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Monday, November 29, 2010

The Cheapest Cars Can Cost Too Much!

This column was inspired by a news article in the PB Post on Monday, November 29 entitled “Cash-strapped county spending $9 million on cars”. The article went on to say “one recent county purchase was a new $28,000 2010 Ford Taurus SEL for County Commissioner Pricilla Taylor.

After I shook my head to ask why on Earth would the PB County government would be spending $9 million to buy new cars for themselves in these direst of economic times, I then thought “how dare they” spend taxpayers’ money for buying the wrong cars too!

It’s a really bad idea to buy last year’s model new car when you can buy the current model. This is especially so of the Ford Taurus because the 2010 is virtually identical to the 2011 and they are priced nearly the same. Car dealers will advertise last year’s model for less money, but if you negotiate you can buy the current model for the about the same price as the old model. This is especially true in today’s economic climate, a buyers’ market. Sometimes the manufacturers will offer special incentives to help the dealers clear out last year’s model, but the amount of the incentive can’t come close to covering the extra depreciation you experience buying a one year old car. When time comes to trade that car in or sell it, nobody cares when you bought your car; they care only what the year on your title says.

Palm Beach County and most governmental agencies buy their cars at special fleet prices offered by the manufacturers. They don’t pay retail. But the fleet prices for the 2010 and 2011 Taurus would have been almost the same. Fleet pricing sounds like a good deal for the governments but it isn’t really. The manufacturers sell cars to fleets like the government and big rental companies at drastically reduced prices, often less than they sell cars to their own dealers. In fact, manufacturers will sometimes actually sell cars to large fleets for less money than it costs them to build the cars. Why, you ask, would they ever do such a thing? It’s less costly for a manufacturer to lose a few hundred dollars on a few thousand cars than have to close down shifts or entire manufacturing plants and reopen them at a later time. They have to pay UAW workers whether they’re building cars or not and the cost of shutting down and reopening plants is huge. Ford, GM, and Chrysler sell fleets anywhere from a one-quarter to one-third of all the cars they build.

This all brings me to the second big mistake Palm Beach County made when they bought a 2010 Ford Taurus for Mrs. Taylor. It’s “Economics 101” that when you flood the market with a product at below market prices, you drive down the resale value of the product. Why are diamonds so expensive? It’s not because they’re so pretty because a cubic zirconium is just as pretty. It’s because the number of diamonds on the market is controlled and limited by a giant cartel, DeBeers. If they didn’t do this, your diamond ring would plummet in value. Ford sells thousands of Taurus’s to governments and large rental companies at greatly discounted prices. When these large fleets buy new cars, they dump their old cars on the market at auto auctions. It’s all a matter of supply and demand. Selling too many Taurus’s over too short a time drives down the price. This also affects the unsuspecting retail buyer who buys and sells just one car at a time.

If you need proof of all of the above, just click on ALG is Auto Lease Guide which is the “bible” for how fast cars depreciate. Every bank, car dealer, and leasing company relies on ALG to set their prices on leasing. The residual value is the estimated value of new car 1, 2, 3,, 4, or 5 years hence. The residual is expressed as a percent of the cars original cost. A car with a 4 year residual of 25% would depreciate twice as fast as one with a 50%. If you go to the above website, you’ll find that the Ford Taurus has a very low residual. In fact it’s rated with only 2 stars, with 5 stars being the best. An example of a car with a 5 star residual is the Honda Accord. Honda sells very few cars to large fleets, about 8% of their total production. The Honda Accord’s purchase price is about $2,000 more than the Ford Focus, but after looking at the difference in deprecation, is a much better buy.

The moral to my story is to be smarter than the Palm Beach County government and don’t just buy the “cheapest” car you can find. Never buy last year’s model new car when you can buy the current year and always check the projected resale/residual value of the new car you want to buy.

