It's Time to Play Monopoly

Do not pass “Go,” do not keep your franchise agreement

by PETER BRANDOW

In today's game of franchisee survival, only a few things are certain.

State-enacted rules and protections are no longer the controlling law of the land regarding dealers' rights, and very few people will ever again completely trust a manufacturer's word, warranty, or franchise agreement.

Perhaps even more bizarre than a belief that too many dealerships, rather than cheap products, cause failed manufacturers, is certainty that fewer dealers in the marketplace will somehow make failed products fashionable. I was raised to believe that monopoly reduces service levels and inhibits competitive pricing.

Somehow, a country that grew rich on the conviction that anti-trust was pro-American, now has decided that a smaller, less competitive, more monopolistic dealer franchise system will better serve consumers, while at the same time putting easier profits into corporate hands. Less competition does not usually result in increased customer value.

Am I to believe that those same hard- hearted and hard-headed martinets who are cutting dealers off at the knees will become caring, loving merchants as soon as the blood washes from the streets?

What will unhappy customers do when the dealer that has been fighting for them so long is no longer franchised? Will they petition the same Congress, that sanctioned that dealer's beheading, for legislation to insure that the manufacturer not sell more cars than its diminished dealer network can service? Will independent service centers finally have their day?

By what logic will a surviving dealer invest in facilities, inventory or service staff when the name of their once-proud predecessor arrives in their shop on the bumper of every other car to serve a daily reminder that the future is only as bright as this season's sales?

I can't figure out how this latest round of dealer terminations and “participation agreements” (based purely on unilaterally imposed standards thrown down by frenetic manufacturers) won't heighten the antagonism between retailers and manufactures to a level that pummels any chance of dealer investment in customers for life.

If the dealers terminated were too short sighted, what has changed to support their successors in adopting a different strategy?

I am confused by the complete lack of public and governmental demand for regulation over the attention to be paid to individual consumers by surviving dealers.

Recent stories of warranty customers turned away by dealership fearing a lack of payment is just the tip of the iceberg. I didn't see in the calculations put before Congress the historic measure of service costs borne by dealers.

Years ago, the rule of thumb was that as much as 15% of the expenses associated with consumer incentives and warranty service came out of dealers' pockets. Have the surviving dealers budgeted that burden?

The theory that fewer, but bigger, dealers will service customer equally well and cost the manufacturer less, is rooted in the notion that the critical difference between Toyota and Chevy is fewer Toyota dealers.

So if we limit the access to Chevys, they'll become more well-liked. While you're pondering that, recall that every Chevy on the lot has been paid for before it left the assembly line. So tell me again, how piling them up farther from my home will make buying one more attractive or more lucrative to its manufacturer?

We have moved from a society that so loved a discount, that its people are now craving the ultimate bargain, the steal. Customers are hovering in wait to buy over stock at huge reductions. I get calls almost daily suggesting that a good price today will trump the promise of future service.

What's more, dealers themselves are literally tripping over one another to pick over the inventories of recently terminated brethren without sufficient concern that they might be next.

Peter Brandow is a veteran dealer in Pennsylvania and New Jersey.


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Dealership Death Watch: Car Dealer Photos, Car Dealership Pictures, Auto Dealer Pictures

Questions Surround Cash-for-Clunkers Program

AFI - We are all curious about this one.

By Byron Pope WardsAuto.com

Details of the federal government’s “cash-for-clunkers” legislation have yet to be confirmed, but a Ward’s analysis of the program reveals numerous holes and the possibility it may not boost vehicle sales significantly.

Under terms of the Car Allowance Rebate System (CARS), dealers largely will oversee implementation of an incentive that provides up to $4,500 for consumers scrapping used vehicles rated at 18 mpg (13 L/100 km) for new cars that achieve at least 22 mpg (11 L/100 km), or light trucks capable of 18 mpg or more.

Trade-ins must have been insured for the past year - (No pulling out of the backyard allowed).

One potential pitfall of the program is how dealers will provide proof the trade-in vehicles will indeed be scrapped and not wind up on used-car lots, which would negate a primary objective of taking inefficient cars and trucks off the road.

