March 2018 SDADA Column

South Dakota Automobile Dealers:

This is my final column as the South Dakota NADA Director so I want to start off by thanking you, my fellow dealers, for the opportunity to serve in that capacity for the past nearly 11 years. I appreciate the input, feedback and support you have given me as we worked together on the challenges facing the automotive industry both nationally and in our state.

I reflected upon the (over one hundred!) columns I have written during my tenure. What a long, strange trip it's been!

Among the challenges we faced together were: The Great Recession of 2008, CAFE Standards, Red Flags Rule, bridge loans for automakers, automaker bankruptcies, "Cash for Clunkers", facilities image programs, the Dodd-Frank bill and creation of the CFPB (and our exclusion from their oversight), navigating the barrage of Obama Administration regulations (Risk Based pricing, Privacy notices, etc.), the threat to repeal LIFO, stair step programs, electric cars, autonomous vehicles, disparate impact allegations, recalls and, most recently, tax reform.

October 2016 SDADA Column

Virtually every dealer, manager or salesperson I know has been put in the position of having to
explain to a customer that one vehicle, with the same MSRP as the identical vehicle sitting next to it, costs $4,000-5,000 more than the other one. Or they have sold vehicles at a significant loss at the beginning of the month in an effort to hit an objective that will allow them to perhaps(!) break even on vehicles they sell at the end of the month.

Manufacturers do not understand the disruption, confusion and malaise they cause with such ridiculous incentive(?) programs. They do permanent damage to their brand, customer-dealer relations and dealer-manufacturer relations.

The NADA Board of Directors had an extended discussion about this topic at our most recent meeting. The frustration, anger and distrust came quickly to the surface as we talked. There was a wide variety of ideas to deal with it but there was not any consensus. Of course, our anti-trust attorney kept the discussion on track and us out of trouble!

The topic is on the agenda for the next board meeting but I'm not confident that NADA is in a great position to really do anything significant (other than have the discussion with the manufacturers) about this issue.

Like most states, South Dakota has a law on the books that specifically deals with this topic (my emphasis added):

July 2016 SDADA Column

In late June, I attended the seventh annual year executive forum sponsored by NADA and the
American Financial Services Association (AFSA) where we discussed legislative, regulatory and operational challenges facing auto dealers and finance sources.

Executives from virtually every major finance company and major bank in the nation engaged in indirect auto financing attended the forum along with a dozen or so dealers from the NADA board. There were representatives from the American International Automobile Dealers Association, National Association of Minority Automobile Dealers, and Automotive Trade Association Executives in attendance as well.

While there were several presentations and discussions during the event, it was Consumer Financial Protection Bureau (CFPB) Director Richard Cordray's comments to the group that stuck me.

As he reviewed the bureau’s activities in the area of vehicle financing, he insisted on calling our retail discounting of interest rates a "dealer markup" and suggested several times that some type of "flat rate" compensation to dealers was a preferred model. While it was not a surprise to hear this, it was frustrating to see and hear how narrow-minded he still was on this issue.

A survey of those in attendance revealed that top concerns for finance sources include exams and enforcement actions, cybersecurity, compliance, changes in vehicle values and hiring, training and retaining employees.

Dealers are most concerned with new regulations from the FTC and CFPB, existing regulations and compliance, and hiring, training and retaining employees. New opportunities focused on technology improvements and mobile financing options for lenders, and leasing and e-contracting for dealers.


House Again Rebukes CFPB Over Its Flawed Auto Finance Guidance 

By a bipartisan vote of 260-162, the House of Representatives passed an amendment offered by Rep. Frank Guinta (R-N.H.) that would nullify the Consumer Financial Protection Bureau's (CFPB) flawed auto finance guidance by preventing the CFPB from spending any funds to enforce the guidance. The amendment was added to the fiscal year 2017 Financial Services appropriations bill (H.R. 5485) on the House floor. This House action is another rebuke of the CFPB's auto finance guidance, which threatens a consumer's ability to receive a discounted auto loan from a dealer. This is the first time Congress has used the appropriations process to rein in the CFPB. Nineteen Democrats and 241 Republicans voted for the amendment.