Tuesday, November 16, 2010

Your Car’s Oil Pan: Its “Achilles Heel”

The container that holds your engine oil underneath your car is made of very thin, sheet metal often aluminum. Because the bottom of the oil pan is so thin, the opening that technicians use to drain your oil cannot hold very many threads. The oil plug which is removed and replaced every time your oil is changed clings to those few threads. The reason for this is that manufacturers try to make your car as light as possible so that they can meet their fuel economy requirements (CAFE) and, of course, the less metal there is in a part the cheaper it is. It might sound unreasonable to think how little it would cost to have an oil pan that was just one-quarter inch thicker, but multiply this by tens of thousands of parts on a car and pretty soon you’re talking lots of weight and lots of money.

Depending on the make and model of your car, you can expect the threads to wear out on your oil pan as early as 40,000 miles just from normal wear and tear. It can be sooner or later than that depending on how often you change your oil. The problem is that when this happens, there’s not a “safe” solution to the problem other than replacing your entire oil pan. This can cost anywhere from $150 to $350 depending on the make and model. There are lots of less expensive solutions some suggest like oversized plugs, rubber plugs, and re-threading but they are not 100% effective. If you gamble with one of these and the rubber plugs pops out, you’re looking at buying a new engine for thousands of dollars. In modern engines you have only a few “seconds” to stop an engine that loses its oil which is exactly what happens when the plug drops out.

As if this isn’t enough to concern you, the technician who changes your oil can easily strip the threads in the oil pan by over-tightening the oil plug. When this happens, you probably won’t know about it until you change your oil again and maybe not for several oil changes. Stripping threads isn’t necessarily an “all or nothing” event. Over tightening the drain plug slightly, repeatedly will cause the thread to wear out prematurely.

Each manufacturer has a specification for exactly how tight the oil plug must be in the oil pan. It’s measured in foot-pounds of torque and a typical spec would be 18 FP. If the plug isn’t tightened enough, it might fall out. This sometimes motivates the technician to over tighten the plug just to be safe. If the plug is too loose and falls out, it could cost him his job. To be sure that the oil plug is tightened exactly right, the technician must use a torque wrench which shows the foot-pounds of torque that the plug has been tightened to.

Believe it or not, many technicians still don’t use toque wrenches. Without one they are just “guessing” how tight your oil plug is. This is a good reason for you to be very careful who changes your oil. Don’t be shy and specifically ask the service department who changes your oil if their technicians use torque wrenches. It wouldn’t be bad idea to find out the manufacturer’s specification for torquing your oil drain plug. It shouldn’t be necessary if you have your oil changed by the dealer, but it might if you use an independent service company or quick-lube company.

The person who changes your oil is the lowest paid individual in that service department. He’s called a “lube tech” and it’s generally considered a starting position for an auto technician. The turnover in this position is usually much greater than for regular mechanical technicians. I’m sure why you can understand why this puts you at risk for not having the job done right.

Be very leery of advertising promoting cheap oil changes. It’s fine to save money having your car serviced, but you should be sure that the person working on your car knows what he’s doing and uses the proper tools. He must know the manufacturer’s specifications for tightening your particular oil plug and he must use a torque wrench. Ideally, you should find a trustworthy, knowledgeable lube technician and always have him perform all of your oil changes. That way, if there’s ever a question about who over-torqued or under-torqued your oil plug, there’s only one person who can be held to blame.

Monday, November 08, 2010

Chrysler and General Motors Must Build Better Mousetraps

I know of no one who hasn’t heard the famous quote by Ralph Waldo Emerson, “Build a better mousetrap and the world will beat a path to your door”. In fact, I know of no one who can disagree with this basic truism.

As you well know, our government decided to use our taxes to keep GM and Chrysler alive. Over a year and many billions of dollars later both companies are claiming to be profitable and are planning to sell stock so that they can pay back a portion of what they owe us taxpayers. Of course, we will never really know how much money we’ve really spent in this futile rescue attempt. The latest secret that was revealed is that the US Treasury is giving GM a pass on paying taxes for several years. This required a change in the law that was kept very quiet until this fact was needed to pump up the price of GM’s IPO stock price. Wall Street was naturally very impressed to learn that General Motors will not have to pay taxes on any of the first $45B they earn, unlike all of their competitors. Talk about a competitive edge! How do you think this makes Ford Motor Company feel after they refused to take a handout from the government like GM. Our government is rewarding bad behavior and punishing good.