The program is tentatively set to begin Aug. 1, with final rules reportedly due by July 23.

NHTSA spokesman Rae Tyson says the agency “has a lot of details to work out,” but adds careful consideration is being paid to ensure dealers can’t exploit the program.

Potential fraud “is one reason we’re being very careful,” Tyson tells Ward’s. “In order to complete the process, (dealers) have to ensure (the vehicle is) scrapped.

Dealers must first be certified in the program. Go to http://www.Cars.gov for more information.

Following certification, a dealer accepting a trade-in would have to make proper disposal arrangements, then submit documentation to NHTSA showing the process had been handled correctly and the vehicle had indeed been scrapped.

Once NHTSA approves the documentation, the dealer would receive the refund within 10 days.

NHTSA already has warned dealers not to begin signing up customers for the program until the final rule has been released.

NHTSA says in a statement, noting violators face fines of up to $15,000 per transaction.

While NHTSA is working to ensure dealers don’t take advantage of the program, some argue most dealers wouldn’t attempt to do so even if the situation presented itself.

“Some dealers will take advantage, but if you’re going to be blatantly stealing from the government, which that would be, they're going to find out,”

Another issue yet to be addressed is how dealers would prove to NHTSA vehicles will be scrapped, as well as how the actual scrappage will be carried out, Tyson says.

In the U.K., which earlier this year launched its own cash-for-clunkers incentive plan, salvage yards disposing of vehicles must submit documentation available online, along with digital images of the destroyed vehicles, according to British salvage firm Douglas Valley Breakers Ltd.

“One (option) would be to figure out how to render the drivetrain inoperative, or at least the engine; and the other would be perhaps do something to the title to allow it not to be re-titled, or some combination (of the two),”

If the vehicle’s body is in good condition, its parts could be sold off, although NHTSA has yet to decide whether or not that would be allowed. In any case, the priority would be to render the vehicle inoperable, he says.

The program is capped at $1 billion and runs through Nov. 1, 2009, or when the funds are exhausted, whichever comes first.

If the entire $1 billion were used with an average rebate being $4,000, it would result in 250,000 additional new-vehicle sales, barely enough to impact even a down U.S. market, which last year totaled 13,493,165 units, according to Ward’s data.

In May, the U.S. seasonally adjusted annual rate was 9.9 million units. Assuming that figure holds steady, the program would result in a mere 2.5% annual sales increase. If the SAAR improves as many predict, the impact would be even less.

Although European scrappage programs have been deemed successful, it’s largely because their respective markets are much smaller than in the U.S.

Perhaps the most important question concerning the CARS program is what vehicles will qualify.

“There aren’t many cars that get 18 mpg or worse,” Wolkonowicz says. “(The program) is not going to do anything but get trucks off the road, but that’s not its intent. It is a classic example of people (writing legislation) who don’t know anything about (the industry).”

Rikess agrees most car owners won’t qualify for the program, and raises yet another question.

“Affordability is an issue for some people driving 14- (and) 15-year-old cars,” he says. “A typical family with a cash-for-clunkers car couldn’t afford a (new car) payment.”

“The problem for a lot of dealers is if this creates a stampede of traffic and hurts them when they try and figure out what kind of vehicle is eligible and there are a lot of questions from consumers,” he says. “That could eat up a lot of manpower, and the majority won’t buy a car.

“It’s just (going to result in) incremental business dealers wouldn’t have gotten,” Rikess adds. “It’s more of a green initiative than a dealer initiative. It shows politics is the real winner.”

Read the entire article at: WardsAuto.com

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Dealership Death Watch: Car Dealer Photos, Car Dealership Pictures, Auto Dealer Pictures

Whoopee, We're Bankrupt!

Auto Industry Finds Out Chapter 11 Has Its Benefits

by: PETER BRANDOW


Note from AFI: I have been reading Peter Brandows articles in Ward's Dealer Business magazine for the last several years - and am a big fan. It is impossible to find another dealer principal who writes with such clarity and emotion about current events as they affect his dealership and the auto industry as a whole. This article should live forever as the point of view of the dealers who are adversely affected by the madness in today's automotive industry.