Last November, the House passed Rep. Guinta's bill, H.R. 1737, by a bipartisan vote of 332-96. This bill would nullify the CFPB's 2013 auto finance guidance and establish a transparent process with public participation to determine future auto finance guidance. In contrast, the CFPB issued the flawed 2013 guidance without any public comment or transparency, and the agency admitted it has failed to study the impact of its guidance on consumers.

Economic Analysis Reaffirms That State Franchise Laws Lower Prices, Benefit Consumers 

Retail prices for new cars are lower for consumers because of state franchise laws, according to a new economic analysis from the Phoenix Center for Advanced Legal and Economic Public Policy Studies.

The analysis, “State Automobile Franchise Laws: Public or Private Interests?” found that state franchise laws serve to foster intense competition among franchised new-car dealers, which “demonstrably lowers prices for consumers” and “alter[s] the way consumers buy cars and service in a positive way.”

“Franchise laws do not limit competition or lead to higher prices,” said study co-author and Phoenix Center Senior Fellow Professor T. Randolph Beard. “In fact, all the evidence suggests that there is intense competition leading to very low margins on new car sales.”

The Phoenix Center study came in response to recent scrutiny of state franchise laws by the Federal Trade Commission (FTC) and others, and the suggestion that these laws are outdated. The study concluded, however, that state franchise laws are indeed still very beneficial to consumers.

“When selling an automobile-service bundle, our analysis indicates that franchised auto dealers have a better incentive with respect to consumer desires than car manufacturers,” said study co-author and Phoenix Center Chief Economist Dr. George S. Ford. “As such, it is not unreasonable for state legislatures to choose a market design that best serves their constituents in the form of local auto franchise laws.”

January 2016 SDADA Column

I am listening to an Federal Trade Commission "Auto Regulation Workshop" as I write this column. This is a rather optimistic title for this "witch hunt".

The FTC has, in the past, shown they supported manufacturer direct selling. Of course this was only the personal opinion of staff - not an official position. 

So the FTC now conducts a "kangaroo court" with panels stacked against the dealers advocating for a demolition of the franchise system (and State Franchise Laws) and endorsing direct selling by manufacturers. 

They are featuring a parade of panelists that are testifying about how the dealers are getting rich ( "average dealership profits of over $1 million/year"), running monopolies within their local markets, adding cost as a middleman and generally doing all of this at the expense of both the manufacturer and the consumer.

The ultimate irony is that the general theme of the panelists is regulation (in the form of State Franchise Laws) is inefficient and adds cost to the distribution system. There has never been an administration that has introduced more regulations (at great cost to our nation's businesses) in the history of our country. But it is only these State Franchise Laws that add costs - none of the federal regulations are guilty of such a travesty!

We can expect the "findings" of this sham to be marched out as evidence that the franchise system is broken and that State Franchise Laws should be sacked. Elon Musk is smiling all the way to the bank.

This is just another attack by the current administration and its legion of regulators who are bitter about the automobile dealers' success in earning a carve out of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010. The attacks by the Consumer Finance Protection Bureau over the past five years are similarly motivated.

I think it is appropriate to end this discussion with a reminder of the Tenth Amendment to the United States Constitution which states that the federal government possesses only those powers delegated to it by the United States Constitution. All remaining powers are reserved for the states or the people. 

That is the Federal Trade Commission you hear in that background muttering "Whatever!". 

Multi-Tier Pricing Strikes Again

You've probably seen the story about Napleton Automotive Group alleging FCA US offered dealers large sums of money to report unsold vehicles as sold. While there are many moving parts to this story and I don't care to opine on this until all the facts are out, it is illustrative of the fact that multi-tier incentives or bribing with "marketing incentives" causes problems for all involved.

It undermines the value of each brand, confuses consumers and now we see it leads to potentially scandalous and misleading reports hitting stock values. It is virtually impossible for dealers to offer transparency in their pricing to consumer if manufacturers will not do the same to their dealers. 

