Yesterday, I went on a quick rant about the automobile industry.  Nothing too harsh, just saying the entire process of buying a car is broken.  I may have also mentioned I don’t care if you want to defend the process, it either makes you a fool for participating or a jerk for contributing.  Now there are hundreds of ways to game the system and win, like I did, but that’s not what I want to talk about today.  Today I want to describe my plan to fix the system.

I’m usually a top-down kind of guy, but for the simple task of re-organizing the automobile industry we’re going bottom-up.  The lowest of the low is the silk tie that greets you wearing too much gold jewelry and cologne every time you want to just go down to the local BMW dealership and drool over cars you can’t afford.  Remove the sales guy, remove the commission.  Right there you lower the cost of the car and increase profit.  Instead, put a college kid in a polo shirt with the company brand and stick him out there.  I knew more about cars than any salesman I met in college.  I would have killed to work at a car dealership helping someone with their purchase for $10/hour in college.  I call this the “Best Buy” model.  No one at Best Buy is getting a commission, but the staff is knowledgeable, customers actually trust them, and the staff is still able to upsell with accessories and warranties that boost profits.  Best Buy makes a profit, GM, Ford and Chrysler do not.  I’m simply stating that while the commission model might work for dealers, the non-commission model will work just as well, and your customers won’t hate you.

On the next level we have the dealers.  Most of the dealers are franchise players, they pay a franchise fee for the brand.  Like any franchise, not only do you have to compete with other brands, you have to compete with your own brand.  This is bad for business.  We often call this market saturation.  I’m sorry, I just don’t need 3 Chevy dealerships and 2 GMC dealerships in the same town, especially since they sell the same trucks and SUVs.  Sorry dealers, the car manufacturers need to ditch the the franchise game.  It no longer works.

We can make fun of greasy haired New Jersey types salesmen and fat balding greedy goober dealership owners all we want (I’m not one to profile), but the crux of the industry is with the manufacturers themselves.  There are two examples of what to do and what not to do.  Both show how Honda does it right, and how some others got it all wrong.

First off.  If you don’t know by now, I bought a 2008 Honda Accord EX sedan, black exterior, tan interior.  There were a few features I wanted in my car, and they all came standard with the car or EX package I wanted.  The other car on my short list was a Toyota Camry SE.  The Camry has one-off added features.  So instead of an option package, I would need to check the options I wanted.  The problem is no Camry came from the factory with just the options I wanted.  In order to get the options I wanted a more expensive trim level was needed or a custom order from the factory.  Option one left me with a car thousands more than the Accord and option two would have left no room for negotiation at the table.  Custom orders require a deposit, and if I decide to not take delivery I lost that deposit.  When the day came to decide what car I wanted, the nearest dealerships had about 20 Accords just like what I wanted, and there wasn’t an entire Camry in the state like what I wanted.  Not only did I get the Accord for thousands less than sticker, but because their option model is simple instead of complicated, I got a few things I never really wanted like a CD changer and sun-roof.  Even without a changer and sunroof, a Camry would have cost me more because there was no negotiating room.

The lesson is to simplify the models.  Yes I ended up with more than I wanted, but I paid less, the dealership made a buck, and Honda did too.  Remember our little college kids in polos?  With a simplified option set-up they could easily locate the car you want.  If he can’t find the exact car you want still, he can arrange to make sure one is shipped to the dealership soon without the need for a deposit.  Why isn’t it needed?  Because the options are so simple, they can easily park it on the lot and sell it to the next customer.  Better still, without having to compete with the dealership in the next town over for business, the retail guy could send you over there or arrange to have a car delivered that day from the neighboring dealership if they have one.

The second lesson is more important than the first.  Again Honda sets the example but now GM is our loser.  Back in 2006, I first read that GM had pushed the development of their new big SUV up a few years because rising gas prices might hurt sales.  Good idea because you don’t want to debut the brand new Suburban in September 2008.  They got it out when gas was lower and had a good year or so of sales before the big gas spike earlier in 2008.  But because of the rushed development, factories that make the trucks now sit idle.  They aren’t making them because no one is buying them, so GM is losing tons of money.

Honda makes some big vehicles too.  Not as large as GM, but their sales have also tanked.  The difference was they aren’t just thinking about sales when they develop their cars.  They keep in mind that efficiency in production can lead to better profits than gross sales.  Factories can be re-tooled to produce different cars depending on what the market demands.  GM wasn’t able to re-engineer their truck facilities to sell their smaller trucks to meet the demand as gas prices rose.  Even though they rushed development because of high prices, they didn’t stop to think about lower demand if prices rose.  Someone put an MBA on their board of directors please!

Honda has had their sales suffer of the big cars too.  But they kept the big picture in mind when it came to production facilities.  When gas shot up, they were able shift production from big cars to little cars.  Honda’s two smallest cars have seen huge increases in sales, the guys working at the big Honda car plants are now making smaller cars.  The guys at the big GM plants are at home playing Poker.

The lesson learned here is the result of a huge company trying to do too much at once.  GM is holding on to their most profitable vehicles (big trucks) without any thought to what might hurt the sales of those vehicles.  Honda has prepared itself to handle increased demand for smaller cars, and if demand shifted to larger they can do that too.

The good news is the old business model is dying, fast.  More and more cars and being sold via internet, leaving the silk tie guy to flirt with the receptionist.  The most successful companies are using the simplified option model, so the stragglers will likely emulate that same model.  While I would love nothing more than to see the death of inflated companies like GM and their ridiculous labor unions, they’ll probably make it, even if they have to go bankrupt to do it.  As a business minded feller, I love to see companies swoop in with a better business model and shake up the status quo.  Japan first did it in the 80s, but everyone learned to live in harmony in the 90s.  Now most of the international companies have used ingenuity and careful planning to become successful, while Americans sat on their fat butts.  Natch.

Related posts:

1. Auto Industry Smack Down Part I
2. The Weakonomist Buys a Car
3. Weakon 151: Banking Industry Explained, Part 1
4. The Weakonomist Pays Off His Car
5. Bailing Out the Auto Companies is a Mistake

Related posts brought to you by Yet Another Related Posts Plugin.

Liked this post? Hated this post? Hate me? Email me and let me know: Philip@weakonomics.com