Would You Purchase an Electric Car?

With the increasing concern over climate change and the cost of gas/importing oil from overseas, there is now a move towards cars being powered by something other than gasoline.

Early “conventional hybrid vehicles” that were introduced in the 1990’s merged a traditional internal combustion engine with a relatively small battery.  The battery provided supplementary power to the engine and was charged usually using regenerative braking, involving charging the battery as the car was decelerating.  These early hybrid vehicles were known for being only slightly more fuel efficient than small economy vehicles of the time in terms of fuel efficiency, and concerns about battery life and increased maintenance costs resulted in slow early adoption.  As with many new technologies, the initial impression turned some people off the concept of electric vehicles for years.

Now recent improvements have resulted in new battery technology and a further shift towards the electric components providing actual power to the vehicle rather than simply supplementing the gas engine.  Tesla Motors only manufactures fully electric plug-in vehicles which you can charge at your home overnight.  They offer a daily range of about 450km, more than enough for most daily commutes and usage.  In addition, they are rolling out supercharging stations across Canada and the US with the goal of offering drivers fast recharging to make cross-country trips nearly as easily as you would in a gas powered car.

Many countries and provinces are also trying to encourage this early adoption of electric cars.  Ontario, for example, has dedicated a section of the Ministry of Transportation website to providing information on electric vehicles including the locations of charging stations, answers to frequently asked questions about electric vehicles and information about tax credits being offered to encourage the purchase of plug-in vehicles. 

In Ontario, there is a tax credit available of between $5,000 and $8,500 depending on the size of the battery in your electric car.  This credit can be applied either to the purchase of a new vehicle or to most leases.  Dealerships can also apply for the credit on behalf of the owner, further simplifying the process for buyers and allowing the dealership to offer a lower sticker price on the car.

- Jeff

So Many Choices – What’s a Car Buyer to Do!

Happy Halloween! On this haunted day, I thought I would share my most recent experience helping my good friend Bill purchase a new car – no ghosts involved. He tends to buy a new car every 2-3 years and the process of how he arrived at his decision was very interesting to me.

Like many people out there looking for a new car, Bill found the choices to be overwhelming. Buying a car in today’s market is not only a ”pricing” decision, it’s also a “lifestyle” decision. Let me explain a little further. Once Bill, or any buyer, decides how much they can afford on a lease/finance/cash purchase, they need to decide what their needs are from a lifestyle point of view. While many adults would like to drive a sports car, as a practical adult or parent you may need to consider aesthetics vs. functionality.

Back to Bill – his wife has an SUV so they don’t necessarily need another big car, but at the same time he regularly has to haul his kids around to school during the week and to various activities on the weekend so he needed to have the ability to carry passengers when need be. He had decided that a four-seater was a must, but there are several sporty four-seater coupes out there that can handle the occasional passenger trip. We took a look at a few of these but Bill decided that the additional benefit of four doors outweighed the benefit of a sleek looking coupe. So it was decided that he was going to buy a four door car. Now we needed to figure out which manufacturer he would go with.

Many people find it an overwhelming time to buy a car in this segment because there are so many brands with tried and true as well as new models. Lexus, Cadillac and Infiniti have recently refreshed their models, whereas BMW and Mercedes are several years into their product cycle. This was Bill’s next biggest decision. I know a number of people who prefer to go with an older design that has likely already been tweaked to perfection as opposed to a new design that may or may not have issues in the first year or two of production – these are tough choices to make!

The decisions don’t end there, you have variations in technology, size, warranty, safety… I could go on forever. At the end of the day, once Bill had identified his price and lifestyle needs, the determining factor was how the car drove. After all, everything else becomes irrelevant if you don’t feel good in the car or it doesn't drive as you would expect. As a result, we narrowed it down to 5 cars to test drive, and at the end of the day Bill chose the one that he was most comfortable in, now that we’d already covered the initial constraints of price and lifestyle.