NADA Convention Registration Open 

Online registration for the 2016 NADA Convention & Expo in Las Vegas is open. As one of the most popular destinations in the country for meetings and conventions, several hotels in NADA’s convention block have already sold out. 

Hotel rooms are still available in NADA’s block but they are going fast. The  convention—which runs from Thursday, March 31, through Sunday, April 3, 2016—will be held at the Las Vegas Convention Center. For more information or to register, visit www.nadaconvention.org.

April 2015 SDADA Column

I recently attended an NADA Government Relations Committee meeting in Washington, DC. I had very productive discussions with all three members of our South Dakota congressional delegation. Senators Thune and Rounds and Representative Noem are all supportive of our legislative priorities: support the CFPB Reform Bill to keep auto loans affordable and accessible, ensure that changes in LIFO and advertising deductibility do not hurt small business, and focus on strategies to boost recall completion rates instead of grounding vehicles for minor recalls.

Each of these priorities is an easy discussion because they have such broad appeal outside of our industry. Community banks are being crushed by the same heavy-handed tactics the CFPB is trying to apply to auto dealers and lenders. Ultimately, fewer community banks and fewer auto lenders does not serve the consumers which is what the CFPB purports to do.

LIFO (last in, first out) is a longstanding inventory accounting method used by businesses to help mitigate rising inventory costs as it allows companies to calculate their income by basing sales on the newest inventory for goods, such as vehicles and parts, which increase in price over time. It is a strategy used by many businesses, big and small, to keep more capital in the business for future investment. Any drastic changes will decrease capital investment by businesses.

Any bill regulating rental and used vehicles under any open recall could cause a significant disruption for consumers, rental companies and dealers. As we dealers know better than anyone, the majority of vehicle recalls do not require the drastic step of grounding the vehicle. In fact, many of the recalls we saw in 2014 would have been handled under "service bulletins" in the past. The current vehicle recall process was not designed to differentiate among potential levels of risk. It would make much more sense to create policies tailored to boost consumer recall response and completion rates. Of course, that's why we shouldn't expect those policies from Washington regulators!

Wall Street Journal Offers Peeks Behind the CFPB Curtain

While Senator Elizabeth Warren (D-MA) was saying that the CFPB should assume oversight of auto dealers, which were left out of the Dodd-Frank Act (a discussion fully vetted during the debate of Dodd-Frank), the Wall Street Journal was offering some insight into exactly how the CFPB goes about their business.

In an April 6 editorial entitled Washington’s Latest Bank Heist, the Wall Street Journal exposed the double secret methodology (Bayesian Improved Surname Geocoding) behind CFPB's accusation that auto dealers are charging minority buyers higher interest rates on car loans than they're charging similar white customers.

A week later, on April 13 in Do Two Half-Victims Make a Whole Case?, the Journal opined that it was unreasonable to fine an auto lender (specifically Ally) if you could not identify a victim.

These two opinion pieces make the auto dealers argument in a very clear and simple manner. No ad NADA could ever buy would come close to the value of these op-ed pieces. I urge you to read them and pass on to anyone who does not understand the issue!

Detroit News Commentary: Direct Auto Sales Could Raise Car Prices

In another article that makes the dealers' case, Lawrence J. Spiwak, president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, makes the case that intra-brand price competition, which is the by-product of many state franchise laws, saves the automobile consumer money.  Not requiring auto manufacturers to sell their cars through independently owned local dealerships will only serve to drive end prices up for consumers.

Another opinion piece that lays out the issue clearly and concisely in a medium that ads cannot be purchased. Just when you think the media are stacked against you...

October 2014 SDADA Column

General Motors is in the third consecutive month of their current “stair-step” incentive programs. As you know, if the dealership meets its sales quota, they get a per-car bonus, retroactively, at the end of the month.

Ask a factory representative where the objectives come from and he/she will backpedal faster than a defensive back on a Peyton Manning bomb. The truth is that the objectives are completely arbitrary and not based on anything that makes sense. In fact, there is no way for any manufacturer to set a reasonable objective in any market because they do not know the market.

