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CATA Bulletin
August 13, 2018


2 factors may be behind rise in used-vehicle sales

August 10, 2018

The retail used-vehicle market likely is benefitting — at the moment, at least — from pulling over and pulling ahead.
That is to say, a value proposition that is pulling would-be buyers of traditional cars in the new market over to the used market; and the specter of proposed automotive tariffs that may be leading dealers to buy used inventory ahead of such measures going into effect.
Analysts with Cox Automotive posited those theories during an Aug. 1 conference call with reporters.
Used a better buy than new, for some
The conference call came right after a month in which used-car sales were expected to reach 3.4 million, according to a late July forecast from Edmunds, a sum that would beat June used-car sales of 3.2 million units. That also would translate to a used-car seasonally adjusted annualized rate of 39.5 million units, compared to the used-car SAAR of 39.2 million a month before.
The used-vehicle sales growth is amid what Cox Automotive senior economist Charlie Chesbrough described as a "huge reduction in the car segment" in the new-vehicle sales market during July.
"[Sales for traditional cars were] down quite a bit on a year-over-year basis, and certainly more than what we were initially expecting. And we think one of the things that might be going on is that car buyers are moving into the used-vehicle market," Chesbrough said.
"One of the things that we saw in our recent data from our auction activity is that used-car prices are above their normal July levels. And so, we think that there’s probably a number of folks that are looking for buying opportunities in the used-car market," he said.
"Buying that same 3-year-old version of that new car in the used market at a 30-,40-, 50-percent discount or getting that crossover vehicle — 3-year-old crossover vehicle — for essentially the same price they would pay for a new small car in the new market."
In a news release issued ahead of the conference call, Kelley Blue Book analyst Tim Fleming said the monthly new-vehicle market share for car segments was likely to be 31 percent, compared to 36 percent in July 2017.
"Consumers clearly are favoring utility vehicles over cars," Autotrader executive analyst Michelle Krebs said during the call.
"What we think is exacerbating the decline in [sales of traditional new cars] is the fact that there’s this plethora of used cars, and more importantly, a richer mix of utility vehicles coming off lease and back on the market," she said. "And we do know that affordability is becoming more of an issue, so the used vehicles provide a value alternative to new vehicles. And there’s the richer mix in terms of utility."
To that end, Krebs said that affordability is starting to be concerning even to luxury vehicle shoppers, according to recent survey data from the company. And if value in general is that important, it raises an interesting choice.
"To Charlie’s point, if you’ve got $20,000 to spend and you can buy a new compact car or you can buy a 3-year-old compact sport utility, hmm, what are you going to choose?" Krebs said.
The recent quarterly results from public dealership groups "reinforces that notion," Krebs said, as they have shown "very heavy reliance on the used-car market for a lot of their growth."
String of used-car gains continues for publics
At Sonic Automotive, for instance, its EchoPark standalone used-car stores were a bright spot in the second quarter amid disappointing new-vehicle margin erosion at the dealership group’s BMW and Honda dealerships.
Its same store, new-vehicle revenue in the quarter grew 1.6 percent, driven by higher average selling prices, but gross profits dropped 6.3 percent because of lower margins.
The EchoPark stores were "profitable as a group" in June, Sonic executive vice president of operations, Jeff Dyke, said during the company’s second quarter earnings call on July 27. EchoPark’s seven stores made more than $1 million in June, and were tracking to exceed that amount in July. The company expects its EchoPark operations to generate about $15 million in profits next year.
EchoPark’s retail sales of 7,459 units in the quarter were more than triple its unit sales in the second quarter of 2017, the company said. EchoPark stores generated $180.2 million in revenue, which was also more than triple its revenue in the year-ago quarter.
"I’m most proud of the topline revenue growth experienced in our EchoPark stores as we continue to open new stores, and our ramp up period is shortening and volumes are building at a more rapid rate," Sonic president Scott Smith said during the call.
Sonic isn’t the only public dealer group with some used-car momentum.
In 34 of the past 36 quarters, same-store used-car unit sales for the seven public dealership groups (which includes Carfax) have climbed, former Cox Automotive chief economist and current Auto Remarketing contributor Tom Webb said via Twitter [4] on Wednesday, citing company earnings. (That said, used-vehicle retail gross margins for those groups were down again, Webb wrote).
Tariff impacts 
Another factor perhaps driving the strength in the used-vehicle market is dealer reaction in anticipation of the impact from the proposed auto tariffs.
"On the used market, we might be seeing some early pull-ahead activity, where … many dealers are buying inventory to try and get ready for [the proposed auto tariffs] if and when they go into effect, which probably wouldn’t be until later this fall," Chesbrough said.
Dealers perhaps are aiming to acquire used-car inventory before these proposed auto tariffs are effective, as they’re apt to increase used-car prices, Chesbrough explained.
In comments provided by email in early July, PureCars chief executive Sam Mylrea echoed much of the same sentiment about used cars being a more cost-effective alternative, while also touching on the potential price impact of proposed auto tariffs.
"There is still a high demand for used cars because when high-quality, off-lease cars are returned to dealerships, consumers are presented with a cheaper alternative to purchasing a costly new vehicle," Mylrea said. "Prices for new cars are on the rise, and as leasing continues to grow in popularity, prices continue to go down in the used car market. Put simply, used cars are often the most realistic purchase for car shoppers.
"Given the pending automotive tariff, however, there’s a chance that used-car prices could skyrocket alongside that of new cars," he said. "This will make it even more important for used-car dealerships to monitor inventory and implement the most efficient marketing strategies possible to move cars off the lot."

