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

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

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.