Business Management

Dealer or Dinosaur - A Change In The Business As We Know It?

Did you see todays Automotive News? If not here is the Headline:

“Finance giant HSBC exits U.S. auto loan business

HSBC Finance Corp. will stop making new auto loans through U.S. dealerships and direct-to-consumer channels. The announcement came Monday, Aug. 4, in the bank’s report of second-quarter earnings.
HSBC had been shrinking its auto loan business since March. According to the SubPrime Auto Finance News, HSBC Finance CEO Michael Geoghegan said the move was because of returns that were too low to make the business worthwhile.

“Our vehicle finance portfolio actually improved credit quality over the period, but the business does not have sufficient critical mass or the pricing power to provide an acceptable return to the group,” he said.

HSBC does not finance auto leases, which have been under increasing pressure in recent weeks as vehicle residual values have plummeted.

HSBC, the consumer finance arm of English financial giant HSBC Holdings PLC, says it will take about three years for most of its $12.5 billion auto loan portfolio to be eliminated as borrowers pay down their loans.

Automotive News | August 5, 2008“

Now we can all look at this and say… “It’s just another repositioning by a bank in these times of recession” or “this is just a reaction to the housing loan fiasco.” … Well you could say that, but in my opinion you would be taking a big risk.

To paraphrase Winston Churchill – “This is not the end of the New Sales Business as we know it. But it is, perhaps, the beginning of the end”!

Let’s face it, recently we have seen manufacturer based finance companies leave the leasing arena and independents following suit. Residuals are under threat; manufacturer’s profits have been cut.
What does this mean for our business’s and for our offerings to customers? Well, for a start there will probably be an increased demand for lower priced cars which has the potential to increase used car sales, but only to those dealers with a professional Pre-Owned operation that is a business in its own right - funded, managed and prioritized but that’s not as many as the industry believe it is. Those dealers that have largely relied on their New Car business and Manufacturer for terms of trade to make revenues and keep their whole business profitable stand a good chance of going to go the way of the dinosaurs.

In addition extended vehicle retention by customers will mean that there will be more AfterSales opportunities but again only for those dealers who have a dynamic AfterSales operation, capable of once acquiring customers, retaining them. Let’s face it these seemingly small changes of emphasis within will ring the death knell to the majority of stores that have not dealt with and changed their practices accordingly with this before the ‘End actually arrives”. The most at risk here are especially those traditional family run dealerships and amongst them it could be nothing short of catastrophic.

Publicly traded dealer groups have grown in prominence and proven that corporations CAN and do run dealerships very well. They often have less business dependence on New vehicles and in general have better performing Pre-Owned and AfterSales operations than the average family run store.
Finally and looking long term, if the transaction price of vehicles continues to drop along with manufacturer revenue (a la GM), then manufacturers will be forced to review the biggest expense in the equation: retail distribution - dealers. Remembering also that Manufacturers only make money from 2 places – New Car Sales and Parts.

As publicly traded dealer groups have proven they have less reliance on New Cars, require less manufacturer support and are more likely to retain the service business in their own franchise store thus providing more parts business for the manufacturer then it’s a fair assumption that those corporate stores will be favored. The family business’s that will survive and prosper are those that behave like corporate – be professional in Pre-Owned and AfterSales, NO not just good, but professional

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