In an AutoNews article by Jennifer Vuong, the author interviewed Steve Kalafer who owns eight automotive dealerships in New Jersey. Kalafer discussed the current state of the automotive industry and issues he has experienced over the past 41 years. Key areas of concern Kalafer noted was the increasing amount of original equipment manufacturer (OEM) incentives and subprime loans.
Incentives are the discounts OEMs provide to move unsold vehicles. Most of us are familiar with incentives through OEM advertising. Manufacturer advertising is mostly focused on communicating how much money off the sticker price you can expect, rather than the benefit of buying their products. The last tactic to use in marketing is now the first, throw money at it, rather than creatively develop programs to sell the product. The root cause of the problem is overproduction due to poor planning and over-exuberance of the OEMs building an increasing number of factories around the world.
In addition to the growing inventories, past-due loans are increasing. Lenders have gone back to using subprime loans to move large numbers of units. These subprime loans have propped-up the record setting sales over the past several years through approving less qualified applicants. The lessons learned from the mid-2000s have been forgotten. The historic crash of 2008 is a distant memory that is probably coming back to bite everyone again.
As talk of a looming recession increases, manufacturers need to scale back inventories and take control of subprime loans. The longer these two issues are ignored, the worse it will be. As in 2008-2009, the amount of incentives needed to move excessive inventories eliminated any profits and resulted in several companies declaring bankruptcy, closing factories, laying off thousands, and taking years to recover. It is a vicious cycle that seems to be soon to repeat itself.
The reliance on incentives is also a key selling strategy within the powersports industry (e.g., motorcycles, all-terrain vehicles); especially with Japanese OEMs. Consumers and dealers have been trained to wait for incentives as OEMs continue to overproduce vehicles that are not aligned with the market. The Japanese manufacturers have created a lack of brand differentiation and struggle for profits. As Chinese manufacturers are slowly improving quality, Japanese incumbents have a very difficult future as they continue to hold onto legacy business models and lack of innovation (not to mention a dwindling future of Baby Boomer consumers). Keep the factories humming is the mantra. Then throw money at the waiting masses.
Auto and powersport manufacturers have to wake up. The changing market trends are resulting in less people driving (and riding), the growth of the share economy, and higher levels of infotainment and other technology needs that make self-transportation less-and-less a requirement.
Manufacturers need to change. They need to focus on creative innovations that align with customer needs. It is critical to scale back and ignore Wall Street. This is easy to say; as poor Mark Fields (ex CEO of Ford) can attest when profits are strong you still lose your job if your share price is not moving. Mary Barra, CEO of GM is now under the same type of pressure.
Manufacturers are destroying themselves – margins and brand. They have opened Pandora’s Box which might take years of excessive pain to close but they must buck-up and take the pain now. Discounting is not a long-term strategy. Brand building, creative marketing, and great products are what create long-term customer loyalty and strong margins. In addition, planners, marketers, and engineers need to get out of the office and talk to dealers and customers. Not just once in a while, but at least 50% of the time. This cannot be done by research firms. Employees must do this themselves. Innovation and strategy are internal requirements. It is time to understand what is going on in the real-world and slowly cut-off the IV from consumers and dealers. Take the pain now, for a long and healthy future.