Do GM's current dealer objectives reflect the current agriculture commodity prices in those small, rural markets dependent on the farmers’ business? Do they reflect the plunging price of oil in those markets dependent on oil? Do they reflect inventory disparities between stores or regions? Do they reflect changes between last year’s local economy and this year’s?

They don’t because manufacturers do not have that information. They do not understand local markets. Dealers do. That is what we do.

This Edmunds.com article lays out the issue quite well. Dealerships may have a lot of money riding on selling the last few cars at the end of the month. So they may cut some deals that they might not otherwise cut. Customers have this annoying habit of talking to each other and comparing what they paid. When the customers who bought earlier in the month find out what a bargain the customers who bought later in the month got, they’re pissed.

I have discussed this issue in this space before. I've also pointed out that our South Dakota law supposedly prevents this kind of factory activity though no one seems to give a damn about that. NADA has pointed out that it's bad for customers, bad for dealers and bad for manufacturers, yet that seems to matter to no one.

Bill Fox, Jeff Carlson Elected

I recently returned from the NADA Fall Directors meeting in Phoenix where we held our annual elections as part of the agenda. Bill Fox was elected Chairman for 2015. Bill and his family have Chevrolet, Chrysler, Dodge, Honda, Jeep, Ram, Scion, Subaru and Toyota brand vehicles in the upstate New York cities of Auburn and Phoenix. He is a good friend and I know he will do a great job as chairman. I look forward to working with him next year.

Jeff Carlson was elected NADA Vice-Chairman. Jeff, who is from Glenwood Springs, Colorado, is a Ford and Subaru dealer. He is a South Dakota landowner and loves to hunt pheasants (I have had the good fortune to hunt alongside him and his wife, Nancy). I think South Dakota dealers will find him to be one of us. Jeff and Nancy are great friends and wonderful people.

McConnell, NADA Defend the Dealership-Franchise System

Forrest McConnell III, chairman of NADA, recently addressed the Automotive Press Association in Detroit. He discussed NADA's solution to the Consumer Financial Protection Bureau's fair credit concerns. He also spoke about competition in automotive retailing and how it is the cornerstone of the franchised new-car dealer network, benefitting both car buyers and automakers. You can read more about McConnell's remark's here.

April 2012 SDADA Column

You may have read about some crazy South Dakota dealer who has been chasing college basketball for the past thirty plus years in a recent NADA Headlines story. Well that same dealer sandwiched this year’s basketball trek between NADA committee meetings in Washington, DC and New York. Both the basketball and the meetings were productive!

I attended Government Relations Committee and Public Affairs Committee meetings in DC. The Government Relations Committee heard from Rep. John Campbell (R-CA), who holds a special place in dealers’ hearts for sponsoring the Campbell Amendment which excluded auto dealers from the jurisdiction of the Bureau of Consumer Finance Protection (CFPB) last year. Rep. Campbell, a former car dealer, spoke of the frustration current legislative environment in which the greatest accomplishment seems to be to see how far they can “kick the can down the road”. He did not look for much action on anything until after the November election.

That was a common theme as I visited with Senator Thune and Representative Noem. I did not see Senator Johnson (again), only a staffer. Thune and Noem are supportive of NADA’s positions on the estate tax, CAFE and LIFO but expected no action on these issues until next year unless a “lame duck” Congress saw fit to take them on. It is doubtful Sen. Reid will have an appetite for that so look for no action until 2013.

The Public Affairs Committee discussed the two issues that dealers seem to be most concerned with, facility image programs and multi-tier pricing, at length. While the multi-tier pricing issue is one that cuts across the country, it is a violation of each state’s existing franchise laws and thus, NADA is limited in their alternatives. The consensus is that this issue will have to be handled at the state level, by state associations. NADA can offer limited support but it seems that state associations might find more help by working together to take on the manufacturers on this. I have weighed in on this issue in detail here.

The facility image program, however, is a different story. I feel NADA needs to take a lead role on this issue. There are a couple of opportunities to stand with dealers ongoing.