Consumer Reports just announced their list of the most reliable new vehicles for the new model year. Do you think that anybody in Washington D.C. is concerned about the fact that Chrysler is ranked “dead last” in reliability out of 27 makes sold in this country? How about the fact that the highest ranking for any GM car is #17 for Chevrolet? Buick is 18th, Cadillac 19th, and GMC is 21st! Of course Honda and Toyota dominate the reliability survey as always. There’s not one single American owned company in the top 10, but Ford is #11.

Washington seems to think that they can solve any problem by throwing enough money at it. The only reason that GM and Chrysler’s balance sheets look better and they are showing a profit this year is because of all the taxpayer’s money and “smoke and mirrors” accounting. I’m not taking a political position here because there were lots of politicians from both sides of the aisle who pushed for the bailout.
Now that GM and Chrysler have their bailout money, they’re reneging on their agreement to build smaller more fuel efficient cars. They’re lobbying to defeat the next plateau in EPA fuel economy standards. About a year ago, GM and Chrysler signed a deal with the White House agreeing to boost fuel-economy standards nearly 35% by 2016 but that’s because they had to “go along to get along”, in other words get their billions in bailout money. They’re now lobbying heavily to defeat Washington’s efforts to continue to improve fuel economy after 2016 with a goal of 62 mpg by 2025. There is no opposition from Honda, Toyota or most other manufacturers on this because they have confidence that they can meet these fuel economy standards.
The simple facts are that it’s easier and cheaper to build lower quality cars and big gas guzzlers and sell them for too much money than it is to build fuel efficient cars, trucks, and vans. GM and Chrysler live or die on the price of gasoline. When gas prices are relatively low, they can sell enough Chevy Suburbans, Cadillac Escalades, RAM pickup trucks, and other gas guzzler models to be profitable. One of the reasons that GM and Chrysler made profits this year is relatively low gas prices. Everybody knows that it’s only a matter of time before oil and gas prices rise to record levels. Ten years from now we will look back fondly on $3 and $4 gasoline. When that happens, GM and Chrysler will go bankrupt again. There isn’t enough time for them to reengineer a new line of fuel efficient cars and trucks and, even if there were, they are so far behind in the quality game it wouldn’t make a difference.

The Chevrolet Volt is a PR stunt, nothing more. GM will build only 11,000 Volts next year and they will be sold in only 23 states, not in Florida. One reason that GM won’t build more Volts is that it costs more to build them than they can sell them for. The Volts sole purpose is to provide a halo effect around their line of low quality gas guzzlers.

Are you ready to bail out GM a second time and Chrysler a third time? I’m not.

Monday, November 01, 2010

Pontiac Dies at 84. October 31, 2010

Sunday, October 31 (Halloween) was the day all remaining Pontiac dealers’ GM franchises expired. Pontiac built their last car about one year ago. Most of you think of me as a Toyota dealer, but I got into this crazy business 42 years ago when I joined my father’s Pontiac dealership in West Palm Beach. My father got into the car business in 1926, but not as a car dealer. He worked for the factory, Oakland, in Pontiac, Michigan. That’s where and when Pontiac was born and was originally named the Oakland.

Dad decided he wanted to give retail a try and started the first Pontiac dealership in Palm Beach County in 1937. He borrowed $10,000 from my mother and she ran the accounting department (I guess she wanted to keep an eye on her investment). His sales department was a man named Harper Clark who went on to become the first Oldsmobile dealer in Palm Beach County. Dad’s service department was a guy named “Slim” Angevine. The first car my father sold was a 1937 Chieftain and the buyer was Annie Swann. She paid $936 for the car plus tax, tag, and a 50 cent “dealer fee”. My father bought this car back from Annie in the late sixties (for exactly what she paid for it new). We had the car restored to absolutely new condition (all original parts) and it sits in the place of honor on my Toyota showroom floor today.

