September 1, 2009

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Article

High-Mileage Measures

Companies Maximize Fleet Vehicles; Impact Auto Industry Woes

By Tom Haraldsen

September 1, 2009

In the early 1980s, Chrysler Corporation introduced something called the K-car, a radical change in design that prompted a lot of skepticism in the auto industry. Lee Iacocca, he with the last name that was an acronym for his eventual title (I Am Chairman of Chrysler Corporation America), initially presented the design idea for the K-car to the Ford Motor Company while he was working for them (along with the Dodge Aries and Plymouth Reliant). But despite the fuel-efficiency those cars promised, Ford rejected the designs, and three years later, as chairman at Chrysler, Iacocca produced the cars to help the financially drained company. Those vehicles became the brunt of a joke in 1981 when comedian Johnny Carson referred to the still-in-design-stage K-car during one of his monologues on “The Tonight Show.” “If this car sells, Chrysler will produce a second one immediately,” Carson quipped. The joke was eventually on the competitors, as in the midst of the nation’s recession in 1981-82, those Chrysler products sold rapidly. Sitting Idly Almost 30 years later, the U.S. auto industry is in nearly the same boat—or more accurately, the same listing ship. Chrysler and General Motors filed for bankruptcy, even after securing government loans to stay afloat. Ford was teetering near the same jagged cliff, but somehow avoided the fall, at least for now. Utah has not been immune from those challenges, as evidenced by the decisions of both Chrysler and GM last spring to pull the plug on many dealerships across the country, including some here at home. Fleet vehicle sales have especially felt the dramatic impact of the economic downturn. Long a mainstay for the Big Three automakers, fleet vehicle sales have plummeted over the past year, and ironically, Detroit may only have itself to blame. “It’s cycler in a sense, because cars today are of better quality and are coming with better warranties, and that’s extended the amount of time that car owners hold on to them,” says Steve Bendt, fleet sales manager for the Young Automotive Group in Layton. “When owners would normally look at buying a new car in three years, they are now driving them for four or five years. I’ve been in the business for 35 years, and I’ve seen a lot of changes, but there’s no question that compared to the past, our fleet sales business is markedly slower.” Bendt’s dealership works heavily with state government offices, the largest purchaser of fleet vehicles in Utah. He says that a few years ago, the state consolidated its purchasing procedures and simplified the way it dealt with fleet purchases. That has worked well, and a number of state vehicles have been replaced in rotating cycles for the past 10 years. But things have changed. “Normally, I’d sell maybe 600 to 700 fleet vehicles during a fiscal year, but thus far, we’re down about 50 percent in volume this year,” he says. “When the new model year begins, we’ll be hard-pressed to come anywhere near our average number.” Tony Schnurr, president of the Larry H. Miller Auto Dealerships says many companies are extending the use of their fleet vehicles. “Cars that are normally recycled are being kept in service longer. We’re even seeing that with car rental companies.” The Church of Jesus Christ of Latter-day Saints is one of the largest customers in the LHM Dealership mix. Though Church officials declined to give Utah Business magazine information about their operation, some church employees and many of its missionaries use vehicles from an auto fleet. Schnurr says the LDS Church is also more conservative in rotating its fleet. A Bumpy Road As General Motors announced its restructuring plans before going into bankruptcy in May, it chose to drop several model lines from future production, including Pontiac. Bendt says that decision was likely impacted by the fleet car business. “We didn’t sell a lot of Pontiacs or some of the other GM products that have been discontinued in our fleet sales,” he says. “Chevrolet has an impressive police car package on its Impala line, one which many cities are purchasing, and I’m sure that was behind the reasoning to close down Pontiac production. GM will use those plants and assembly lines to make the cars they’re getting the most orders for, and Pontiac was not one of them.” Another challenge facing dealer-ships—lead time. Even before the recent bankruptcies at GM and Chrysler, some plants were shuttered and others retrofitted for only certain makes and models. Through last January, the normal lead time for a car being produced and transported to a dealership was 60 to 90 days. As of last July, that lead time has been extended two to three weeks. “With the economy shrinking, production has been cutback, and delivery has been slowed,” Schnurr says. “It still varies a lot, but we aren’t getting vehicles as quickly as we have in the past.” Bendt says in some cases, vehicles were produced and sitting idly at the plants because, as those plants were shut down for a few weeks, there wasn’t anyone working to transport the finished vehicles to the rail lines for shipping. “From a dealership standpoint, we had cars floored (sitting to be sold on a consignment-type basis) without new car orders coming in. So the slowdown in one sector bled over into many others.” Both Bendt and Schnurr also acknowledged an increase in consumer preference for used vehicles. “More people are buying used cars,” Bendt says. “It comes down to dollars and cents for a lot of customers, and used cars usually come with a lot of their warranties left and a price tag that’s several thousand dollars less than a new vehicle.” In April, the State of Utah announced plans to spend $4.5 million, doubling its fleet of compressed natural gas cars and gasoline-electric hybrids in its fleet of 7,400 cars. Margaret Chambers, director of the state’s Division of Fleet Operations, says seven to nine new CNG vehicles and 150 hybrid vehicles have been ordered, while 75 gasoline-burning vehicles will soon be converted to run on natural gas. All of the new vehicles are late 2009 models from Ford, Chrysler and GM. “We’re fortunate in that we order our vehicles in a large fleet order, and the manufacturers turn their assembly lines to fill those orders,” she says. “We’ve had no problem or delay in getting our new fleet vehicles.” The increased popularity of hybrid vehicles could be a good sign for the auto industry, but it also presents some challenges as well. “There is still low volume and loads of mandates that come with producing hybrids,” Bendt says. “One of Chevy’s most popular models is the Malibu hybrid—but it still costs $8,000 to $10,000 more than the regular Malibu. So consumers still have a decision to make between price up front and the overall cost savings of fuel efficiency [and the environmental advantages] of a hybrid vehicle.” “I think the gas crisis of last year was a wake up call for everyone,” Schnurr adds. “It really brought to the forefront the importance of having domestic manufacturers focusing on fuel-efficiency and the environment.” The Road to Recovery It was Iacocca who took advantage of the auto industry’s first government bailout in 1979. But Chrysler didn’t actually receive any money, only government guarantees on the loans the corporation took from banks. Iacocca used that guarantee to create the three front-wheel drive models that saved the company and led to the creation of the minivan, an industry leader in sales for the next 25 years. Can recent government intervention salvage things again? “There is hope, and it’s on the horizon,” says Craig Bickmore, executive director for the New Car Dealers of Utah association. “Yes, sales dropped dramatically in the past year, but the last numbers I saw [for May] showed sales of U.S. automakers were starting to increase, and we take any incremental sales increase as a good sign.” He says Utah auto dealers are resilient, even those whose franchises may have been pulled by downsizing at Chrysler and GM. “These are world class business people, they truly are,” he says. “This is an industry that’s very entrepreneurial. These dealers have dealt with adversity before, with trying times, and they will survive again. I have great faith in them and feel the industry will come out of this. Utah auto dealers are wonderful individuals, wonderful business people. They’ll be there.” Schnurr agrees. “I think it can be turned around. It’s sad to see everything that has taken place, but it will make us stronger. The automobile industry is a big part of the American economy, and we’ve faced problems before.” Throughout the 1980s, Iacocca produced company commercials with the slogan, “The pride is back.” GM and Chrysler have produced similar messages in their advertising and promotion since restructuring began. Will it work? “I truly believe that we need to stress the concept of ‘Buy American,’” Bendt says. “We are making great cars. We are offering wonderful warranties. Service is better than ever before. We can bring that pride back.”
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