Lessons Learned and What the Future Holds for the American Automotive Market Albert Gallegos, Director - International Affairs, National Automobile Dealers Association (NADA), USA The past fifteen months have been extremely chaotic for the American automotive sector. In the summer of 2008, declining home values and spiking oil prices resulted in $4 a gallon gas, which led to a sharp decline in the sale of trucks and sport utilities. This was followed by the economic crisis that paralyzed the global economy in September. What was not clear last September was the depth of the challenges that the financial crisis would have on entire automotive chain in the United States. By October of last year, consumers had stopped spending on big tickets items - i.e., vehicle purchases. Those who were purchasing vehicles were often having difficulty obtaining financing due the lack of credit. By November, dealers were experiencing problems in obtaining wholesale credit. In December, the Detroit Three automakers signaled that without financial assistance from the U.S. government, their companies could face dire consequences. At year-end, the Bush administration authorized loans totalling $30 billion to General Motors (GM) and Chrysler. Fast forwarding to mid 2009, Chrysler and then General Motors exited from bankruptcy, over 2,000 dealers have closed their doors, and we witnessed one of the most successful simulative programs in the history of the auto industry - Cash for Clunkers. While sales have decreased 27% this year, August was a bright spot when the industry sold 1.2 million units - the first time in twelve months where sales were over 1 million. In August, the annual selling rate was 14.1 million - the first time since last October that selling rate was above 10 million. The Cash for Clunkers program netted over 690,000 sales of new vehicles. The U.S. Department of Transportation reports that 57% of the purchasers had never purchased a new vehicle. Lessons Learned The National Automobile Dealer Association (NADA) played a critical role as the financial and automotive crisis unfolded. The countless meetings that were held with the Obama administration, members of Congress and the CEO's of General Motors and Chrysler were important to ensuring that our voice was heard. As we begin to see some normalcy returning to the auto sector in the United States, it is worthwhile to explore key lessons learned from the turmoil of the past 15 months. The principle lessons learned are: 1.  Dealerships are still vital - they are still an economic engine of local communities 2.  State Franchise Laws are still critical to the success of the franchise system 3.  Engagement with policy makers and politicians is still vitally important Dealerships are vital As it became clear that General Motors and Chrysler would enter bankruptcy and the likely outcome would be the closing of several thousand dealerships, it became apparent to politicians at all levels of government -local, state and national that these closing would have adverse impacts on their respective economies and the finances of their respective government entities. It had become fashionable to criticize the Detroit 3 for having bloated dealership networks but now that thousands of dealers would be put out of business, the reality set-in as to the important role dealerships play in local economies. When you consider that a large portion of tax revenue for cities and states is generated from the sale of new and used vehicles and service and parts business, it is not an inconsequential amount of money. Beyond being an important contributor to revenue due to taxes, dealerships are employers in the communities. Both these facts were not lost on politicians as the crisis unfolded. Lesson Learned: As a dealer association or as a dealer, you must continually remind politicians the important economic role you playas a dealer. You pay wages, you pay taxes on wages and you generate tax revenue when you sell vehicles. All this helps to support the government services that are provided to the public. State Franchise Laws still Matter State franchise laws have always been a source of pride for U.S. dealers. In my travels, there are often queries by international dealers on how franchise laws work in the United States. For over 50 years, these laws have protected the financial investments that dealers have made in their business and ensured that manufacturers do not overreach with mandates. Since the bankruptcy of GM and Chrysler, the question I am most often asked is: ow is it that franchise laws did not protect the dealers? Bankruptcy laws trump state laws - that is the short answer. Notwithstanding, had GM and Chrysler not entered bankruptcy, state franchise laws would have been in force and we as a dealer association (NADA) and individual dealers would have fought to ensure dealer rights were protected. Lesson Learned: State franchise laws are the single most important tools available to dealers to ensure their investments are protected and that OEM's do not overreach. For these two reasons, it is important for U.S. dealers to continue to protect franchise laws. For dealers in India and elsewhere, it is important to engage policy makers and politicians so they understand the important role that dealers play in local communities. Hopefully this engagement leads to implementation of laws that protect the interest of dealers. Engagement with Government The auto crisis of 2008 and 2009 proved that engagement with government is so critical to the long-term success of dealers. As noted above, dealers are an important facet of the economy. Curiously throughout the crisis, it became apparent that often time's politicians did not fully understand how dealerships operated. For example, repeatedly dealers were accused of being a cost center to manufacturers. The argument by GM and Chrysler was they needed to close dealerships because they were an expensive burden - dealers cost us money was their mantra. The fact of the matter is that dealerships are a minimal cost to OEM's. NADA and our board members worked tirelessly to ensure that "government" understood how dealerships operated. Another example of government engagement was on the issue of floor plan (wholesale credit). Many in government did not understand how critical it was to have working credit markets for wholesale credit. Once government understood the importance, NADA was able to secure loan guarantees for dealers. Lesson Learned: Engagement with government will always be critical to ensuring that policy makers and politicians understand the "dealership model" No dealer or dealer association should ever assume that they understand your business model. It is incumbent on all of us to educate and expose government to what we do, how we do it and why it is important to the economies of our respective countries. What the Future Holds So what will be the 'new normal" for auto industry in the coming years? IHS Global Insight, a global consultancy expects that by 2015, the American market will sell close to 17 million units. When you consider the pain that dealers have faced in 2009, where we will be lucky to sell 10.5 million units, increasing volume by almost 60% in five years will be beneficial to dealers and the industry as a whole. The bankruptcy process for General Motors and Chrysler was meant to allow them to reduce their cost structures so they could become more competitive. In many respects, we may look back and determine that was the easy part. The bigger challenge moving forward will be if they can once again win back the confidence of customers. Gaining the confidence of customers will be critical to stabilizing their market share and generating profit. After all the turmoil, the American market will lose just one brand - Pontiac. While GM will sell three brands -Saturn, Saab and Hummer, these three brands will be bought by others and likely to continue to sell in this market. It is hard to imagine that American market will be any less competitive in the years to come. Dealers will continue to face thin margins on new vehicles and will have to rely on used vehicles and service and parts to generate profits. In 2010, the American market will witness the entry of Mahindra to the marketplace. It is likely that we will see others enter the market as well -the Chinese. This will only serve to offer additional offerings to consumers and potentially make the retail landscape a bit more competitive. The benefit to dealers is that they may be able to secure additional franchise opportunities. Dealers across America are thankful that this most difficult period is almost behind us. One never knows what the future holds but it is clear it will not be dull!