Tech shortage brings meeting at White House

August 10, 2018

White House officials met Aug. 2 with National Automobile Dealers Association representatives to discuss promoting the value of careers at new-car dealerships — especially service technicians — in the retail automobile industry.
The meeting followed an executive order issued last month by President Donald Trump to establish the President’s National Council for the American Worker and the American Workforce Policy Board. The council is developing a national strategy to address urgent workforce issues, including a national campaign to raise awareness of the urgency of the skills crisis.
"Our industry faces an acute shortage of service technicians, and we look forward to working with the White House in any way we can to address this issue," said Annette Sykora, a former NADA chairwoman and a dealer principal in Texas. "We need to come together to address this shortage and tell the story of the benefits of employment at new-car dealerships."
Sykora is the current chairwoman of the NADA Foundation, which was founded in 1975 to raise donations to support causes such as emergency assistance for dealership employees after natural disasters, scholarships for deserving students and trained assistance dogs for children and wounded veterans.
"Service technicians are among the last jobs in America where young adults without a four-year college education can make a living wage and have opportunities to advance into management careers," Sykora said. "These jobs are critical to providing safe transportation to all Americans and are available in communities across the country."
The NADA Foundation in March announced funding for a large-scale workforce initiative to address the shortage and educate America about the benefits of dealership jobs, especially service technicians. The initiative includes a unified marketing effort by dealerships and manufacturers, and aggressive outreach with policymakers and educators.

0% financing seen declining as interest rates rise

August 10, 2018

Financing deals in July with zero percent interest were at their lowest levels since 2005 and are down 439 basis points year over year, according to a new report from Edmunds.
Zero percent financing deals accounted for 6.95 percent of sales in July, down from 11.34 percent in July 2017. The summer typically is when these deals see an uptick, as manufacturers attempt to push out inventory and increase sales, according to Edmunds. However, with interest rates rising and the Federal Reserve planning for more two more hikes before yearend, zero percent financing is becoming more expensive for automakers.
"A lot of it really is contingent on the rising interest rates that we are seeing throughout the market," Jeremy Acevedo, Edmunds’ manager of industry analysis, told Auto Finance News. "As the APR rises for new vehicles, it becomes a more expensive endeavor for automakers to roll out the 0% financing deals."
Sometimes when a customer is buying a car, they will have a 0% financing option. This means that they don’t pay any interest on the loan and the consumer is essentially paying the same amount as a cash buyer but spreading payments over a longer term. In this way, automakers are making money on the car rather than the financing deal.
Despite the decline, Acevedo does not see it becoming a trend month over month.
"I think that we might see a little more toward the end of the year, but I don’t think it’ll be those rates that we saw in 2017, especially not close to 2016 or the years before that," Acevedo said. "As the year goes on, automakers are going to need to liquidate to their outgoing model year inventory. Otherwise, it is going to become very expensive for them to move them if they have a bunch of 2018 lots when December rolls around."
The average annual percentage rate for new vehicles in July was 5.74 percent, up from 4.77 percent during the same month last year. Used car interest rates were also up, increasing to 8.31 percent from 7.46 percent at the same time the year prior.

