Since the “Great Recession” in 2008 when the US congress voted to bail out the automotive industry, $79.7 billion in total, the U.S. automotive industry has experienced a resounding comeback. In 2015 the big three (Ford, General Motors, and Chrysler) broke their all-time record for sales, Selling a total of 17.5 million units which surpassed their previous record of 17.3 million 15 years ago. When the bailouts were being doled out, Ford Motors did not take any funding. How does the produced car get from a factory to your hands? This is all more complicated than you may think.
After a car company comes to a final design and decides to bring it to production, the first thing they have to do is send the concept car through rounds of safety, efficiency, and emissions testing.. Crash tests alone could cost up to $1 million dollars per model and they have to be done every time something is changed in the car. Recently, as computer technology has improved, Texas A&M has been able to run accurate computer simulated crash tests. This allows for significant reduction in costs and the ability to test different designs and materials without having to make changes. Once all testing in each of the required areas is complete and the company is happy with the results, the car will go into production.
Once the car is produced by the parent company, it will then be sent to the car dealers. Each owner of the dealership will give an order to the parent company whether it be Ford, General Motor’s, etc. The dealership will pay for the car at that point so the car ownership will go from the parent company to the dealership. Picking what cars the dealership will keep stocked on their lots is a gamble for the owner of the dealership. What models are picked could make or break a dealership’s success. For example, after Volkswagen’s emission scandal, any diesel models that a dealership would have had stocked went overnight from a hot commodity to zero sales. The loss from these cars is taken on by the dealership. In Volkswagen’s case, the parent company decided to buy back all the vehicles from their owners. The car dealerships will collect data through consumer surveys to make sure that they are making the right decisions on what cars to order. They will look at statistics, such as last month’s sales and popularity, and survey consumers as to what car they would purchase.
Since dealers need to be able to keep a high volume of cars on their lots, dealers finance their cars from the manufacturer through floor plan financing. Most of the time the manufactures will have a financing branch to the company that will support the loans for the dealerships. Since the recession in 2008, car dealers have had a hard time growing. One of the reasons for this is the flood of cars in the market place. In the United States, there are over 30 different brands of cars to choose from where each brand could have over 15 different models of cars. With this much competition, there is little room for growth in market share for each company. In General Motor’s case 50 years ago they held over 50% of the market in the United States. That has now shrunk to just under 20% between all of their brands. For a dealership to become profitable there needs to be ownership over many dealerships with many brands. Many dealerships that consist of only one or two brands will find themselves losing money month after month and they will eventually be bought out by the larger “chain” dealerships. For dealerships to grow, they need to attract a larger customer base, most of which is spread via word of mouth. That is why most dealers consist of massive complexes that are very modern with their own service bays, repairmen, well-dressed salesmen and other things to give their customers a good experience buying a new car.
Car dealerships also face a very high rate of employee turnover. Many salesmen face long hours and poor pay. Many of them work for a percentage commission of the cars they sell. However, dealerships are experiencing a decrease in profit on each car, some cars are sold at a loss by the dealership. Paul Taylor, chief economist for the National Auto Dealers Association, found that in fact, most dealerships face a loss over all from new car deals and in fact used cars, parts and service are what keep dealerships going. This shift in profits, where the majority came from new cars to the “back side” leads to dealers aggressively trying to sell the consumer things like extended warranties and other products that will keep the customer coming back.