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How to Worry about Mobility

October 2, 2017

I was impressed by this article, How to Worry about Climate Change.  It was neither activist nor skeptical, but rather placed the threat in an appropriate policy context.  So, I was inspired to update my earlier post on the “mobility revolution.”

McKinsey has some new research out which, I feel, overstates the case.  The case, as you may recall, is that four trends will come together in some kind of perfect storm:

  • Electrification
  • Connectivity
  • Autonomous driving
  • Shared mobility

The best research on mobility is still this series of papers from the BCG.  Like me, BCG is reserved about the U.S. market.  I strawman McKinsey a little by focusing on U.S. car dealers.  Their focus is on manufacturers, with a European orientation.

The right way to worry about mobility is to ignore the interaction effects, and look at each trend individually.  This is where I differ from McKinsey.  They model three different outcomes – small, medium, and large – for each of the four trends.  This gives them eighty-one different scenarios to evaluate (consultants love this stuff).

Electric Cars

My local BMW dealer has a lot full of i3s and i8s.  Electric cars won’t change auto retail at all – service, obviously, but not sales.  This “revolution” only affects dealers if Tesla succeeds in doing it without a dealer network.  From my perspective, not having a dealer network is a weakness, and a sign that the company lacks confidence in its product.

Connectivity

It turns out Jacques Nasser was right.  Kids today will ride in a hamster box as long as it has satellite, wireless, navigation, and a sound system.  Gone is my generation’s enthusiasm for hemi heads and dual overhead cams.  No one drives a stick anymore, and the steering wheel will be next (see below).

Connectivity will change auto retail the same way electric cars will – new features to sell and service.  I have the BMW connectivity app on my iPhone.  Connectivity in terms of telematics will open up new opportunities for service retention, as I described here.  There are new opportunities in F&I, and even lot management, as people invent more things to plug into the OBD port.

Autonomous Cars

I am deeply skeptical about self-driving cars.  People who promote them tend to focus on SAE level four, and overlook the greater challenge of full autonomy.  I see self-driving in limited contexts, like self-parking and advanced cruise control.  Check out BMW’s lane-departure technology.  This is cool stuff, and what it means to car dealers is … more expensive cars!

Remember that the nightmare scenario for self-driving cars only occurs when the cars are smart enough to be widely shared, i.e., robot Uber drivers.  A car that can autonomously drive the kids to school is years and years away.

A close examination of the technologies required to achieve advanced levels of autonomous driving suggests a significantly longer timeline; such vehicles are perhaps five to ten years away.

Like “catastrophic anthropogenic global warming,” that date keeps moving out as we approach it.  In 2012, Sergey Brin said self-driving cars would be widely available by 2018.  In 2016, Mark Fields said no steering wheel by 2021.  McKinsey, in any year, always says, “five to ten years from now.”  For a clear-eyed look at the challenges, see here.  For more about luxury driver assistance see here.

That about does it for my deconstruction of three mobility trends that should not worry car dealers.  Next week, I’ll report on that fourth one.  Now that I am living in a big, modern metropolis, I can see shared mobility first hand.  I may not even need a second car.

Wanted: Experienced F&I Trainer

July 26, 2017

I am in the process of creating an eCommerce department for Safe-Guard.  Regular readers know that I specialize in creating new organizations, and my record is pretty good.  The training function, which is also a kind of sales function, is likely to grow.  So, this is an opportunity to get in early.

The job is to train all of the F&I managers who sell products administered by Safe-Guard, and ensure they know how to present them properly using any of the top ten menu systems.  For one person, at least to begin with, this will be a challenge.  We are in thousands of dealerships.

Thus, the successful candidate must have the skill and temperament to leverage the resources of our affiliated agents, vendors, manufacturers, and dealer groups.  Self-starter.  Travel.  Proficiency in F&I procedures and software, notably menu systems.  Salary commensurate with experience.

How to Go Freelance

July 19, 2017

Since I posted Why I Freelance a few months ago, people have been asking me for advice on how to get started.  So, this week I fulfill a promise to share some pointers.

There are probably books on this, and they’re probably better organized, but here is my experience.  We start with the easy stuff:

 

 