A lot of people think I’m a typical foreign car dealer when I criticize General Motors and Chrysler for what I say led to their demise. But what many don’t know is that I have real soft spot in my heart for GM and especially Pontiac. I feel like I have a special insight into what happened with GM and Pontiac because I was “along for the ride”. I remember when Pontiac was one of the most exciting and sought after cars in the USA. When I joined Pontiac in 1968, we were number three in sales, behind Chevrolet and Ford. GM had over half of the US car market and feared an antitrust suit for running a monopoly.

Back then it was about styling and power. The Pontiac Trans Am and GTO were the kings of the road. Gas was cheap and nobody complained about quality because everything is relative. Nobody else was building a car that was any better, so who was going to complain. I remember finding an empty vodka bottle inside the door panel of a Pontiac Bonneville after the customer complained of a rattle. I remember a customer bringing a Le Mans convertible back after he bought it because he couldn’t find the switch to lower the top. After a careful inspection, we discovered the problem…Pontiac had forgotten to put the switch on the car.

Then, as you know, things changed. Do you remember the Arab oil embargo of the seventies? All of a sudden Americans were waiting in line for gas and many gas stations just didn’t have any gas at all. That GTO with dual 4-barrel carburetors and a supercharger that got 10 mpg (if you were lucky), suddenly was a problem. About the same time, Americans began noticing these strange little cars with funny names…Honda, Datsun, Toyota, and Mazda. This didn’t seem to worry Detroit because everybody knew that this “gas thing” was only temporary and there was an unlimited supply of oil under the ground. Also, these funny little cars really weren’t built all that much better but they sure did get a lot better gas mileage.

It was in 1970 that I first decided I better “hedge my bet” and I took on the Mazda franchise. I was the first Mazda dealer east of the Mississippi. We were building our Mazda dealership (actually renovating an old gas station) so I temporarily displayed a Mazda on my Pontiac showroom floor. One day, the Pontiac zone manager dropped in and walked up to me while I was standing in the Pontiac showroom. His words to me are indelibly engraved in my brain…”Get that goddamned ‘Jap car’ off my showroom”. The Pontiac manager’s name was Murphy (Murph) Martin and he personified GM’s arrogance and blindness toward the Japanese competition. I bought the Toyota franchise in North Palm Beach (Lake Park) in 1975 as a further hedge.

In the late nineties, the “handwriting on the wall” was transferred to my Pontiac financial statement. As fast as my Toyota dealership and Mazda dealerships made money, my Pontiac was losing it. We simply couldn’t compete with the Japanese cars fuel economy, quality, and price. I had a personal dilemma too. Often friends of mine would look me in the eye and say, “Would you recommend that I buy a Toyota or a Pontiac”. If I told my friend the truth, I was being disloyal to all of my employees at the Pontiac dealership. Pontiac and GM’s quality gap was huge with the Japanese imports. At my Toyota dealership we did practically no warranty work but at the Pontiac dealership we did a huge amount. Chuck Schumacher, the Buick dealer then and now, had been calling me every few months for a while asking if I would sell him the Pontiac franchise. He also had Oldsmobile and GMC truck and wanted to add Pontiac to the “family”. I turned him down for as long as I did for purely sentimental reasons. He finally “made me an offer I couldn’t refuse” and I sold him Pontiac.

The rest is history. The Japanese cars continued to improve (kaizen) their quality, their fuel economy (which was already far superior), and their styling and they even priced their cars lower than Detroit’s. GM, Ford, and Chrysler just never “got it’. They had their head in the sand and when they pulled their heads out it was too late.

My three sons (Stu, Jason, Josh) and my wife (Nancy) all work with me in my Toyota dealership and I try to remind them often that we must never underestimate our competition like Detroit did the Japanese car makers. You can bet we have our eyes on Hyundai. Toyota began to get a little arrogant and complacent not too long ago, but snapped back into reality recently with the “cold shower” of media and governmental attacks over the recalls. Looking back on that experience, I’m actually glad it happened. I’m not saying NHTSA, the media, and the politicians dealt fairly with Toyota…far from it. But what happened, humbled and frightened Toyota and made them realize that they could lose everything they had worked so hard for if they ever again became over confident and underestimated the competition.