The lesson learned here is when making a significantly large purchase such as an automobile, you really need go through a thorough process that identifies both your needs and wants so you don’t end up with a car that you are unhappy with – which can mean significant penalties to either get out of the lease or sell the car. How did your last car buying experience go?

- Dave

Vehicle Dashboard Technology

Smartphones are now a part of everyday life.  Need directions to a restaurant? Google Maps is just a click or spoken word away on your phone.  With the rapid pace of development of apps and phones, the new features being offered are changing every day.  Many people get tired of their shiny, new smartphone in less than three years, and cell phone providers are now offering replacement phones after two or even one year to keep customers happy and current.

On the other hand, people tend to replace their car every five to seven years.  Those used cars then stay in service for another five to ten years after that.  Now think about the development cycle of a new car which takes over a year; whatever system existed to integrate the vehicle with the smartphone when it rolled off the assembly line has to survive three or four new generations of smartphones over its life cycle, and from phone vendors that may not even have existed when the car was initially developed.

Coming up with a system that allows consumers to use certain aspects of their phones with their cars is a significant challenge, but one that consumers expect in today’s cars.  Different manufacturers have developed their own proprietary approaches to this problem, and there are industry working groups developing specifications for interfaces between cars, phones, mp3 players and other electronic devices.

The auto industry is still in its early stages of trying to figure out how to deal with this new compatibility people expect from their everyday electronic devices.  Likely in ten or even five years when we look back, many of the approaches that exist today will seem antiquated, in the same way as people regard diskmen or the Edsel. Until then, I look forward to seeing what emerges!

For the time being, many systems allow for updates to be made as easily as getting your oil changed.  While the systems of today may not be the systems of tomorrow, at least an easily upgradeable system will allow owners to match the latest current technology, whatever that may look like.

- David

Virtual Showrooms Become Reality

Normally Dave is more geared towards dealership news and I’m more focused on posting financial information that affects the auto industry, but this week our Marketing Manager Jamie Rubenovitch shared some very interesting information with me on a new type of dealership that I would like to discuss today. We’re all used to going online to check out a new car we’re interested in buying and then heading into the dealership next to interact with the salespeople and get the lowdown on our potential new car. This may be a thing of the past as Audi came out with their first virtual showroom in 2012.

My first thought was “what is a virtual showroom?” Well it’s apparently a lot like what we see in the movies – floor to ceiling digital and 3D screens showing customizable vehicle exteriors, interiors, engines and colours. Now that Audi is on to their second of a proposed 20 virtual dealerships (first was London and most recently Beijing), other auto brands/manufacturers are trying to keep up.

BMW is working on bringing “geniuses” to the dealership. Similar to how Apple has a genius bar of technologically savvy people who are available to explain features and answer questions, BMW will have auto savvy, iPad wielding staff available to answer any level of question.

But what are the benefits of a virtual dealership? They enable dealers to have a presence in smaller urban spaces they normally couldn’t have fit in before. If they don’t need sprawling room for 5-15 cars, they can set up shop in a popular mall and reach more people.

Consumers also benefit from being able to see the ins and out of a vehicle without having to drive to the suburbs and climb underneath the hood. On the flip side, could you buy a car without ever actually driving it? I guess that’s what the regular dealerships are for, and they’re not going away anytime soon.

So far virtual dealerships don’t exist in North America, but it will be interesting so see the degree of consumer acceptance. Dealers have significant investments in their buildings and showrooms. Cars still need to be serviced, so that part of the business likely won’t change, however, what happens to the showroom? I believe consumers still want to “kick the tires” and experience first hand the automobile they may purchase. No matter how sophisticated the graphics and websites are, there will be initial reluctance to buy sight unseen. Automobile purchases represent significant investments to most consumers; it’s definitely not like purchasing a cell phone or small electronic equipment. People want to drive the car and see first hand what it has to offer.