  • Form a legal entity. I have tried various forms over the years, including a Latin American SA.  What I recommend for you is an LLC.  This leaves you free to elect C- or S-Corp tax status later – and you don’t need a lawyer.  You can form an LLC online for a few hundred dollars.
  • Draft a consulting services agreement. For this, you will need a good lawyer.  It is always better if you can send a prospective client your standard contract.  This frames the negotiation in terms favorable to you.  Pay special attention to the non-compete terms.
  • Find a good accountant. If you are good at tax prep, and using a “disregarded entity,” you may be able to do the firm’s returns on your own.  Otherwise, seek professional help. Pro tip: pay Uncle Sam quarterly to avoid a surprise at tax time.  Canadian pro tip: keep your HST receipts in a separate account.
  • Choose a tax status. The last time I was incorporated in the U.S., I used an S-Corp.  This is a hassle because you have to deal with payroll tax.  It was handy for me because I was able to have my wife on the payroll.  The Canadian version of this is called “income splitting.”
  • Set up a web site. No, don’t look at mine.  It’s overdue for an update, and this here blog is my main presence online.  Depending on how you plan to market yourself (see Networking Tips for Consultants) you will spend more or less money on the web site – and you may have to learn about SEO.
  • Open new bank accounts, and obtain a corporate credit card. Using the corporate card is an easy way to keep your business expenses separate, and it’s a source of working capital.  When I started at GMAC, it was months before I got paid, and I had accrued thousands of dollars in expenses.
  • Learn how to use QuickBooks. As you can tell by now, keeping the books is a big part of running your own business.  You will need to keep track of your accounts, and payroll, and 1099s, and present your clients with professional-looking (and accurate) invoices.
  • Obtain health insurance. I can’t help you here.  I haven’t lived in the U.S. since Obamacare took effect.  I understand it’s expensive.  At present, I have an international Blue Cross policy.  Depending on your tax status, this is deductible on either your business or your personal return.
  • Plan your budget. Figure out how much income you need to pay the bills, and then figure out how you can earn that much – after taxes – assuming you are on the beach for three months of the year.  That’s a sardonic Big Six expression, “on the beach.”  It does not mean happy hour in Playa Bonita.
  • Identify your prospective clients, as specifically as possible, and where they’re located. Unless you have a versatile skill set and live in a high-demand area – developing software in Seattle, for instance – you will be on the road.  I could write a whole ‘nother article about living on the road.

I presented the easy stuff in a short list that you can print out and check off.  Now, the hard question is, why should somebody buy what you’re selling – and for how much?

As of this writing, I know that I can rent a good software developer for about a hundred dollars an hour, and down to $65 for newbies.  The rental agency may keep up to 25% of that, which is not the scam it sounds like once you consider they have to do all the stuff on that list – plus find the gigs.

If you can possibly manage it, work under contract for whatever agency serves your trade – they’re ubiquitous – and learn everything you can about how they do business.  Learn how they handle sales, contracts, billing, payroll, benefits, beach time, and something called “realization.”

Your situation will depend on how old you are, and where you are in life.  The best way to start is with a firm, while you’re young, and before you have kids.  Consulting can be demanding.  If you have a family, I recommend keeping your day job, and then picking it up after the kids are grown.  I know a bunch of successful “mature” consultants.

I was fortunate to start in a Big Six firm (there are four now) that taught me how to manage clients, how to sell an engagement, and how to write a statement of work.  I had classroom training, role playing, one-on-one instruction, and a whole lot of hard knocks.  That early experience was priceless – and I can’t distill it into a blog post, sorry.

The good news is that I was a lousy staff consultant.  All of this stuff is trainable.  I hope these few pointers from me will help you to make the transition.  On the other hand, if you’re having second thoughts – that’s valuable too.  It’s not for everybody.

New Consolidation Stats from NADA

July 11, 2017
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I chose consolidation for the first of my megatrends series, because it’s the least controversial.  Everyone seems to know it’s happening, and the records and rankings in Automotive News are dominated by big groups.

Ten years down the road, we don’t want to be the 13-point dealership group feeling that pain from the larger groups the way the smaller ones are now

This year, for the first time, NADA Data takes a look at consolidation.  Probably the best single number to look at is the ratio of rooftops to dealers, which represents the average number of stores in a dealer group.  This has grown from 1.8 to 2.2 over the last nine years – not exactly a revolution.  I was a little surprised to see such small numbers, but this is an artifact of how NADA presents the data.

NADA, logically enough, presents the number of dealers owning a group of a given size.  I would have preferred to see the number of stores, not owners, in each category.  This is a better reflection of the market coverage.  To show the distinction, I plotted the total count of both rooftops and owners.  You can see that, while the number of rooftops is recovering since 2010, the number of dealers is not.

Next, I recast the data in terms of rooftops.  The number of rooftops belonging to groups of ten or more has almost doubled over the period, from 12.2% to 21.3%.

Below, I have plotted the number of rooftops in three tiers, by size of the dealer group to which they belong.  The 2 to 10 tier has been remarkably stable, numbering roughly 8,200.  The single points have been in steady decline, losing 2,500 over the period.

Dealers know that single points are vulnerable to market shocks and competitive pressure, if for no other reason than being tied to a single make.  On present trends, we can expect them to vanish entirely within ten or fifteen years.