Manufacturer subscription programs are changing auto financing

August 10, 2018

Subscription programs that allow for more flexible vehicle ownership could wind up being a bust. But if investments from just about every major OEM on the market, a handful of startups, and numerous dealerships are any indication, this is a fad that will be around for some time to come.   
What "flexible ownership" means differs drastically among programs. Some offer total flexibility to swap in and out of cars whenever the consumer wants, but at a hefty price. Others offer used vehicles and fewer amenities for a lower price. Some OEMs have traditional lease programs that include insurance and maintenance, while other dealerships are bypassing the manufacturers altogether.   
It’s hard to tell if this trend will grow to 30 percent or more of the market, as traditional leasing has, or if consumers will come to see it as a glorified rental.
Grayson Brulte, president of consulting firm Brulte & Co., said in January that these programs are largely going to serve as the testing grounds and starting point for a world in which fleets are 100 percent autonomous and the need for car ownership is largely diminished.
"On a traditional three-year lease, [the industry] knows how the system works, but if you’re on a one-month, two-month, three-month lease or you’re constantly swapping out vehicles, [the industry] has to learn," Brulte said. "You’ll see interesting pilots pop up in cities around the country and you’ll know it’s working when they announce, ‘We’ve added two more cities to the platform.’ "
4 luxury OEM programs driving subscriptions
This is the top end of the market, where the trend started to take off beginning in 2017 with the introduction of General Motors’ Book by Cadillac program.
All of these programs allow consumers to swap cars within the OEM’s brand at will and to do so through a white-glove concierge service, which delivers the car to the consumer’s home or desired location.
That level of service comes at a steep price. Services in this category such as Book by Cadillac, Porsche Passport, and Mercedes-Benz Collection all start at or near $1,600 a month and can range as high as $3,000 a month. Access by BMW recently cut monthly prices to $1,100 due to consumer demand. 
Toyota’s forthcoming Lexus program and Fiat Chrysler Automobiles’ Jeep subscription program could fall into this category as well, but pricing details have not been revealed. The Lexus program is scheduled to launch during the 2018 holiday season, with Jeep coming in 2019. Carpe by Jaguar Land Rover also launched in June, but it’s exclusive to the U.K. with no plans to expand into the U.S.  
Edmunds found that consumers in these programs would pay on average a $27,124 premium for these subscriptions versus a traditional three-year lease. However, they also provide the greatest amenities and service for the price.
Finding a Fair price
The car subscription startup named Fair came onto the scene last year in a big way by adding $1 billion in capital from a group of investment banks in October 2017 and then buying Uber’s Xchange Leasing program to become the ridesharing company’s exclusive leasing partner.
Fair offers vehicles on its app from as low as $150 and $300 a month but can also get up to $1,000 or more depending on the vehicle.
Chief Executive Scott Painter said last year that the company is able to offer this lower price because it offers only used vehicles and focuses on affordability based on how much typical consumers spend on car payments and mobility combined as a percentage of their income.      
"In our model, we must understand what you can afford and we constrain your shopping experience to that because we don’t show selling prices or cap costs on cars. Everything is shown in the form of a monthly payment and we don’t show you cars you can’t afford," Painter said. "Everything we do at the beginning of the app experience from a data collection point of view is getting to the bottom of that question: How much can you afford? And it turns out everyone can afford something. You could be a single mom, working two jobs and you can only afford $150 to $300 a month. We’ll show you a ton of cars in that price range."
Fair is expanding rapidly as it seeks to meet the demand of Uber drivers nationwide seeking temporary vehicles. Fair also addressed how it will deal with the used vehicles coming out of the subscription program with a partnership with Ally Financial and the SmartAuction platform. 
Dealership programs turn to 3 tech providers
If dealerships have the fleet financing arrangements from their bank partners, they don’t need the OEMs to offer a subscription program. However, most still look to partner with one of three technology providers offering a consumer interface and inventory system.
Cox Automotive’s Clutch Technologies, Flexdrive, and Mobiliti are the main players in this space selling the technology to dealerships. Cars usually start at about $1,000 a month, include maintenance and insurance but won’t be delivered to a consumer’s home like the luxury OEM models do. In this way, dealerships still become the mobility hubs for an individual’s city and increase the consumer loyalty.
"A vehicle subscription service is for people who want a car but aren’t ready for ownership," Mobiliti CEO and Co-Founder Chance Richie said in May. "It’s similar to a lease, but without the things consumers dislike most about leasing, including long-term contracts and upfront costs."
New OEM lease offerings
If the previous programs listed above are following the Netflix model of offering a monthly price for full access, there are other OEMs offering something closer to an annual Amazon Prime membership.
Hyundai Capital America and Volvo Cars are the primary players in this category.
Hyundai started with a pilot in California called Ioniq Unlimited+, which offers an electric vehicle for $275 a month, a 36-month term, no down payment, unlimited miles, and free charging. This year, Honda expanded to Ohio offering conventional combustion engine cars for the same price and terms as the Ioniq
Care by Volvo is a subscription program for the OEMs XC40 compact crossover but offers a shorter term — 24 months with the ability to swap to the newer model after a year — starting at $600 a month. Bank of America is the lender behind the program.  
"It’s a more attractive price for the consumer," said Mark Abbasi, Hyundai’s vice president of product development. "If you look at month-to-month programs it’s quite expensive — it’s a premium price and we wanted to come out with something that’s more affordable and provides more value to the consumer. That three-year term helps you get there."
There’s also a small San Francisco-based startup dubbed Less, which offers consumers three cars during a 36-month contract starting at $550 per month.
Ford’s 2 used-car subscription models
Used cars are much easier to price because the initial depreciation of driving off the lot for the first time is already factored, Fair’s Painter explained to AFN. The industry is also flush with low-mileage used cars right now coming off record-high lease volume, which makes subscription programs a good way for companies to use up some of that volume, he added.
Ford Motors took the used-vehicle route with the launch of Canvas in May 2017 offering users access a number of off-lease Ford vehicles starting at $329 a month, according to the Canvas website. Ford looks to take a similar approach with its upcoming Lincoln subscription service, which will offer more luxury features on off-lease Lincoln vehicles.
"Our biggest challenge was simply seeing how customers responded to and used the product, and using that feedback to help refine it and add features that would better their experience," a company spokesperson told AFN earlier this year. "For example, we found that features like adding a second driver are hugely popular with our customers."
Other programs look to make a splash  
Two companies are seeking to break into the car subscription space but either hasn’t found their niche yet or are seeking OEM partners to bring them to the next level.
Los Angeles-based Borrow is a car subscription service that rebranded from PrazoNow in November 2017. The company only offers electric vehicles starting at $499 a month on a three-month term. Likewise, Carma Car is part of the Techstars Mobility accelerator and is seeking expansion for its program starting at $400 a month for sedans such as the Ford Focus, Honda Accord, and Chevy Cruze in the base package.
The complete list of subscription services’ starting monthly price:
Access By BMW:  $1,100
Book by Cadillac: $1,800
Borrow: $499
Canvas: $329
Care by Volvo: $600
Carma Car: $399
Carpe by Jaguar Land Rover: $1,057
Clutch Technologies: $850
Fair: $150
FCA’s Jeep Subscription: TBD
Flexdrive: $750 (on average)
Hyundai Plus/ Ioniq Unlimited+: $275
Less: $550
Lexus: TBD
Lincoln: $625
Mercedes-Benz: $1,600
Mobiliti: $1,000
Porsche Passport: $2,000

