A matter of simple mathematics
Want to start a business and make loads of money? Don’t start a car dealership.
Eddie Jordan is a canny Irishman. He made his money in motor racing, started a successful Formula 1 team and then had the good sense to get out of the sport when he discovered he couldn’t compete against manufacturer backed teams with manufacturer sized budgets. Now he’s a TV pundit and is often seen wearing floral shirts matching his lightly burned Caucasian man with a few too many beers complexion. Nice work if you can get it.
Eddie is also a businessman and one of his famous quotes was “To make a small fortune in Formula 1 you need to start with a big one”. Read between the lines and it means the only people who make profit from the sport are Bernie Ecclestone and the drivers with everybody else lucky to break even.
A car dealership, even one of those new multi-million Ringgit glass and steel monolithic dealerships, is a far cry from the glamour of the premier motorsports event in the world. Formula 1 is all about the show with pristine mechanic overalls while car dealers are about eking out the very last drop of profit from a customer. Yet, there are now parallels to be drawn from both businesses.
Malaysia’s car market has undergone a rapid change over the past year and it mostly has to do with two things. One of them is volume, or rather, the sales volume committed by dealer principals to their masters overseas. The other is something called ‘The Competition Act’ where car sales figures can’t be shared among car companies for fear of price fixing and you and I have to sell our underpants to buy a new car.
The result has been what can best be described as a fire sale for new cars. Forget about the Malaysian Mega Sale where they jack up the price of old-season clothes just to give you a 50% discount. The Malaysian car sale is an all-year affair with no brand too proud to offer incentives just to make sure the metal moves out the door. A little bit of nudge-nudge and wink-wink in the showroom and you could possibly get a big discount, free servicing and the latest iPod/Pad/Mac/Phone/PowerBook combo thrown in.
It’s great news for car buyers but I find myself actually worrying about the health of car dealers for a change. Imagine you’re a car dealer. You’ve spent millions on a huge piece of land close to the city and put a building with a showroom, service centre and spare parts warehouse on it. Your utility bills and manpower costs are astronomical, you have to pay a monthly marketing fee and there are cars on a trailer parked in your lot and ready to be off-loaded.
Because you have to plan your orders in advance, cars will come to you whether you’re having a good month or not. You have committed volumes to meet so you cannot let all that shiny metal take root on your showroom floor. Do so and you’ll be stuck with loads of holding costs and a negative dealer profit margin in about three months and for added fun, there are several other dealers in the same central trade area looking for the same customers. Geographical demarcation is nonsense when it takes you less than ten minutes to get from PJ to the centre of KL on weekends.
If every dealer is also struggling to meet their quotas, you get a scenario where people start throwing prices. Look at it this way, you lose more and more money the longer a car is left unsold so the prudent thing to do is to cut your losses. Sell it fast and move along because these days, being a day late can mean a lost opportunity that took you weeks to develop.
So if dealers aren’t making money from selling cars, where else can the revenue come from? Servicing? Most new cars come with free servicing deals that can stretch up to five years and though many only cover basic consumables (like filters and engine oil) it’s still a big dent in dealer revenues. Major parts replacement? Not much left there either as warranties also stretch to five years. It’s getting to the point where they should perhaps offer additional extras like doing the school run and driving couples on date nights to earn money.
The nett result therefore has been the gradual reduction in numbers of independent dealers. Selling cars will eventually become a business for big businesses because they have big fortunes to start with; and do you know what will happen then? They’ll all collude, fix prices and reduce discounting levels so we’ll end up selling our underpants to buy a new car again. Maybe we should all start looking for jobs that allow us to wear flowery shirts and saunter through the Formula 1 paddock.
