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Dealer's Choice: Thoughts On The Good, Bad And Ugly Of The Auto Industry

Don Hicks, Carol Scott and Pete Tynan are wandering the aisles of the Detroit Auto Show this week, collecting intelligence they can use to better operate their dealerships in Colorado. For the U.S. auto industry, intelligence is a precious commodity this year.

Consider that:

  • New car sales plunged more than 20 percent in 2009 to a 27-year low of 10.43 million units, the lowest level since 1982.
  • Battered by worldwide recession, Chrysler and General Motors reduced operations after filing for bankruptcy.
  • New car sales in 2009 were 40 percent lower than the peak of 17.4 million units registered in 2000.
  • Analysts say 2010 sales are expected to recover to only 11 million units.

The Players

Hicks, Scott and Tynan all operate dealerships along busy Havana Street in Aurora, a sprawling suburb east of Denver.

Hicks, in Detroit for his fifth auto show, sells Subaru, Suzuki, Hyundai and Kia from Shortline Automotive. He also owns Porsche of Colorado Springs. He has 38 years in automotive retail business.

Tynan is general manager of Tynan Volkswagen, owend by his cousin Sean, grew up in the car business and has spent his entire career on the retail side. He's attending the show for the fifth time.

Scott, general manager of Gateway Mazda, counts this as her first Detroit Auto Show. She's worked in the business for 25 years, beginning her career as a clerk in a dealership accounting office.

The trio recently down with CNBC.com for a roundtable discussion of what it’s been like at the battered auto industry's ground zero—the dealership showroom and what they expect out of the Detroit show.

What cars will sell best this year?

Scott: Fuel-efficient vehicles. When gas prices are high, our dealership is on fire. When prices go down, traffic goes down.

Tynan: For us, diesel-powered vehicles. You get great mileage without sacrificing performance. The rest of our line doesn’t sell as fast. I can’t keep enough diesels in stock because of production quotas in Germany. Germany just ended a 12-month-long, cash-for-clunkers program, which was detrimental for us because we couldn’t get as many cars.

Since the program ended they won’t need as many. VW is coming out with a diesel roadster this year that should sell very well. They’re selling a diesel 4x4 pickup in Argentina this year, but it’s not in the U.S. yet. That would sell big.

VW is taking diesel-fuel economy and deliberately spreading it across their fleet.

Hicks: Subaru is on a roll, coming off its best year ever. They only make all-wheel-drive vehicles, which offer great comfort, safety and security. They’ve got a redesigned transmission that is showing mileage in the high 20s in town.

We usually try to keep 250 Subarus in stock. Right now we have 36, so there have been some replenishment problems. We typically sell 85 in a month. Last month we sold 132. But I have 178 coming between now and February.

The Detroit Auto Show 2010
The Detroit Auto Show 2010

How responsive have automakers been to changing consumer tastes?

Tynan: It’s been tough getting VW to change their offerings. One reason they built a U.S. plant in Chattanooga [Tenn.] is to get us cars that we can sell cheaper. With the euro vs. dollar exchange rate, the cars were too expensive to build in Germany and sell here.

Hicks: The auto manufacturers respond as much as they can to the consumer. When gas prices went from $2.50 a gallon to $4.00, the change in consumer demands was like a ski boat turning on a dime. There simply is not a 90-day pipeline for factories. They have to go out and buy new motors, new batteries, new everything before they can change their offerings significantly. But people want them now!

Scott: It’s a lot easier for automakers to plan at all levels if gas prices would just stabilize - at any level.

Hicks: If it’s a known quantity, you can deal with it. The volatility of gas prices is whipsawing consumers, dealers and manufacturers alike.



Scott: I’d have to say Mazda’s been slow in responding. We couldn’t get the new Mazda 2 into the U.S. last year because of emissions regulations. (Mazda 2 was named last year's World Car of the Year. It made its North American debut last month at the 2009 Los Angeles Auto Show and will go on sale in late 2010 in the U.S.)

And Mazda wanted to see if the desire for fuel efficiency was a fad. All of us have had high-mileage vehicles in the past that could get 40-45 mph. They didn’t sell so production was cancelled. Not to take away from the current model offerings, but Mazda waited too long on more fuel-efficient cars and now there’s a lot more competition there.

Hicks: There’s also a lot of anxiety about conforming to new CAFÉ standards. Last March, the Department of Transportation released its revised Corporate Average Fuel Economy standards, raising the minimum requirements to 30.2 mpg for cars and 24.1 mpg for light trucks by the 2011 model year.

Tynan: They have the tough task of pulling more horsepower out of increasingly smaller engines; it’s very tough.

Hicks: That’s why VW just bought 19 percent of Suzuki. Suzuki’s fleet has so many microcars that get high mileage, it will raise the corporate average mileage of the rest of VW’s divisions, which include Bentley, Porsche, Lamborghini and Bugati. There’s not a high mileage car in any of those groups. Their stake in Suzuki allows the other brands to have lower mileage.