So “hats off” to Audi and BMW for their respective efforts to stay competitive and ahead of the curve. However, this accountant feels that we are still years away from automobile dealers shutting down their showrooms and displaying their cars only on digital screens. Mind you, if consumers are offered virtual rides in the future that realistically represent rider experience, who knows what may happen. 

- Jeff

HST-Exempt Financial Services No Longer Exempt

This week I want to address a topic that’s very important for auto dealerships. The CRA made a significant change to HST rules that directly affects dealerships, and in turn, their cash flow. The change was made a while ago yet not everyone seems to be aware of the modification or the new developments surrounding it so I think it’s worth mentioning.

The CRA has narrowed the definition of HST-exempt financial services. What does this mean for dealerships? Most auto dealerships have a finance department that helps customers arrange a lease or loan with a financial institution. In return, the dealership receives a commission from the financial institution. This commission, or fee the dealership receives, is no longer always an exempt financial service – under these new rules the fee may now be considered taxable and subject to HST.

This means you have to be careful how you structure the agreement with your financial institution of choice and be mindful of the added tax you may have to pay. Keeping these factors in mind will ensure you’re not surprised in a tax audit.

The CRA made this change a while ago, however, the Canadian Automobile Dealers Association (CADA) is working to overturn the legislation and make dealership’s arranging financial services tax exempt. There are possible circumstances which could enable a dealership to object to an audit assessment from the CRA; I highly suggest you speak with your accountant to check if your particular circumstances apply. Meanwhile, keep in mind that if your dealership has already received an audit assessment, you have 90 days from the date of assessment to file an objection.

Have you been hit by the new HST changes? If you have I’d be interested in hearing your story in the comment section below.

- Dave 

Auto Industry Statistics

Recently Dave has talked a lot about the state of the automotive industry in Toronto and Ontario, specifically through the lense of the auto clients we work with, which gave me the idea of using today’s post to look at the big picture of what’s going on with the auto industry across Canada. The following are some interesting facts* about the industry:

• Canada is the world’s sixth-largest exporter of road vehicles.
• We account for 16% of North America’s vehicle production.
• There are 1,300 auto companies in Canada with revenues totaling over 70 billion dollars.
• Annual exports total over 50 billion dollars.
• There are over 111,000 Canadian autoworkers skilled in engineering, machining, welding, metalwork, manufacturing systems and services, robotics, tool-and-die making, etc.
• Ontario alone has over 300 parts manufacturers and 88,000 skilled workers.
• In the 10 year period leading up to 2011, more than 3 billion dollars in annual capital investment and more than $450 million in annual R&D spending was invested in Canada’s automotive industry.

That shows a lot of vehicles being built in Canada, and a number of sales to be broken out over the various dealerships located throughout Ontario. If you own a dealership or are a controller at a dealership, there are a number of tax planning strategies you should be taking advantage of. To list a few: holding companies, family trusts, purifying your dealership of its redundant assets, creditor proofing your dealership, share for share exchanges and planning considerations for business sale and/or succession.

Leave a comment below for more information or if you have a question, or check out this page for additional information on tax planning.

                              

*Facts are taken from the Canadian Government’s “Invest in Canada” website.

- Jeff

Suzuki Canada Follows American Suzuki Automotive Shut Down

In spite of protests that Suzuki Canada was going to remain in the automotive industry after their US counterpart American Suzuki restructured to focus on motorcycles and ATVs, I had suspicions that the Canadian branch would soon follow suit. I was unfortunately right.

Suzuki Canada has now officially announced the end of their auto division. The will be discontinuing auto sales after their 2014 model to refocus, like the US, on motorcycles, ATVs, and their marine branches. This could give dealerships anywhere from 12 months to the end of 2014 to either shut down or sell Suzuki’s other products.

While Suzuki Canada sold over 13,000 cars just 5 years ago, they sold only 5,500 last year, and American Suzuki ended last year with 25,350 cars sold – a definite year-over-year decline for both.