Every dealer advocate I know is reeling from the news alerts about Chrysler and GM cutting dealers' throats to right their failing businesses. May 14, 2009 will go down in history as the day our government and Chrysler tore the heart out of our franchise system by endorsing the termination of 789 duly franchised dealers without paying them a dime for cars, parts, tools or goodwill.

GM followed that by announcing it will ax 1,100 dealers. GM big wigs are clearly taking careful notes on how the political and marketing winds are shifting. Their dealer nasty-grams come without the cover of bankruptcy; they've set the precedent for terminating dealers simply because they just don't want to deal with them anymore.

Time will tell whether and where that works. They are seeking absolution based on giving the death-row dealers notice that they may appeal. Could they not even deem to offer stock in the future GM should it prosper from their sacrifice? Clearly the bailout is fueled by the very taxes that suffering dealers paid.

Could it be right that they will be cut out of any way to recoup their investments? I may be cynical, but I suspect that the time they are giving dealers is the hammer with which they are pushing others to buy inventory or risk a similar fate (and this from companies propped up by taxpayer bailout money).

When I closed my Chevy store, I was forced to sell new vehicles for two thirds of what dealers were paying GM for the same vehicles.

Clearly the survivors will have very valuable franchises and improved territories at the expense of those forced out. They should recognize this, as should the manufacturers.

If federal bankruptcy or simple arrogance can be used to sidestep state-legislated dealer protections, even Ford (who prides its self on avoiding such tactics) will not likely resist the temptation of availing itself of some bankruptcy salve.

Once everyone is doing it, and the buying public accepts the “B” word, the spin doctors will turn Chapter 11 into a tonic for fixing the American economy.

But, look out before you slap on a bumper sticker “Bankruptcy — Leveling the Playing Field for Americans.” You're being played.

Chrysler's bankruptcy comes with 789 dealer closings leaving a wake of 38,000 lost jobs — American jobs. That's just the first round. One can only assume that the number of American tragedies occasioned by GM's cuts will take the number of victims to well over 100,000.

Bankruptcy is code for stiffing people who trusted you on the way to a reorganized payday.

Reorganization is a tool not a goal.

We have not yet been informed as to whom the emerging companies will most benefit.

Worse yet, no one has yet completed a plan for success.

We have only identified the first victims of past failure. We still need to find how future products will become popular.

No one seems to be asking that question. Everyone is so fixed on bailing out, that they have not decided who will still be in the boat when the holes are plugged and the ship is able to float unaided.

While forming an opinion on who should live and who should die, we should not forget that it is because the domestics provided so many benefits to our economy that imports were able to limit their investments to immediate profits, much of which was quickly shipped off shore.

This current dealer inquisition is brutal and neither the bankruptcy court nor our economy seems prepared for the potential fallout, or cognizant of the disproportionate sacrifices being made to build a brighter future.

The current gatekeepers have pitted us against each other on the appearance of having a handle on this. Let's hope we're not just helping them to dig a deeper grave and that those lucky enough to make fortunes off these changes not forget the debt they will owe to those suffering to get them through.

Peter Brandow is a veteran dealer in Pennsylvania and New Jersey.

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Dealership Death Watch: Car Dealer Photos, Car Dealership Pictures, Auto Dealer Pictures

The Day After - GM Dealers Get Letters

A strong and emotional article by Greg Goebel



Today, June 2nd, was the day that 5969 dealers received FedEx packages of either good news, a Participation Agreement (OK, it's not-so-bad-news, your franchise agreement may be renewed), or bad news, a Wind-Down agreement and payment of some monies to help you liquidate your inventories.

My phone started ringing early this morning. Five friends/clients all with at least one Wind-Down, and some with Participation Agreements. Shortly after the calls I had copies of the agreements forwarded to me. Out of confidentiality I can't post copies here of the documents, but they weren't short.

Bottom line is that dealer have until June 12th to sign and return the documents to GM. They were absolutely as heavy handed as I predicted they would be in yesterday's blog. Incorrigible.

