmity as the two sides sparred over governance changes at the Japanese automaker, an apparent tit-for-tat following Nissan’s refusal to endorse a deal with Fiat Chrysler Automobiles NV. Nissan Chief Executive Officer Hiroto Saikawa said it was “most regrettable” that Renault planned to stymie board reforms, after receiving a letter from the French company’s chairman, Jean-Dominique Senard. Renault’s salvo contrasts with more reassuring remarks from French Finance Minister Bruno Le Maire.

Source: Bloomberg

RENAULT CHAIRMAN FACES INVESTORS AS NISSAN ALLIANCE FALTERS

On Wednesday, Renault shareholders will gather in the same cavernous hall in the French capital and again consider the company’s relationship with Nissan. But the circumstances have changed radically. Ghosn is gone, arrested in Tokyo and charged with financial crimes, and the alliance he nurtured is under unprecedented strain. When Renault’s new chairman, Jean-Dominique Senard, takes the stage, he’ll be pressed to explain whether the world’s biggest auto-making alliance can survive at all, especially after the French company’s failed effort to combine with Fiat Chrysler Automobiles NV pushed the partners further apart.

Source: Bloomberg

GM EXPECTED TO INVEST $150 MILLION TO BOOST TRUCK OUTPUT IN FLINT, MI.

General Motors Co is expected to announce on Wednesday it is investing about $150 million at its Flint Assembly in Michigan to boost production of heavy-duty trucks, sources briefing on the matter said. The Detroit automaker announced in February it was adding 1,000 jobs to build a new generation of heavy-duty pickup trucks. The company confirmed its president, Mark Reuss, will make an announcement at the plant Wednesday, but declined to comment further.

Source: Reuters

‘CAR WARS' STUDY - CONCENTRATION OF COMING CUVS WILL SQUEEZE PROFITS

Product saturation within automakers' current and future crossover offerings is leading to increased competition and profitability levels at or below those of sedans, while also leaving dealers short of entry-level new vehicles to sell, according to Bank of America Merrill Lynch's annual "Cars Wars" study of the U.S. product pipeline.

This year's study, which looks at automakers' current and planned product offerings from the 2020-23 model years, was released to the Automotive Press Association here by senior auto analyst John Murphy. Among its top findings:

  • Automakers collectively plan to launch 246 new or significantly updated models in the 2020-23 model years, an average of 62 per year — half again the average number of new or major updated models introduced in the 2004-19 model years.
  • Seventy percent of automakers' planned products through the 2023 model year are crossovers, SUVs and light trucks, compared to 24 percent in the small/midsize/large-car segments. The study suggests that the overweighting within crossovers will pressure profitability.
  • Slowing new-vehicle sales will further pressure profitability for automakers chasing market share.
  • Japanese automakers' continued commitment to passenger cars appears to be shifting somewhat to a heavier crossover mix, making their product cadence volatile through 2023, with Honda and Toyota planning larger moves compared to Nissan.
  • Hyundai-Kia's replacement rate for the next five years is above the industry average, especially in the 2020 and 2021 model years, but remains weighted heavily toward passenger cars.
  • Introductions of alternative-powertrain vehicles, including hybrids and battery electrics, will remain limited for now, due largely to continued prohibitive development costs keeping pricing for those vehicles elevated above those of traditional powertrains.
  • While the average showroom age of automaker products has declined year over year, it is largely attributable to product cancellations.

The annual study is based around the notion that newer product directly drives increases in market share for automakers and, as a result, the higher the replacement rate for an automaker's vehicle lineup, the larger chance that automaker has to increase its market share.

The study finds that Honda, Hyundai-Kia, and Ford have the highest replacement rates for their products in the 2020-23 model years, while General Motors, Volkswagen, and FCA have the lowest planned replacement rates. The study's authors caution that outside factors including product mix, pricing, and market disruptions can affect its broader thesis in unforeseen ways but predict that Honda and Hyundai/Kia are poised to increase their market share through the 2023 model year, while GM, Fiat Chrysler, and Nissan risk losing market share during that period. The relative market shares of Ford, Toyota, and European automakers are predicted to remain relatively constant throughout the period, according to this year's study.

New vehicle launch mix 2010-19

Source: Automotive News

U.S. AUTO INDUSTRY FACES 30% DROP BY 2022, ANALYST PREDICTS

The U.S. auto industry is heading toward a nearly 30% decrease in sales by 2022, a Bank of America Merrill Lynch analyst predicts. Softening vehicle sales since 2016 will continue as cyclical demand softens. And that will challenge automakers as they balance their core market of traditional vehicle sales with investments into the industry's autonomous, connected and electric future, said John Murphy, a senior auto analyst.

Source: The Detroit News