Optimal IQ for Managers is 120

June 26, 2017
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It has now been proved that you can indeed be too smart for your own good, at least in a business context.  New research shows that the optimal IQ for managers is roughly 120.  This theory is based on dividing the bell curve into three regions:

Let’s say that your IQ falls at the point marked above, which happens to be the optimum.  The colored bands show the size of three groups:

  • To the right (blue) are people who are smarter than you. They may like you, but they will not look to you for any difficult decision.
  • To the left (yellow) are people somewhat less smart, within 16 points. They respect your intelligence and look up to you as a leader.
  • To the far left (grey) are people who do not understand you at all. They think you are arrogant and condescending.

The theory is that the optimal IQ for leadership falls at the point where the size of the middle group, minus the size of the smarter group, is greatest.  A little calculus finds this optimum at 1.2 SD, or roughly 120 on the standard IQ scale.  Other theories have generally assumed a continuously positive effect of increasing IQ, but with diminishing returns.

Researchers plotted intelligence scores versus perceived leadership attributes, for a large sample of middle managers at seven multinational companies.  All attributes, like the one shown below, had a maximum value around 30 on the Wonderlic scale, or 120 IQ points.

I have long suspected that medium-bright students, who must struggle to make good grades, end up more successful than the super smart ones who breeze through school.  Throw in some military experience, and you’ve got the perfect employee.

Of course, this is in a corporate context.  It assumes you are working with a reasonably large group of people having normative IQ distribution.  There have been no studies yet on scientists, engineers, or professionals in private practice.

So, if you are languishing in your company’s IT department, maybe you are just too smart to be a manager.  I’ll see you at the Star Trek convention.

Car Dealer Megatrends – Conclusion

June 14, 2017

This is the conclusion of my series on car dealer megatrends.  The first three articles covered the long running trend toward consolidation, steadily improving process maturity, and disruption from new technology.  Like all good megatrends, these three flow together, reinforcing each other to produce a sea change in the industry.  Consolidation means bigger groups with more money to spend on technology, and the scale to exploit improved procedures.

Big dealer groups crave stability, and repeatable successes.  In my trade, software development, we have a formal process maturity model.  The bottom rung is where your success depends on “heroes and luck.”  When you own 20 stores, you are less interested in one superstar killing the pay plan, and much more interested in a hundred guys making base hits.  If you are not clear on this, I recommend the movie version of Moneyball, featuring Brad Pitt as Billy Beane.

We’re making less per transaction, but we’re doing more transactions.

I work mainly in F&I, but you can see the same general idea in the velocity method for new and used car sales.  That idea is margin compression.  The quote above is from Paragon Honda’s Brian Benstock and, last I checked, he was still hard at it.

The locus of high gross shifted from new cars to F&I, and then from finance to products.  Smart people tell me the 100% markup on products will soon be ended, either by competition or by the CFPB.  Today, when you read about the latest PVR record from Group 1 (or whomever) you will also read management downplaying expectations of further such records.

The executive, however, said the group’s F&I operations may have reached the peak in terms of PVR.

Dealership ROI is above 20% but, as you know, highly cyclical.  The stock market has been around 14% lately and, arguably, less volatile.  AutoNation has been chugging along at a steady 10%.  Investors will accept a lower return, in exchange for stability.

AutoNation was founded in the era of big box retail.  My colleague there, Scott Barrett, came from Blockbuster.  It was always our intention to remake auto retail in the image of Circuit City, which, by the way, was the parent of CarMax.

I spoke with an ex-AutoNation executive recently who told me that learning to live with margin compression is an explicit part of their strategy.  It is an iron law of economics that, in a free market, competition will drive margins toward zero.

Have a look at this NADA chart.  In five years, gross has been cut almost in half.  This is a breathtaking diminution, and then you go on the industry forums and find people bitching that vAuto has cut used car gross, and TrueCar has cut new car gross, and now some idiot proposes to cut F&I gross by putting VSC prices online.

Marv Eleazer has called this a race to the bottom, and he’s right, but this is not a race you can opt out of.  That’s not how competition works.  Think of it as a race run in Mexico City.  The smart dealers and big groups are already training to compete in the thin air of lower gross.

Cox Automotive Double Play

June 9, 2017
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It is time to break out your game board once again and play “link the subsidiaries.”  I heard this one recently from a Cox person at a conference.  I don’t know if they have it in production yet, but it sure sounds good.

If you authorize vAuto to source new inventory as it sees fit, then it can connect to Manheim and automatically place the orders.  As soon as the gavel goes down, Dealer.com can pick up images and data from Manheim and immediately begin merchandising the vehicle.  Cox also owns the logistics company that hauls the vehicle, so they can report when it will arrive on the lot.

So, you could conceivably have a customer walk in to buy a vehicle that is arriving today, with the entire sourcing cycle untouched by human hands.  In fact, this sounds a little like what I described in Cox Automotive Home Game.  No mention (yet) of the COXML message format.

Update:  Details here from Mark O’Neil.  The chain goes: vAuto, Stockwave, Manheim, NextGear, and then Dealer.com.