tens of billions of dollars banks admit to having written off over
the last few months. It’s a lot – and there would appear to be lots
more to come. The result, as we are regularly told, is that credit
available through banks, their financial subsidiaries and
specialist vehicle funders, is getting scarcer while criteria for
loans are becoming tighter.
One result, at least in the short term, is we could well be
moving into, or close to, a recession as funds for investors,
private borrowers and mortgagees apparently dry up, despite central
banks pouring billions into those same banks to retain
Businesses may well need to move into a new modus operandi. One
challenge which may impact across the motor trade is the relative
paucity of senior executives with management experience in handling
a recession or even inflation. Management in recession is somewhat
different to that in a period of economic growth, or inflation.
Realistically, how many of your senior management team had real
decision-making experience during the last recession?
Back to basics
Consider some of the issues. Risk management will spring to the
fore: how good a risk is the potential client? How stable are your
suppliers? How robust are your finance sources?
Have your prospects arranged their own finance through banks or
from the motor manufacturer’s captive finance house – or, as logic
suggests, might there be a resurgence in the role of ‘dealer as
funder’ with a surge in demand for point of sale finance for new
and used cars?
‘Recession,’ a slowdown in sales or simply a lack of credit may
lead to bargains for those with cash, in the form of discounts or
lower interest rates. Borrowers are therefore likely to be more
closely scrutinised because of the risk aversion of creditors.
Whether there will movements in used car prices, or disguised
discounts on new car prices could be another issue, and that, in
turn will lead to questions for dealer managements regarding
pricing and buy-in strategy for used cars.
From the dealer viewpoint, tight cost management will become
critical. Think of it in terms of margins. A genuine cost saving of
£400 could be equivalent to the margin on a used car – where in
your dealership can you save £400? Realistically, how many blocks
of £400 can you save across the dealership – every £400 could be
equivalent to a car sale – but while still protecting long-term
Cut fat – not muscle
Cost management is critical, and so are new sources of profit. Try
this check list. How many immediate cost reductions, and how many
‘vehicle sales equivalents’ can you find around the dealership
finance activity; equally, how many new profit opportunities might
- Establish alternative forms of finance to compensate for
prospects who may not be able to get conventional loans – look at
point of sale
- Ensure all sales prospects are offered dealer-provided finance
– train and monitor staff further where necessary
- Check your consumer finance sources are all in good order –
what terms – how often does the dealer seek second attempts if one
- Review pricing focus for new and used vehicles – in a period of
poor economics does pricing and margin strategy need revision?
- Do you anticipate a change in customer demand in vehicle
product mix over the next six months, and if so, what actions
should you take?
- Review vehicle stock – especially used vehicles – to ensure mix
matches demand; be willing to reduce absolute stock but speed up
Are such steps negative – or best practice? Whatever route one
takes the critical issue is cash flow management, and ultimately a
leaner business model.
And inflation? Central banks can cut their lending to the
commercial banks at the drop of a hat, theoretically stopping it
before classical inflation gets out of hand. But inflation has
already begun. Oil, food and raw material prices have all rocketed
in the last year. The Eastern Europeans who wash my car at the
local Tesco have just increased their price by a pound – 20 per
cent – and don’t work after 3.00pm on a Sunday – but that could be
a different economic malaise.
Professor Peter N C Cooke, KPMG Professor of Automotive
Management, University of Buckingham
Motor Finance Issue: 42 – April 08
Professor Peter Cooke ,
Published for the web: April 24 08 9:28
Last Updated: April 24 08 9:42