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Used vehicles biggest opportunity for dealers in China

 

At the request of organizers of Global Automotive Forum, leading Chinese media recently interviewed William Underriner, chairman of the U.S. National Automobile Dealers Association (NADA) about his views on the China market, which sheds light on the differences of the world’s two largest automobile markets. The following are highlights of the interview. — Editor

Question: How many registered members does NADA have currently?

Underriner: NADA has 16,500 dealership members. They represent all 36 brands that are sold in the United States. NADA has achieved over 90 percent penetration of the U.S. dealerships.

Question: NADA has the authoritative NADA Guide which is widely used by financial institutions, the federal government as well as insurance companies. How did you establish and maintain such a huge and exclusive and authoritative database?

Underriner: The NADA Used Car Guide Co. has been in operation for over 80 years. The company utilizes multiple sources to obtain the value of used vehicles. One important partnership is the association with the various auction companies that sell vehicles at wholesale to dealers. This transaction data (selling prices) is used with a proprietary software when developing pricing of vehicles. At present NADA Used Car Guide houses 180 million data records.

The Guide has a staff of over 100 individuals that monitor and assign values to vehicles on a monthly basis. This process entails both analytical analysis combined with the expertise of the staff that look at pricing trends when assigning a value to a particular vehicle.

Question: We would like to hear your opinion about China’s automobile distribution and the gap between China and the U.S. as well as some of your advice and suggestions. China’s new vehicle sales reached 18 million in 2011. But there were only 4 million used cars sales.

Underriner: Clearly one of the biggest opportunities for Chinese dealers going forward will be the used vehicle market. Of the 40 million used vehicles sold in the U.S., 13 million are sold by franchised new vehicle dealers. The remaining two thirds is sold by either independent used vehicle dealers or customer to customer. I think it is important to remember that Chinese dealers may never sell the bulk of used vehicles in China but it is important for them to begin to prepare for this opportunity. In my opinion what is most critical is to provide customers a credible price for their used vehicle – by that I mean, a dealer in China must offer a reasonable price for the trade-in (wholesale) and sell the vehicle at reasonable price (retail). It is important for Chinese customers to perceive they are getting a fair price when selling or buying a used vehicle. For Chinese dealers to be successful long-term with used vehicles, fair pricing will be critical to persuading consumers that a new vehicle franchise is the best place to purchase a used vehicle. You must give compelling reasons for a customer to come to your dealership to buy a used vehicle.

Question: Dealers in China currently are often in a significantly disadvantaged position in their relationship with automobile manufacturers. What is the situation in the U.S.

Underriner: U.S. dealers are very fortunate in that there are laws that protect the interests of dealers. Each of the 50 states has franchise laws that protect the relationship between manufacturer and dealer. While the laws differ from state-to-state, they generally protect a dealer from being unfairly terminated by a manufacturer. NADA believes that franchise laws have been a good way of leveling the playing field and ensuring that manufacturers do not have undo leverage.

I would also suggest that it is important for dealers in China to remind policy makers and politicians that franchised dealers make significant investments in the communities they serve. It should never be forgotten that if you combine the investment made by all the Chinese dealers, it is likely to match or surpass the investment that manufacturers have made. Dealers are economic force – we heavily invest in facilities, people and our communities.

Question: There are a huge number of small-scale dealers but very few large-scale dealer groups in China. What is the situation in the United States? What do you think will be the trend of automobile distribution in the U.S. and other countries?

Underriner: In the United States, the average dealer sold 750 new vehicles in 2011. In the past five years we have seen a rise in the average number of vehicles a dealer would sell. NADA believes that this trend will continue – we will see that dealers over time will be become even larger. One important factor that is driving this trend in the United States is the land prices. Especially in larger cities, the cost of land is expensive and the only way for a dealer to be financially viable is to sell greater volumes of new and used vehicles. I would argue that this same trend is affecting dealers across the globe. I have spoken to dealers in India and Brazil who face extraordinary property prices which results in having to have larger volumes to support the cost of land. I suspect that China’s largest cities face a similar dilemma – because of high property prices, it is difficult to make a business case for opening a dealership unless you have high volumes. It is my belief that the volumes will grow for most dealerships across the world between now and 2030.

Question: In recent years, with the introduction of restrictive policies in China, the profitability of new car sales has been on the decline. Based on your experience, what other new profit models can Chinese dealers try in the future?

Underriner: For over 20 years, U.S. dealers have faced tremendous margin pressure on the sale of new vehicles. Manufacturers have routinely cut the dealer margin. For the first time in eight years, U.S. dealers had a profit of $85 for each new vehicle sold in 2011.