Perhaps you read megadealer Norman Braman is suing General Motors over the manufacturer's Essential Brand Elements program. This would seem to be good news for all dealers as Braman has deep pockets and appears ready to fight. Dealer Jack Fitzgerald also is suing General Motors in a Maryland state court over the EBE program.

NADA needs to stand by these dealers, and any others willing to take on the manufacturers, in a very public way. These dealers must be able to count on NADA’s legal, public relations and financial support. Dealers on the Public Affairs Committee agreed that we need to help “take the fight to the people” by letting all dealers know about the details of the fights as they unfold.

I would really appreciating hearing your thoughts on these issues. As I mentioned above, these two issues seem to drive EVERY conversation that I have with dealers and they seem to be looking to NADA for some leadership.

NADA/ATD Study: EPA Underestimated Costs for Model Year 2004-2010 Heavy-Duty Trucks
I am quite certain this won’t surprise you: a government agency has underestimated the cost of regulation! NADA and ATD released a new report March 8 that calls into question the Environmental Protection Agency’s (EPA) cost analysis of emissions control requirements for model year (MY) 2004-2010 commercial trucks. The mandates resulted in substantially higher prices for commercial vehicles, depressed sales and delayed the environmental benefits that the EPA originally sought. NADA/ATD released the following statement:

“Until now, few studies have ever compared the EPA’s cost predictions to the actual cost of meeting its motor vehicle emissions mandates. The study, which looks back at the 2004-2010 medium- and heavy-duty truck emissions mandates, reveals that the EPA underestimated actual compliance costs on average by a factor of two to five. It shows what can happen when a regulatory proposal – based on far in-advance predictions – seeks to set mandates far in the future. Importantly, the study documents the real-world market disruptions that can occur as a result. The lessons learned from this report apply directly to the proposed MY 2017-2025 fuel economy regulations for light-duty vehicles. That rulemaking, combined with previous Obama administration fuel economy mandates, will raise the average price of a vehicle by $3,000, according to EPA and National Highway Traffic Safety Administration estimates. When faced with unreasonable federal regulatory mandates that increase motor vehicle costs, buyers of light-duty vehicles – similar to what commercial truck buyers experienced – will seek out less expensive alternatives in the marketplace.” Click here for the study.

Consult Your Tax Practitioners Soon About the UNICAP Safe Harbors
On Nov. 9, 2010, the IRS issued Revenue Procedure 2010-44, which created two optional safe harbor methods of accounting for motor vehicle dealerships (including light, medium, and heavy duty truck dealerships). If properly elected and applied, the new safe harbors permit dealers to (i) deduct, instead of capitalize, certain costs related to their inventories, and (ii) significantly simplify their computation of these costs (known as their Uniform Capitalization – or UNICAP – computation). If qualifying dealers elect the safe harbor methods of accounting for their first or second tax year ending after Nov. 9, 2010, they may do so without having to consider most of the potential restrictions that apply to automatic method of accounting changes. Consequently, for dealers whose tax year corresponds with the calendar year and who did not elect these methods for the 2010 tax year, they should speak with their tax practitioner soon about whether they should elect the UNICAP safe harbors for the 2011 tax year. The election is made on IRS Form 3115. For more information, consult summaries of the revenue procedure by the IRS Motor Vehicle Technical Advisor and NADA.

Law, Without Force, is Impotent.

--- Blaise Pascal - 1623-1662. French mathematician, physicist, and religious philosopher.

I am not a lawyer. I don't want to play lawyer. But I am affected by the law - especially when I do business with aparty who flaunts the law. What follows is my interpretation of an existing condition in South Dakota that I find unfair and in violation of our state laws.

South Dakota franchised automobile dealers are subject to state laws that regulate their activity. If a dealer finds himself in violation of one of the regulations found in Chapter 32-6B of South Dakota Codified Law, he or she can expect a phone call or visit from the Division of Motor Vehicles with a request that he or she "cease and desist". And if he or she does not "cease and desist", I would expect that the Attorney General would proceed with prosecution.