Wind-down dealers may purchase no more vehicles from GM, but must stay in business through at minimum January 2010, and up to October 31, 2010. They must continue to service and honor warranties. However, they may not return any parts - whether currently owned, or those bought from GM during the 18 month transition. Yeah, that's right. Order a part, have GM ship you the wrong one and you own it, regardless. The RIM program is gone. I have one client that has about $140 in GM parts in inventory. That is going to leave a mark. His Wind-Down incentive? $36K.

The smallest package I heard today was for a nearly new store in a smaller market that is losing Pontiac and Cadillac. (Cadillac was an addition from May 15th). $12,000 is all they get.

There are a number of friends and clients that I have not talked with today. I truly hope no news is good news, but based on the heavy handedness put forth by GM for those that get to keep their franchises (if they comply) there may not be any good news. Dealers are being asked to blindly agree that they "must substantially increase its sales of new [GM vehicles]" and that the dealer will be assigned goals each year that they must meet. (Sidebar: Has a manufacturer ever been overly optimistic on what their market share should be?) They must willing to use their best efforts to "stock sufficient additional motor vehicles" in order to hit these assigned sales goals. MORE INVENTORY?! Have you seen the seven, eight or nine month supplies that some dealers have? They want them to take more?!

No duals will be allowed with non-GM franchises. Expect to have facility upgrades mandated. (That has worked so well for Toyota dealers over the past 12 months...) Oh yeah...one last thing. You agree to indemnify GM and agree not to file suit.

Yes, you may call me cynical, but I am not sure which side got the worse end of the deal. OK, I have repeatedly stated, it is just incorrigible to have your independent profitable business terminated for you, so sure, they are getting the worse end, but I am not sure I would run out and celebrate for the other group. This is the ultimate "shotgun wedding."

Finally, what was my advice? It was simple - sign the agreements. If you don't, you get to pay an attorney to go to battle. Then, should you win the battle (and I assure you it won't be cheap), you still lose the war. You will be grouped with the Old GM assets (what few there are) and all the old liabilities. As wrong as it is, GM's offer is still better than what is being offered terminated Chrysler dealers. It at least gives them some time to plan to do something and a modicum of compensation.

For the rest, take it or leave it. (Wink-wink - we guess it is kind of hard to leave that big expensive facility we had you build.) I doubt the winners will ever forget the gun that GM has put to their heads. Of course GM says they want transparency and to be a good partner. That looks like lipstick on a pig to me...and this is one big pig contract. Sounds like to me they have been associating with some career politicians too long already.

Wow.

AFI's take on this: I hope all these dealers take care in securing all those deal jackets full of customer information. There is a GM dealership where I bought a car from several years ago on this list whose General Manager will be getting a personal visit from me to explain how their red flags and safeguards procedures will be protecting my private information. Keep this in mind if you purchased a vehicle from a closing dealership. What a nightmare - thinking about trash pickers looking through piles of deal jackets and all the info contained therin. Aarrgghh - Please wake me up.


View Greg Goebel's blog HERE


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Dealership Death Watch - Car Dealer Photos

Congress Mulls Significant Expansion of the False Claims Act

AFI: Important to keep in mind as you design your Red Flags Rule program.

From: Metropolitan Corporate Counsel


Originally a Civil War-era statute, the False Claims Act (FCA) was significantly revised in 1986 to protect whistle-blowers who disclose activities at their companies that may defraud the government.

Now this unfamiliar act is at the forefront again as federal bailout money is injected into the economy with a need for greater visibility.

Every entity that does business with the federal government (or does business with another company that does business with the federal government) is potentially the target of an FCA lawsuit.

It is critical that companies take proactive steps to minimize their exposure to FCA lawsuits, such as setting up rigorous compliance programs, employee outreach programs, and putting structures in place to address potential areas of exposure.

Read the rest of the article: HERE


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The Truth Behind OFAC Part 1

by Justina Ly

OFAC checks might seem useless, but not complying could mean 10 to 30 years in prison. Find out why compliance is a good thing and how it can act as a first line of defense.