Suzuki made this statement a few months ago in response to concerns that Suzuki Canada would follow American Suzuki’s lead: “Suzuki Canada Inc. is a completely separate entity than American Suzuki Motor Corporation. We are completely independent of one another, and you will not see a rollback in dealerships for Canada.”

This latest quote shows Suzuki Canada’s reasoning behind their decision to in fact shut down their auto division: “[We have] been monitoring market conditions carefully and, after reviewing the long-term viability of automotive production for Canada, [we] concluded that it was no longer feasible to produce automobiles for distribution and sale in the Canadian market.”

Suzuki is by no means the only automotive manufacturer having troubles in this economy, but they seem to be struggling especially hard as Suzuki Motor Spain also closed its motorcycle plant in Spain as of March 2013. Suzuki sold more than 10,000 motorcycles and marine vehicles in Canada last year, but this development in Spain signal the imminent end of Suzuki motorcycles and Suzuki as a whole? Only time will tell.

-Dave

The Vanishing Margins

I wish I had the all the answers, but I unfortunately don’t. The automotive industry is going through a tough time right now and after speaking with a number of my automotive clients, I decided to write an industry overview this week.

Auto dealers, much like other franchisees, are being put in a difficult position as the large brands are charging dealers more to purchase their vehicles, yet dealers can’t charge the same amount more to customers as many people are earning less than they did 5 or 10 years ago. It’s reminiscent of the aviation industry where fuel prices rose and rose and the airlines had to fight with consumers and the media to justify their increased surcharges.

Furthermore, while only a few airlines fly to certain cities, there are currently a vast amount of choices available to consumers when it comes to choosing a vehicle to purchase. The result has been that each auto dealer is fighting even more than before for a small percentage of the dwindling consumer purse.

Let’s look at a few of the major issues facing automotive dealerships and the solutions some sharp dealers have come up with.

·        Market share is driven in large part by vehicle quality and corporate marketing, but there are a number of external factors that can’t be controlled by dealer owners, such as consumer taste and the economy. This can make it feel like dealers have few options available to them when trying to maintain market share, profitability and sustained growth.

·        To complicate matters further in this scrambling market, manufacturers have a number of programs that dealers have no say in but have a direct impact on dealers.

·        Many dealers have combatted this trend by acquiring numerous dealership points as a way to spread overhead amongst the different dealerships. The end result is similar margins, lower overheads and thereby same or higher net income. This is a strong model and likely sustainable for the short term. However, this too will eventually become ‘old news’ and dealers will have to become even more creative.

·        Other standalone dealers have explored the idea of offering additional services at their dealership such as a collision center, used car department, stronger F&I department, etc. The additional services offered at the dealership allow for diversification of risk in times when new car sales are not as strong.

·        The government also has a number of programs that can help dealerships – corporate tax rates have been coming down consistently, apprentice tax credits have increased, HST harmonization has improved cash flow

·        Auto dealers can also take advantage of various tax planning arrangements in order to maximize their corporate and personal after tax returns, for example the family trust (a formal discretionary family trust governed by a trust agreement drafted by a lawyer, not to be confused with an “in trust” account provided by your bank).

If my overview leans toward the dreary side, let me know what you think – will margins increase again in the future? Will the cost to produce automobiles stop increasing or decrease?

- Dave 

Service department let down!

I am going to talk about poor service I have both witnessed personally and heard about from family and friends to make recommendations that can help dealers be more competitive and successful. Many dealerships offer excellent service, so the recommendations below will not apply to everyone.

I have been a car owner for over 33 years and I have had a lot of experience dealing with auto dealership service departments. Years ago there were lots of options for car repairs, but the small auto repair shops located at local gas stations have been disappearing for the past decade and now dealerships are the most common choice for repair work. This is a fortunate circumstance for dealerships because the service department usually provides significant margins, but given the level of service I’ve seen lately, I wonder if some dealers aren’t taking this shift for granted.