What happens when a franchisor, or automobile manufacturer residing in another state in this case, violates a law in that same chapter of South Dakota Codified Law? Who is it that enforces the good people of South Dakota's laws in that instance? Does the Division of Motor Vehicles visit or call them? Does the Attorney General call to remind them that they are violating laws that the the South Dakota Legislature has passed into law? At what point does it move to prosecution?

In Chapter 32-6B of South Dakota Codified Law, section 57 prohibits an automobile manufacturer selling their vehicles to dealers at different prices:

It shall be unlawful for a franchisor to offer to sell or to sell any new vehicle to any franchisee at a lower actual price therefor than the actual price charged to any other franchisee for the same model vehicle similarly equipped or to utilize any device including, but not limited to, sales promotion plans or programs which result in such lesser actual price; provided, however, the provisions of this section shall not apply to sales to a franchisee for resale to any unit of government, federal, state, or local. Provided, further, the provisions of this section shall not apply to sales to a franchisee of any vehicle ultimately sold, donated, or used by said franchisee in a driver's education program. Provided, further, that the provisions of this section shall not apply so long as the franchisor offers to sell or sells new vehicles to all franchisees at the same price. Each and every person who violates this section shall be guilty of a Class 1 misdemeanor, and each and every person violating this section shall be liable thereby for all damages caused by such violation.

Now despite the fact that this is written in legalese and someone did their best to camouflage the true meaning of the law, one can still glean what is intended by the law. I believe that this law says that an automobile manufacturer cannot sell a vehicle to a South Dakota dealer at a price any different than that same manufacturer sells a similarly equipped vehicle to another South Dakota dealer (except in the cases of a government fleet vehicle or a vehicle intended for driver education purposes). That is not that difficult to understand.

So what happens if a manufacturers does sell a vehicle to one South Dakota dealer at a price any different than that same manufacturer sells a similarly equipped vehicle to any other South Dakota dealers? Well, the law indicates that they are committing a Class 1 misdemeanor and they are to be "liable thereby for all damages caused by such violation".

Well, what the hell does that mean? Apparently, it means nothing. I mean ABSOLUTELY NOTHING! Let me explain.

Virtually every automobile manufacturer that has multiple franchisees in South Dakota has sales or marketing promotions that allow a dealer to get some kind of "kickback" from the manufacturer that results in the ultimate cost of a vehicle being different for different dealers. These programs might be related to facilities or other aspects of the dealers business practices or they may be related to sales volume. An example of a program that rewards dealers for spending money on their facility is General Motors' EBE program which I have detailed here.

An example of a program that rewards dealers for their sales volume might be as follows. The manufacturer assigns a dealer a sales objective. These sales objectives are completely arbitrary (though they are usually based on past sales performance) because they cannot take into account the various factors in any given market. These might include the dealers' current inventory (how many vehicles or models does dealer have available to sell), local market conditions (think urban versus rural, metro versus small, etc.), and a variety of other circumstances over which a dealer may have no control. The dealer then earns a "kickback" based on how well he performs against the arbitrary sales objective.

Regardless of how the dealers earn the "kickback", they come in different amount to different dealers and because this is included under the "sales promotion plans or programs which result in such lesser actual price" provision of the law, this practice violates South Dakota law. A quick visit to Google to see what the punishment might be for a Class 1 misdemeanor in South Dakota indicates the  maximum penalty is one year imprisonment in a county jail or two thousand dollars fine, or both. I haven't see any automobile manufacturer executives headed to the county jail in Lyman or Brule Counties.

So why should you care if you are not a South Dakota automobile dealer? The law is intended to protect dealers and their customers by assuring fair competition for all. It is similar to the destination charges on new vehicles. There was a time when you could travel to Detroit and pick up your vehicle direct from the manufacturer, thereby eliminating the destination charge. This ended over 30 years ago, when the automotive industry was required to adopt equalized freight charges.

You should also care because this is our law. As South Dakota residents, we don't get to pick and choose which laws we like and will follow and which we don't like and want to leave behind. Manufacturers who choose to do business in our state should be held to the same standard. If you want to do business in South Dakota, you must comply with South Dakota laws.