The Automotive Sectors 3 Most Pressing Issues Post The Lock-down? Liquidity, Liquidity, Liquidity!

Well automotive manufacturers and their franchise partners are going to face some hefty challenges when the doors of businesses open again, but the nature of these challenges will change from manufacturer to manufacturer, depending on the desirability of their new car product, how they see their future of new car retailing and their long term requirement for franchised dealer networks, in the guise that we are used to.

Now to be fair to all those who have started reading this article, before we go on, we think it only right to state the direction of travel for this article, in terms of our opinions, because with a market as volatile as the one we are likely to return to, your thoughts as to how the market will evolve are going to be pivotal to the decisions you then make. We have witnessed many opinions of late and it is becoming apparent that there are polar opposite trains of thought appearing, so our article can only be aligned to those of you preparing for how we see the market evolving.

Although nuanced by the desirability of you product, two of the most important questions at the foundation of your thinking must be surrounding used car values and new car demand, because we have to write this article around what we feel will emerge. Most importantly we think that apart from a few highly specialised and low volume products, we DO NOT feel that the value of used car stock holdings will go up, nor do we feel there will be tremendous pent up new car demand.

Before the pandemic struck 95% of the people reading this article were involved in retailing, (you note that we say “Retailing” here and not “Selling;”-  none of you were “Selling”), new cars from a combined approach of discounting and making stock freely available to independent third party tech entrepreneurs, who were then only going on to undercut your strategy for giving new cars away. You also staffed your businesses in a way that left them with no genuinely successful sales professionals and/or used car professionals, so 95% of you weren’t used car retailers, you couldn’t be, in reality you were only a business that disposed of part exchanges and ex-demos.

So the trading reality of the future for 95% of you is that you have the following drivers in the used car market effecting values;

·      No skills in stock disposal or the required trade networks to release funds and return liquidity.

·      ￡Million’s worth of used car stock at auction houses depreciating at a staggering rate and going nowhere because they are shut! Now we have commented on the trading lunacy of over relying on auction houses many times, most recently in our articles; Your All Auction Policy?,,,,, I Bet It Seemed Like A Good Idea At The Time? and The Madness Of “All-Auction” Disposal Policies And The Cost That Will Be Paid!

·      Interesting to note the We Buy Any Car has also ceased operations for the time being.

·      New cars supplied on PCP agreements to return where the guaranteed residual value, (set when the car was sold, probably in 2017), will be markedly above the new market reality; leaving cash strapped consumers with little or no equity to move forward, unwilling to purchase their current car, so likely to return the car and walk away and purchase elsewhere. This will no doubt further flood the used car market with supply. To put this in to perspective, during March to May in 2017, 900,678 new cars were registered in the UK; that will result in approximately 765,000 cars returning at the end of finance agreements during the same period this year.

·      Franchised dealer networks with too many weak links in the chain having to return liquidity to their business, in order to survive, therefore entering a very expensive game of “Who Blinks First” when it comes to used car pricing.

·      A consumer for whom many will have lost jobs, businesses and/or livelihoods, many of which will take years to replenish; so therefore unlikely to see purchasing a car as top of their priority list.

·      Manufacturer new car initiatives to kick start new car retailing and the effect this will have on used car pricing. The unfortunate thing about a market dominated by the PCP agreement is that the monthly rental figure/cost of ownership for a used car must always be cheaper than that of a new car; the cheaper the new car gets in real terms, the more the value of used car stock holdings are driven down.

Now we can promise you all; having traded and built successful businesses in many commodities markets there are 2 very important golden rules effecting pricing. The first is that “Supply and Demand” is always the governing driver for pricing and the second is that any commodity, (and a used car is no different), is only worth as much as somebody is prepared to pay. So taking all the above into account, (apart from the very odd exception), how on earth can you ever think that used car values will be going up when the doors of franchised dealerships open again?

And please can no one else quote any figures from the Chinese new car market regarding surging new car demand! Surely the one thing the pandemic has taught the world is that there are lies, damned lies and Chinese state statistics!

So with all this in mind let us proceed. With some manufacturers having already made the decision to drastically reduce the size of their franchise dealer networks prior to the lockdown, (Honda by over a third in the UK), it will be interesting to watch who decides to do what, in terms of their future for new car retailing; because essentially there are only really 1 of 2 options to take.

You will either have to, (in some cases), continue down the path of leveraging technology over professionals, what we call the “Race to the Bottom” on price model and the long term preserve of those with very deep pockets; or you stop this soulless journey with many pitfalls, (provided you have the cache attached to your product and the sales professionals required), and return to the model of blending the opportunities to do business generating and recording advantages of technology with recruiting and developing the best sales and management professionals.

However, many reading this will have little choice when it comes to this decision; for many their trading models of the past combined with the lack of cache attached to their product, means that the die is already cast. But regardless of which route you are taking all manufacturers in the UK have the same pressing and major operational issue when they open the doors for business again;

How Do You Return Liquidity To Your Franchise Partners So They Can Return To New Car Retailing?

