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

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

Getting a new car? Should you lease or buy?

The discussion of lease vs. buy has been discussed in various publications over the years and I am not going to bore you with the basics of a lease vs. buy analysis. I just want to write a little bit about my experiences with buying a new vehicle and hopefully some of my readers can relate and provide some feedback.

I will attest that the starting point of acquiring any new vehicle should be based solely on choosing the car you want to drive for the next 4 years or so, not based on manufacturer rebates, cash incentives, 0% finance rates and so on. Making a decision on that basis will undoubtedly ‘get’ you into a car that you will likely regret 1-3 months after acquiring it. Focus on the car you want and then look for every possible avenue to acquire this vehicle, whether it’s new, used or certified.

From a purely financial point of view, it is easy to prove that purchasing a vehicle is more cost effective than consecutive leases if you plan to drive the car long-term and you do not encounter serious maintenance issues. However, I, along with many other buyers, look at variables that have nothing to do with finance when buying cars. There is also value in the option of driving a new vehicle every 3-4 years, not having to worry about paying for service costs and so on.

To provide a very simple example, I will compare the cost of leasing versus buying if you:

1. lease a vehicle that has a $20,000 MSRP for 3 consecutive terms of 4 years each, with a 50% residual at a 0% lease rate; or
2. purchase the same vehicle and drive it for 12 years. 

Under a lease you will pay $30,000 to drive the car for 12 years, and under a 0% finance arrangement you will pay $20,000 to drive the car for 12 years. I have not built in maintenance costs or fair market value (FMV) of the used vehicle after 12 years, but holding these factors equal, you have saved $10,000 in this example.

Clearly if you are looking to buy a car and drive it for 12 years you need to ensure you do some homework and buy a car with low maintenance costs and high reliability. If you are leasing a vehicle, these factors are not relevant because most likely all maintenance costs, with the exception of wear and tear will be covered by warranty in the lease period. Once you start to cloud the formula with interest rates, expected maintenance and so on, you may end up with a different answer.

Over the last 20 years or so I have owned approximately 10 different vehicles. When I add up the cost of what I paid for those 10 vehicles, it’s about 5 times higher than if I had driven each car for 10 years. It’s not uncommon to see cars on the road that are 10 plus years old and, if they are well-maintained, they can look almost brand new. Each time I leased or purchased a vehicle I knew that I was only going to drive it for 2-3 years before I got bored and wanted something new.

This is where the advantage of a short-term lease comes in. If you don’t plan on driving the car for more than 3 years, a lease is your most cost effective option because it allows you to walk away after 3 years versus having to sell the car to the dealer. The lease arrangement builds in a residual value that should approximate the FMV of the vehicle after 3 years, but based on my experience the residual is typically higher than the actual FMV and therefore you will pay less in the end than you would have if you bought the vehicle and sold it after 3 years.

To further complicate the matter, several manufacturers have discontinued the practice of leasing vehicles and are pushing customers into a strong finance arrangement. This comes back to my discussion earlier on with regards to first starting with the car you want and then looking at how to structure the deal. If you are adamant that you want to lease a car and the manufacturer does not offer a lease, there is always the option of leasing from a third party leasing company. This option will cost more, but it will give you the option of moving out of your car earlier.

-- David Hertzog