Bob Morrissey, an F&I manager for Scoville-Meno Honda in Oneonta, N.Y., had heard of others getting a hit, but he had never experienced one himself. That all changed on June 14, but as he said, the experience wasn’t all it was cracked up to be.

It happened on a Saturday. The name of the customer Morrissey was talking to on the phone partially matched a name on the Specially Designated Nationals (SDN) list, a compilation of individuals and groups sanctioned from conducting business in the United States.

Morrissey double checked the name with an online database, but couldn’t clear his customer. Since this was his first hit, he eagerly called the Office of Foreign Assets Control (OFAC), the federal agency that oversees and compiles the SDN list. Unfortunately, as he’d come to find out, the Washington, D.C.-based office was closed on weekends, which meant he’d have to leave a voicemail message with his name and contact information on the department’s automated answering machine.

...

Three days later Morrissey received a call back from an agency employee. He was asked for his customer’s name only, but no other information was requested. “Nothing about address, date of birth, Social Security number or anything,” recalled Morrissey. “He says, ‘No, it’s only a partial hit. You’re OK.’ That’s it, conversation over.”

The casualness and brevity of his encounter with the OFAC employee left Morrissey disenchanted by how the 58-year-old agency handled his situation. “If it was a typical handling of a hit, the process is so flawed that it will yield no results,” he said.

“I’m not asking to make a major case out of a partial hit, but at least there should be more of an effort to be certain it’s a false hit,” he added. “How about asking for additional info to see if there are any other similarities?”

Verifying a Hit

Morrissey’s question is valid for any auto dealer that comes across a partial or full OFAC hit. What are dealers suppose to do when their compliance solution indicates a positive hit? The answer is simple, but it may also confound dealers who get OFAC hits.

Officially, the OFAC office advises business owners who think they have a hit to contact the government agency’s 800-number to verify their customer’s personal information. An agency representative will ask for a customer’s first and last name. If there is not an exact match, then the dealer is free to conduct business with the customer.

However, if there is a match, then the representative will ask for more of the customer’s personal information, such as address, nationality, passport, tax ID or cedula number, date of birth, place of birth, former names and aliases, until the hit is verified.

The process is straightforward and low-tech, which is why dealers such as Morrissey question why the OFAC does not take a more rigorous approach to verifying customer information. Aside from asking a series of questions, the department does not employ any other method for validating an individual’s identity. To the agency’s credit, its staff is well versed on compliance issues involving financial institutions and other businesses, but only provides limited service to dealers with questions.

The agency takes thousands of calls each year from businesses nationwide, but has no record of how many of those businesses included automotive dealerships, said John Rankin, a former spokesperson for the OFAC. The agency also has no record of partial or full hits reported by auto dealers.

In addition, OFAC does not mandate that dealers use a specific compliance process to conform to its regulation. “We recognize that all businesses are different,” Rankin said. “What works for a huge operation might not work for a smaller outfit.”

Rankin said that hits recorded by a dealership’s compliance solution may be related to another list, such as the FBI’s Most Wanted List or the State Department’s Debarred Parties List. That’s because lists from various government and international organizations are often lumped into one database, and used by compliance solution providers. So, if a dealer runs a credit bureau report on a customer, it’s possible his or her name will be screened against all of these records.

“It’s important that businesses understand the list and think about what process they have to make sure it’s a false positive or if it’s actually a real name,” Rankin said.


NEXT: The Truth Behind OFAC Part 2


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The Truth Behind OFAC Part 2

Origins of OFAC and the SDN List:

Good info.

The OFAC became actively involved in scrutinizing cash and other transactions with foreign nationals under the USA Patriot Act, which went into effect after the Sept. 11 terrorist attacks in 2001. Since then, the agency has monitored auto dealerships and other businesses.

The OFAC was originally created in 1950 during the Korean War in response to President Truman’s order to block all Chinese and North Korean assets subject to U.S. jurisdiction. The agency operates under the jurisdiction of the U.S. Department of the Treasury, and continues to be responsible for the administration and enforcement of the federal government’s economic and trade sanctions.