It is important to remember that just because the doors of your business are open again, it does not mean that customers will be walking through them. In reality nobody, (ourselves included), knows how the trading landscape will look when we return but we know for certain that liquidity will be the name of the game when businesses open again; after all cash flow is the oxygen of business and without it you are going under.

Although highly nuanced depending on the manufacturer and the brand concerned, in a market awash with stock and likely to be light on consumer demand, the critical “Supply and Demand” ratio that is at the profitable foundations of all commodities markets, will all be in the customers favour, and those manufacturers with no cache attached to their product and without the professionals required, will have no option other than to enter a “Race to the Bottom” on price; and quickly!

Now this is going to affect some manufacturers more than others and for sure there will be winners and losers but they will be determined by the speed that liquidity can be returned to their businesses and the socio-demographic of their customer base, (and how soon they can be encouraged to return to purchasing once more); and the consumer is vital in all this because too many manufacturers and their franchised partners became a “One Trick Pony” when it came to liquidity and stock disposal; and sadly for many, their “One Trick Pony” is in the knackers yard.

Too many of you became far too reliant on the following operational procedures for stock liquidation and disposals policies: Auctions! And now that auctions are shut, awash with stock and with no demand, how can they be the answer? Well they can’t because the same market dynamic applies; customers need to return to the businesses acquiring their used car stock from auctions, in order for auctions to sell cars and return you your money and this will not be happening either, for all the reasons listed above; those that are affecting your business.

This is not the time for cheap points but anyone who follows our blog or who reads our content articles will know that we have NEVER recommended all-auction disposal policies, because it is this policy that has left franchised dealerships without the skills, the professionals and the trade networks required in order to have traded more profitably in the past and to be capable of returning liquidity to businesses again when they open. If the automotive sector has learned anything from the pandemic it must include the determination to NEVER return to all-auction disposal policies again and to invest in the skills required to ensure that they return to more rounded and successful trading models.

So what’s the answer? Well this will be determined by the manufacturer, their franchised dealer networks, the decisions they make at the outset and the brand involved. For some there is no dressing it up, just accepting that it’s all about timing, price and the ability of your sales team; this will not be the time to be waiting for enquiries, this will be the time to roll your sleeves up and knowing how to “Prospect” and “Sell!”

Now the ability to be able to “Prospect” and “Sell” will be required for every manufacturer and their franchise partners but some will have far more favourable market dynamics to lean upon, due to holding different positions within the market, higher levels of cache, being an aspiration brand and lower levels of unsold new car product. But this will not be many of you and even these businesses will probably be afflicted by the wrong stock disposal policies, no stock disposal skills or associated networks, and a lack of genuinely successful sales professionals; those who can operate in the likely market conditions.

So regardless of the stock holding you are returning to, cash is the oxygen of business, and without it you will go under! Those dealers “Grasping the Nettle” early and who take the long term pragmatic view on pricing and ensuring they have access to the professionals required to get the job done, will stand a chance of being in business after what is likely to be a dramatic first 3 - 6 months of trading.

Unfortunately this is likely to involve some heavy losses for all of you and sadly too many businesses invested everything in technology and not people, allowing themselves to become a “One Trick Pony” using the internet and pricing to get customers through the door; so many are likely to find they are woefully underprepared what is coming.

Over the coming weeks we will be exploring the skills and operational procedures required to return liquidity to your business, leaning heavily on how we have been adapting the skills, procedures and successful behaviours we had been utilising whilst owning and running successful used car businesses of our own, and those of our clients.

But the time for action is now if your business is to be ready for the market conditions as the doors to businesses open again; for many there is much work to be done and this can be completed during this time, therefore allowing you to hit the decks running when the doors to your business open again. Those of you who wait for the moment the doors of businesses open again before you to start thinking about what will be required are going to be left struggling to get to grips with the trading environment and left fatally behind the curve. 

For many this article will not represent your perspective and that’s fine; for us also things are changing and this is not a time for us to be training hostages and or running campaigns to convince those who are hoping that everything will return to normal, that things won’t. Our business can’t run under a “Stockholm Syndrome” style environment, we will be working with those who want to eliminate risk and be market ready, so if you fall into that category and/or are wavering, and you would like to know more about the services and skills available that can return liquidity to your business, please feel free to contact either Andrew Banning at [email protected] or Malcolm Thomas at [email protected] in the first instance, in order to arrange a no obligation exploratory discussion.

Alternatively please feel free to call me on 0044 7796 260261.

For more information about our services please visit our website at www.autoformance.com

Please feel free to follow our used car market place blog at https://usedcarbusinessdevelopment.blogspot.co.uk

I look forward to hearing from you.

Andrew Banning.

Used Car Business Development Director.