As Carmakers Recall Vehicles, Dealers Might Make A Profit
Originally published on Fri June 27, 2014 5:20 am
The auto industry is cruising toward a record number of safety recalls: GM has recalled 20 million vehicles in the first six months of this year, and most carmakers have lowered the bar for the kind of problems that'll have them sending you back to your local dealers.
But while that sounds like bad news, it turns out that recalls can have an upside — at least for car dealers.
Michelle Krebs, a senior analyst at AutoTrader.com, explains that dealerships can actually make money when carmakers discover defects. The reason? Customers have to take their cars into a dealership to get the problems fixed.
"It's another touch point with customers, so they get to have them come back in. They're reimbursed by the automaker, so there's no money going out," Krebs says of those dealers. "And with customers, they may be able to suggest they do an oil change, suggest some other maintenance things, that may actually make them more money."
Selling maintenance to customers is a really big thing for dealers because their profit really comes from selling parts and services more than selling new cars.
Furthermore, Krebs' company has surveyed customers, and more than half say a recall makes them think more favorably about the brands. That might sound sort of weird, but she gives two examples:
"Back when Toyota created Lexus, its luxury division, and when General Motors formed Saturn, both of those companies had recalls in the very early days," she says. "But they handled it so perfectly that it actually helped their brand loyalty and their reputation for taking care of the customer."
But General Motors' recent recalls have been hampered by the slow pace of the repairs, according to dealer Bill Fox.
Fox is one of the few dealers who's been willing to talk about those recalls — the ones caused by the faulty ignition switch that GM didn't tell the public about for more than a decade. Thirteen deaths have been linked to the problem, as well as a lot of bad press — but strikingly, GM stock prices and car sales haven't been hurt yet.
Fox sells several car brands in upstate New York with his sister, including Chevy. He's also vice chairman of the National Automotive Dealers Association.
He says the problem with the GM recall is that less than 10 percent of the cars have been fixed. There's a backlog because of a shortage of parts; GM is offering incentives to dealers and their workers to help speed up the process and get the job done.
Fox says dealers may benefit when there's a recall — but no one profits if customers have to wait too long.
And that's GM's real test for the summer.
STEVE INSKEEP, HOST:
The auto industry is cruising toward a record number of safety recalls. General Motors is the industry leader with 20 million vehicles recalled in just the first 6 months of this year. Executives at GM warned customers to expect more. And most carmakers have lowered the bar for the kinds of problems that will have them calling you back to your local dealers. Turns out that recalls are not necessarily a bad thing - at least for the dealers. NPR's Sonari Glinton reports.
SONARI GLINTON, BYLINE: There's a sort of interesting thing that's been going on with the General Motors recall - you know, the ignition switch problem that took the company more than a decade to tell the public about. Well, here's a piece of tape that sort of sums up the problem. You'll hear Republican Congressman Tim Murphy questioning GM CEO, Mary Barra.
(SOUNDBITE OF RECORDED AUDIO)
CONGRESSMAN TIM MURPHY: How many Cobalts still out there? How many Ions? How many other cars that are affected by this?
MARY BARRA: Something less than 2.6 million.
MURPHY: 2.6 million. And so far - I forget how many you've said on your website have been repaid.
BARRA: Almost 200,000.
MURPHY: 200,000 - OK, that's a lot of cars out there that could still stall, could lose control of the car, you could crash, your airbags won't deploy, some will be injured or die.
GLINTON: Fairly dramatic, right? 13 deaths have been linked to the problem. Bad news story has followed bad news story. And here's the but - GM's stock price hasn't really been hurt yet. GM's car sales haven't been hurt yet. Actually, they've been going up.
MICHELLE KREBS: There's an upside to recalls.
GLINTON: Yep, there's an upside to all this bad news.
KREBS: Michelle Krebs, senior analyst, autotrader.com
GLINTON: The upside starts with the dealers.
KREBS: It's another touch point with customers so they get to have them come back in. They're reimbursed by the automaker so there's no money going out. And with customers, they may be able to suggest they do an oil change and suggest some other maintenance things that will actually make them more money.
GLINTON: That's the really big thing for car dealers because- and this may sound strange - but car dealers don't actually making a lot of money selling you a new car - really. I'm going to say that again. Car dealers don't make their money selling cars. It's the service and the parts where they make the money. And Krebs' company has surveyed customers and more than half say a recall makes them think more favorably about the brands. Now that sounds sort of weird but she gives us two examples.
KREBS: Back when Toyota created Lexus - its luxury division - and when General Motors formed Saturn, both of those companies had recalls in the very early days but they handled it so perfectly that it actually helped their brand loyalty and their reputation for taking care of the customer.
GLINTON: GM is offering incentives to dealers and their workers to help speed up the processing and get the job done. Bill Fox is one of the few dealers who's been willing to talk about the recalls. He sells several car brands in upstate New York with his sister. He's also the vice chairman of the National Automotive Dealers Association.
BILL FOX: So yes, is it extra business? Yes, it is extra business. But then as them growing over the years as recalls have become more - more commonplace.
GLINTON: Fox says the problem with the GM recall is that less than 10 percent of the cars have been fixed and there's a backlog because of shortness of parts. Fox says dealers and carmakers may benefit when there's a recall but they don't if customers have to wait too long or have to come back to the dealership. That's GM's real test for this summer. Sonari Glinton, NPR News. Transcript provided by NPR, Copyright NPR.