The agency’s SDN list is a 400-page document that contains more than 6,000 names of individuals and groups who are “owned or controlled by, or acting for or on behalf of, targeted countries.” The list also includes names of individuals, groups, and entities, such as terrorists and narcotics traffickers, designated under programs that are not country-specific. The assets of these individuals and groups are blocked and U.S. persons are generally prohibited from doing business with those on the list.

The SDN list is updated frequently, but not according to a predetermined timetable. The OFAC makes the list available to the public in a PDF or text document format through the agency’s Website. Users can search the list manually or use the “find” feature in the Adobe Acrobat Reader program to locate a name. Another option is to employ compliance software solutions to automatically screen a customer’s name against the list.

Effective Use of the SDN List:

Although the outcome of most inquiries can be anti-climatic, the agency’s SDN list is a good first line of defense for some dealers. “I think it’s a great regulation,” said Bob Dixon, an F&I manager at Lewes Auto Mall in Lewes, Del.

Dixon uses the OFAC checks to demonstrate the care his dealership takes with each customer, as he will often take the time to explain to customers what the OFAC screening entails and how it benefits them. He’ll even show customers their results from the OFAC test. “I show them the check mark and they’re impressed with it,” he said. “I haven’t had any complaints. It’s one extra step that protects us and them.”

That extra step may seem tedious, especially considering the numerous compliance regulations dealers must abide by. But it’s a step that must be taken, said Mark Thaw, a certified public accountant and partner of Morrison Brown Argiz & Farra LLP, an accounting firm that specializes in automotive dealerships.

“We are in some form of a financial crisis in the country. [F&I managers] are trying to make deals fly at all costs,” he said. “It’ll be more difficult for businesses to turn away customers, which leave the doors open for potential problems.”

Thaw said dealers must remain vigilant when it comes to compliance, as regulators and plaintiff attorneys are well aware of the pressures today’s credit crunch is putting on dealers. That’s why he recommends that dealers employ technology solutions that check for OFAC and other legal regulations. If anything, he added, software compliance tools demonstrate to state and federal regulators that the dealer is putting forth a good-faith effort to remain compliant.

But dealers can’t simply depend on technology to verify customer information. Morrissey points out that criminals or terrorists designated on the SDN list are savvy, and less likely to be caught using real forms of identity. “If someone is trying to pull a fast one, what are the chances they are going to give you the exact name? They’re not going to serve themselves on a silver platter,” he said.

The ease of using fake or stolen identities is one reason why Morrissey believes OFAC needs to shore up its defenses. He supports the OFAC regulation on credit and cash auto retail transactions, but believes F&I managers need more support in the case of an actual hit.

“If we’re going to add on the expense for compliance and burden F&I personnel, it seems like there should be additional support when a hit comes up,” he said. “What happens if someone tried to spot deliver a vehicle?”

His question is one that OFAC does not have a response to. “There is no simple rule for what an auto dealer should do if he or she is sure that he or she has a correct match to the list,” wrote OFAC’s Rankin in an e-mail. “As I said, such a circumstance would be very rare. In all cases, it is best to contact OFAC for guidance.”

Morrissey said he relies on his compliance solution provider’s instructions to verify his customer’s information. “It gave you steps to investigate further, the number directly for OFAC, and described what steps you could take,” he said. “It was more than thorough.”

However, he still did extra legwork and asked his customer additional questions about her profession. “She worked in the educational field and came up with names of people that I knew who worked in that district,” he said. Having a better idea of his customer’s background gave him the peace of mind to close the deal.

Although software solutions and online databases provide dealers with an instant method to verify a customer’s name, it never hurts to ask a few questions. What F&I managers need to remember is that the dealership and its profits are vulnerable, which is why F&I managers must be vigilant and use every tool available to them.

“As much as you detest or hate this, you don’t have a choice, because it’s a threat that can put you out of business in a worst-case scenario,” Thaw said. “At a minimum it’ll cost you money just with the lawyer, and dealerships don’t have money to do that right now.”


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