The service and parts departments continue to be an important source of revenue and profit for U.S. dealers. Approximately 60 percent of dealership profits come from these two departments. While warranty revenue has been in decline, U.S. dealers have learned to sell “retail” service to customers (non-warranty). OEM’s have been instrumental in assisting dealers with products that can be sold in the service department.

Since the used vehicle business is still under developed in China, I would argue this is an important future profit opportunity. The dealers who successfully develop the right processes to implement a robust used vehicle department will likely see positive results.

Question: Distribution in China mainly adopts the 4S shop or franchised model. Do you think the 4S model will change in the future? Do you think auto supermarkets and online auto sales will become mainstream modes?

Underriner: I do not believe for the foreseeable future that the franchised model will change. In the United States we have not seen a large migration to online vehicle sales and far less to “supermarket” model. It is my belief that consumers still want to come to a dealership to learn about the vehicle, inspect it and test drive. It is important to remember that for a new vehicle buyer across the world, the purchase of a new vehicle is likely their second largest investment they will make. It is logical to believe that a consumer would want to have a more intimate experience when purchasing. Clearly online sales does not allow for this.

Question: What do you think the relationship between car dealers and manufacturers should be?

Underriner: The ideal situation is to ensure that there is always a continual dialogue between dealer and manufacturer. One the most important roles that NADA plays is ensuring that we foster an environment where our dealer members can have a dialogue with each manufacturer. We have over 60 meetings a year with manufacturers, which ensure that our dealers have a voice with their respective OEM.

My view is that our relationship should be collaborative – we should work jointly on issues that affect both our businesses. While our issues may be different at times, it is important that both parties understand that we have one important goal – to satisfy our mutual customer. In the end, the customer who purchases a vehicle from the dealerships is not only our customer but the manufacturer’s customer.

Question: How can you make car manufacturers realize the importance or indispensableness of car dealers?

Underriner: It is important to remember that manufacturers and dealers play distinct roles in the selling of vehicles. Dealerships are the face of the manufacturer/brand in our respective communities. Our customers know us because we are part of the community. Manufacturer’s core competencies are designing, engineering and producing world class vehicles. Dealerships core responsibility is to ensure the customer satisfaction of our buyers who purchase new and used vehicles and service their vehicles in our dealership service departments. Dealerships are critical link between the manufacturer and the customer and we know the most about the needs and wants of our customers.

Question: How can car dealers understand the intention of car manufacturers and then based on this, creatively open up the market?

Underriner: We as dealers understand the complexities of designing, engineering and producing world class vehicles. We understand that each manufacturer makes significant investments to produce vehicles. What I believe is most important is for manufacturers to share their vision for their brands and include the dealers in the process. By including dealers in the process, we can offer our prospective and hopefully this results in an more strategic vision. I strongly believe that dealer input can go a long ways in ensuring a more successful strategy for each OEM.

Question: Which car manufacturers are on good terms or have good cooperation with car dealers in the US? What results have they achieved?

Underriner: NADA conducts a study twice a year that measures dealer satisfaction with their respective manufacturer. The NADA Dealer Attitude Survey is an in-depth survey that measures dealer satisfaction on a variety of subject areas as it relates to the manufacturer/dealer relation. NADA is pleased that we have over 50 percent completion rate of the survey.

The survey that was recently completed this spring showed that the following top five brands had the greatest satisfaction amongst their dealers: 1. Hyundai; 2. Lexus; 3. Kia; 4. Subaru; and 5. Mercedes-Benz.

Question: The past several years witnessed the bankruptcy or restructuring of the former “Big Three” in the U.S. Was this a big blow to their respective dealers? Why?

Underriner: Clearly the bankruptcy of GM and Chrysler was very difficult for many of our dealer members. Over 3,000 dealers were required to close their businesses as a result. Throughout this difficult period, NADA was concerned the impact these dealership closings would have on the communities in which they operated. For example, NADA estimated at the time that over 140,000 jobs would be lost as a result of the dealership closings. In addition to the job losses, individual states and communities suddenly lost important tax revenue from both payroll taxes and also sales tax revenue that is generated from dealerships from the sales of new and used vehicles and service and parts sales.

Question: Please give us a brief introduction to the general situation of the US auto market and car dealers.

Underriner: The U.S. market has seen steady improvement in 2012. Through June, sales in the United States have improved 15 percent versus 2011. NADA expects volumes for 2012 to be close to 14 million units. Clearly the U.S. market is not at the levels we experienced in the early 2000s but we believe that sales could approach 16.5 million units by 2015.

General Motors is the top selling manufacturer in the United States with market share of 18.2%. The Ford brand is the top selling brand in the United States with market share of 14.9%. Through the first six months of the year, the best performing manufacturers are: Chrysler Group with sales up 30 percent, VW/Audi Group up 30 percent and Toyota/Lexus up 29 percent.

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