Over the past 15 years or so I have switched from purchasing cars to leasing them, and consequently I moved my repairs from a local garage to the automobile dealership. I’m not your average Joe at a dealership waiting for repairs. I’ve been working with dealers for many years and I know what drives their bottom line, and I can tell you that service departments deserve more attention at some dealerships.

Recommendation 1 – Get customers in and out as efficiently as possible.

Service is a volume business meaning that a dealership needs to service a lot of customers to see good returns. Dealerships need to be prepared for high volume, and usually they are. I never just show up at a dealership for repair work. I call the day before, secure a time that works and make sure that I am not late for the appointment. And still, sometimes I have to wait a long time before anyone greets me and starts the service appointment. In a volume business, every customer counts. And, in the auto service business, which is a necessary evil to most people, making a customer wait is painful. They don’t want to be there and even though there is coffee and newspapers, they generally have something better to do. Your service department will take care of servicing cars, but you also need to make sure someone is servicing the customer. If your customer is going to wait for their car to be serviced, be sure to keep them informed if your promised delivery time changes. Have a dedicated employee greet and acknowledge incoming customers. Take their keys and let them go as soon as possible.

Recommendation 2 – Don’t make promises you can’t keep.

On countless occasions I have been promised that my car would be ready in an hour only to be let down when it wasn’t ready for 90 minutes. I understand that things can get hectic in the service bays, and there are unexpected situations and a million reasons for a service delay, but your customer doesn’t care. So, in all circumstances, recommend that they take advantage of your shuttle service or take a loaner and leave their car with you. It will take some stress off the service department because they will have more time with the car and it will avoid a situation where you are likely to upset the customer.

Recommendation 3 – Go the extra mile.

I can’t tell you how many times I have heard of people having to wait for their car because they were out of bounds for the service shuttle. This isn’t a pizza delivery service – these customers are paying you hundreds of dollars for a painful, mandatory service that offers them little personal value. Go the extra mile, literally, and do your customers a favour. They’re paying you for it and they’ll continue to pay you for it in loyalty and recommendations to their friends and family.

Recommendation 4 – Hire the right people and train and reward them.

Service staff can have attitude because they are rude or overworked and dealing with the customer takes them away from the long line of cars demanding their attention. You certainly don’t receive this type of service when you enter the sales area of the auto dealership. I know that the service department is a key profit center for the auto dealership, so why is there such disparity in the service provided in the service department? Your service department needs to service the customer as well as the car. Attention to customer service should be considered during the hiring process; is this person technically proficient and well-mannered? Would I want to introduce this person to my most valued customers? Once you’ve hired the right people, have you told them what you expect and trained them on how to deal with a long line? A frustrated customer? Have you rewarded them when you witnessed good behavior? You need to tell your employees what you want and reinforce it with monitoring and rewards.

Recommendation 5 – Walk the floor.

I believe the problem with service really rests at the top. Auto dealer owners are not spending enough time training, educating, rewarding and monitoring their service employees. When is the last time you walked the floor? Did you notice the bored customers flipping through the newspaper in the service department? Did you ask them about their experience? Did you watch your service department interact with your customers? Your attention to service will communicate volumes to your staff.

So, while dealerships are in the glory days of service with less competition from mom and pop shops, don’t be lulled into complacency. Chains of aftermarket service shops offer “Warranty Approved” services that threaten the dealership’s hold over the leased car maintenance market. In addition to threats from aftermarket shops, you can lose customers to the next dealership over when they start to shuttle to and from your area, promptly greet customers as they walk in and generally make service as painless as possible. The profits your dealership gains from service are far too precious to take a back seat.