Cybersecurity is 'cornerstone' of autonomous, connected driving

August 10, 2018

The operation of self-driving vehicles will require an intense focus on cybersecurity, experts said Aug. 3 during a conference in Detroit organized by Billington Cybersecurity, which brought together representatives from the automobile and tech industries and the government.
Dan Ammann, the president of General Motors, told the conference that GM cybersecurity is one of "the key enablers" to achieving GM’s vision of "zero crashes, zero emission and zero congestion."
"As we continue to develop our Autonomous Vehicle program, safety is paramount, just like it is in everything that we do," Ammann said. "For our customers, that means providing the safest products possible, including the strongest cybersecurity."
"In today’s connected vehicles, safety and cybersecurity are one and the same," he added.
Ammann also said public and private sectors must collaborate to prevent security breaches and thwart bad actors. "The public and policymakers would view a major cybersecurity incident involving any one of us ... as an incident involving all of us," he said.
GM seeks to make the Bolt its first fully autonomous vehicle.
"At General Motors, we view cybersecurity as a shared concern with the rest of the industry," said Ammann, noting that any breach of cybersecurity could "cripple" the development of AVs.
"Our collective customers are best served by industry-wide collaboration and solutions," Ammann said.
"Cybersecurity is the cornerstone of autonomous and connected driving," Thomas Billington, the founder of Billington Cybersecurity, said as he opened the conference.
"There is no magic bullet," said Heidi King, deputy administrator of the National Highway Traffic Safety Administration. The challenge is to build a culture of strong risk management that searches for threats and vulnerabilities, she said.
"Public confidence is key to technology deployment," King said. Collaboration and cooperation between government, suppliers and manufacturers is one of the keys to a broad system of cybersecurity in an industry where it has been something of an afterthought up until recently.
Michael Chertoff, a former U.S. Secretary of Homeland Security and an expert on terrorism and cybersecurity, also told the conference that "security by design" is critical to protecting against cyberattacks. The threat of terrorists taking operational control of a vehicle without directly taking is critical in an era when the industry is moving closer to putting autonomous vehicles on the road.
There also are nation states, such as North Korea, Russia and China, to name three, that have used hacking to spy on the U.S. or to achieve specific objectives such as stealing trade secrets or technology.
In addition, the necessity for any industry or individual enterprise to safeguard the data gathered customers or users is also critical, Chertoff said. The recent experience of Facebook, which saw its stock value drop dramatically on Wall Street, underscored just how critical protecting data has become, Chertoff added.