What’s more important for a recovery of the auto industry—better cars or a better economy?

Hicks: Consumer confidence. It doesn’t matter much what kind of car you have. If people aren’t feeling confident enough to buy homes, appliances - even clothing - they aren’t going to buy cars.

Scott: Certainly, but a big component of consumer confidence is employment. Everyone knows a neighbor or cousin who’s out of work. Even if people have enough money to buy a car, they’re not going to spend it until they feel confident that their employment is safe.

Tynan: You also need a great financing commitment from your manufacturer.

Hicks: Yes, if your franchise doesn’t have a financing arm, it’s very difficult.

What lessons did you learn from the disastrous year of 2009?

Hicks: Expense control, expense control, expense control. If your expenses start to outstrip your income, you’re sunk. We had to restructure everything—turn down the thermostats, turn off the computers at night, renegotiate the contract with the guy who cuts the lawn. I learned that, between the pressures brought about by the government and by manufacturers, the dealership is an endangered species.

The manufacturers want you to be an exclusive franchise for their cars only. They want your dealership to use their special tools, their showroom furniture. They want you to do everything possible to display their brand.

The government? Health care reform—we don’t know how expensive that will turn out to be. With the regulations they keep putting on banks, lending has dried up. These days, it’s one thing to have a willing buyer, it’s quite another thing to have a willing buyer who can get financed.

Scott: We’re also looking hard at all our employees. We have let go some long-term people who didn’t have the right attitudes. We’re working harder to hang on to every customer. We’re working longer hours, and we were working very long hours before. We need employees who are on board with that.

Tynan: Attitude, in some respects, is more important than talent these days.

Everything we do now is very defined and regimented. The way we used to do business was looser. Now, in order to survive, you have to define every single thing you do, and follow through with everyone to make sure they understand their part of the plan. Most employees understand and appreciate the fact that you are trying to stay in business and keep their jobs for them.

I never prayed so hard as I did last year.

Scott: I learned to communicate a lot more with my employees. It used to be that everyone was aware of sales each day. Now there needs to be much more awareness of every aspect of the business, not just sales. And if you communicate all these things, you’re more likely to get buy-in from employees.

Tynan: I used to send my used-car manager to a seminar every year on that aspect of the business. This year, I sent the service manager and the parts manager along with him, so each person could see exactly what part he plays in making the used-car department successful.

How important are all the innovations we hear about with in-vehicle technology—the consumer gadgets?

Hicks: I think the technology you don’t see is far more important. The anti-lock brakes, the electronic stability control, emissions control—all the seamless things that make new cars run so well. We’ve reached the point where what comes out of the car’s exhaust is cleaner than what went in.

CES '10 - Your Digital Life - A CNBC Special Report
CES '10 - Your Digital Life - A CNBC Special Report

Bluetooth, MP3 players, navigation systems? It’s a given that you have to have all those things available, but they’re not on the shopping list for most people.

In my opinion, drivers don’t need to be doing anything else. You are driving a two-ton missile, focus on that. People really don’t need to be otherwise engaged.

Scott: When the economy was going strong, people thought nothing of spending an extra $2,000 on these apps.These days, my customers are telling me to give them a lesser model without the bells and whistles. They’d rather pass on it and keep the money in their pockets.

Assess last year’s cash-for-clunkers program.

Hicks: It was a huge success. We’re very proud as an industry. The government gave $750 billion to banks, and nothing happened on Main Street. They gave $3 billion to the auto industry and in 45 days we sold 700,000 cleaner cars.

It had an effect on the factories, which called back workers. Even mines called back workers as a result. Plus, at a time when governments are suffering from a lack of sales tax revenue, it was a huge generator of sales tax revenue.

Critics say it helped auto dealers and do one else, and that’s wrong. It helped everybody.

Scott: It was stimulus that helped Main Street. It drove stimulus dollars down, so that everyone felt the impact at all levels.

Yes, we sold some cars. But I think it’s the best investment the government has made lately. It was a stimulus plan that actually stimulated something.

Tynan: We doubled our new cars sales in that period. They say that 80 percent of air pollution comes from 20 percent of the vehicles. We took a lot of those polluting cars off the road and destroyed them. Everyone benefited that way too.

What’s your prediction for car sales this year?

Hicks: If everything goes as planned, I see a 10-percent increase in new car sales. I think used-car and service sales will be good too. But offsetting some of that, there will continue to be a severe lack of warranty work because cars are so well-built. It’s great for the consumer, but that had been a profit center at dealerships. Oil changes are further apart. Brakes last 100,000 miles. Better tires, spark plugs. That will continue to hurt.

Scott: I’m looking for more than 10 percent. I see an uptick in consumer confidence and better banking relationships this year. I see another 10 percent on top of that.

Tynan: I think Don nailed it with 10 percent.

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