-- Jeff Carbell

Diversify your investments

It takes so much capital to start, maintain and expand an auto dealership that there usually isn’t much cash left for other investments. I have heard many auto dealership owners tell me their retirement will be funded by the ultimate sale of their dealership business and property. “I make the best return on my money through my dealership business; therefore why invest in anything else?” While I like the passion and confidence these dealers express, I must admit that I am worried for their futures.

In light of the changes in the auto industry over the last ten years, I would recommend that every dealership owner have some of their money held outside their business. Many of the dealers that had their dealerships cancelled or retired over the past couple of years lost their current source of income and the nest egg they had been banking on for many, many years. Just as you wouldn’t put all your extra cash in a single stock, you shouldn’t have all your cash tied up in a single business venture.

It doesn’t take much to have a diversified portfolio. Contributing to your Registered Retirement Savings Plan as well as the Tax Free Savings Account and investing in stocks, bonds, mutual funds or other securities that are unrelated to the auto industry will give you a degree of diversification and lower risk in your investments.

With maximum annual RRSP contributions capped at $22,000 for 2011 and $5,000 per year for the TFSA’s you can easily see that your investments in these types of vehicles can grow substantially over time. Make the commitment to fund these types of investments annually, and more importantly work with someone who understands your concerns and risk tolerance so you’ll feel comfortable with the investing process.

Lessons Learned and Forgotten

It has been over a year since GM Canada began notifying many dealerships that they would be required to close their doors. Several of the dealers who lost their dealerships have experienced financial distress and may never recover. What is very sad to the outside observer is that many dealers saw, or should have seen, the writing on the wall years earlier, but were so ‘emotionally attached’ to their dealership that they were not able to react appropriately. Many kept throwing good money after bad until it was too late. Granted, the ‘dethroning’ of the largest auto manufacturer in the world may never happen again, but the lessons that could have been learned from this seem to have fallen on deaf ears.

Businesses, and more specifically auto dealers, continue to be emotionally attached to their product preventing them from operating objectively. The auto industry is becoming ever more saturated and individual dealers are seeing more and more risk in managing cash flow and liquidity. There are a vast number of dealers out there who feel that as long as they weather the tough economic climate, they will eventually prevail. Are they taking on too much risk for themselves and their families?

As an accountant, I profess that I have a conservative bent while dealers tend to be entrepreneurial risk takers. I agree that it takes risk to make money, but the risk needs to be controlled. Strong business plans and financial forecasts help entrepreneurs make informed decisions about the level of risk they are assuming, and strong creditor proofing can mitigate the amount of capital being put at risk, however often times little to none of this preliminary work is done. Usually it’s, “Let’s make a deal and then worry about the legal and accounting aspects.” I have found that the preparation of even a simple financial forecast can significantly change the decision making process and as a result I recommend my clients do this when budgeting for the following year or consider acquiring a business.

The demand for vehicles varies each month and fluctuates by manufacturer. Honda may be the hot product for 2011, but Hyundai could be the front-runner for 2012. Many dealers structure their businesses on the premise that they will attain certain sales numbers per month, however when those sales numbers don’t materialize, what is the back-up plan? Usually there isn’t one. I tell all my dealership contacts to ensure they have diversified their product lines so that when one hurts, the others can take over. A strong body shop, used car dept, leasing, parts and so on can help take over if new car sales drop.

Another way to weather the storm is to run a lean and mean operation. Too often I see dealers reacting to low volume in sales by suddenly cutting 10-30% of their overhead. Why is this only done when times are dire? If the dealership could survive on less, why would they maintain such excess? I guess GM set the tone by running ‘FAT’ for many years, and then, when sales volume plummeted, GM reacted just like the dealers by cutting costs and running lean. With increased competition, I hope that running lean will be the new norm rather than a cyclical short-term fix.

In conclusion, it is not only important to set aside money in the boon years, but it is also vitally important to critically review your dealership (with an outside advisor) to ensure you do not have tunnel vision and your rose colored glasses are not the wrong shade. In a later blog I will discuss some of the ‘savings’ options for your company.