FTC: Dealer group falsified consumers' information on financial documents

August 10, 2018

The Federal Trade Commission on July 31 charged a group of four auto dealerships operating in Arizona and New Mexico, near the border of the Navajo Nation, with a range of illegal activities, including falsifying consumers’ income and down payment information on vehicle financing applications and misrepresenting important financial terms in vehicle advertisements.
The move marks the FTC’s first action alleging income falsification by auto dealers. The complaint also names the dealerships’ owners as defendants. Many of the affected consumers are members of the Navajo Nation.
The FTC files a complaint when it has "reason to believe" that the law has been or is being violated and it appears to the FTC that a proceeding is in the public interest. The case will be decided by the court. 
"Buying a car is one of the biggest purchases consumers make. When consumers tell an auto dealer how much they make and how much they can pay upfront, the dealer can’t turn those facts into fiction," said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. "The FTC expects auto dealers to be honest with consumers from the first advertisement to the final purchase."
Corporate defendants
According to the complaint, since at least 2014, Tate’s Auto sought to increase its sales by falsifying consumers’ monthly income and down payments on financing applications and contracts submitted to third-party financing companies. The four dealerships named in the complaint are Tate’s Auto Center of Winslow, Tate’s Automotive, Tate Ford-Lincoln-Mercury, and Tate’s Auto Center of Gallup.
The FTC charges that, during the sales process, Tate’s Auto asked consumers to provide personal information, including their name, address, and monthly income. However, according to the complaint, instead of using consumers’ actual information, in many cases Tate’s Auto falsely inflated the numbers, making it appear that consumers had higher monthly incomes than they actually earned. The dealer group often inflated the amount of a consumer’s down payment as well, according to the complaint.
The complaint also alleges that Tate’s Auto representatives often prevented consumers from reviewing the income and down payment information on the forms, such as by rushing consumers through the process of reviewing and signing the financing applications, having consumers dictate the information for the forms over the phone, and failing to give customers the income and down payment portion of the application before they signed.
In other instances, Tate’s Auto allegedly altered financing documents after consumers signed them, without their knowledge. Such consumers, the FTC alleges, often were approved for financing based on the false information Tate’s Auto provided. As a result, financing companies extended credit to consumers who defaulted at a higher rate than qualified buyers. 
The complaint also alleges that Tate’s Auto’s advertising deceived consumers about the nature and terms of financing or leasing offers. For example, Tate’s Auto allegedly advertised discounts and incentives to consumers without adequately disclosing limitations or restrictions that would prevent many customers from qualifying for them.
Finally, the FTC alleges that Tate’s Auto’s social media ads violated federal law by failing to disclose required terms. The complaint charges Tate’s Auto with violating the FTC Act, the Truth in Lending Act, and the Consumer Leasing Act. The FTC is seeking an injunction barring the defendants from such practices in the future.

Sedgwick deflects Q2 2018 jobless claims

August 10, 2018

One hundred forty-four CATA dealer members reported a combined 505 unemployment claims during the second quarter of 2018 to Sedgwick Claims Management Services, Inc., which has been serving CATA dealers under various names since 1979. The company’s efforts saved those dealers a total of $1.35 million in benefit charges by contesting the claims.
Sedgwick, Inc. monitors any unemployment claims against its clients and contests all unwarranted claims and charges. The company counts about 235 CATA dealers among its clients.
Claims that can be protested and subsequently denied help minimize an employer’s unemployment tax rate. The rate can vary between 0.525 percent and 6.925 percent of each employee’s first $12,960 in earnings.
The 2018 average unemployment tax rate & new employer rate for Illinois employers is 3.225 percent, or about $418 annually per employee ($447 in 2017). The rate continues to inch down from 2007, as the Illinois economy continues to improve.
"The unemployment tax is really the only controllable tax in business, in that it’s experience-driven," said Bruce Kijewski of Sedgwick. An ex-employee’s claim affects the employer’s tax rate for three years.
For new enrollees, client fees amount to $2.85 per employee, per fiscal quarter. For the fee, Sedgwick monitors all unemployment claims; files any appeals; prepares employer witnesses for hearings, as necessary; represents the client at any hearings; verifies the benefit charge statements; and confirms the client’s unemployment tax rate.
For more information and information on how to retain Sedgwick’s unemployment services, contact Kijewski at (773) 824-4322 or
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