Comment by MrFoof | Hacker News Reader

Comment by MrFoof | Hacker News Reader

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>First, dealerships don't really make that much of a profit on new car sales. At least not Honda dealers.

This is essentially the case on all volume mainstream manufacturers. Hyundai/Kia, Toyota/Scion, Honda, Nissan, Mazda, Ford, Chevrolet, Dodge/Chrysler all fall in this bucket in the United States. The exception to this being trucks (RAM, GMC and Chevy Silverado, Ford F-Series).

Where money is actually made on sales are in the luxury segment. However, who is really making the good money has become interesting over the years. Lexus, Acura, and Cadillac margins are fine, but the Europeans have better margins still, though there's still a chasm between everyone and the VW Group.

Rolls-Royce aside, BMW only has Mini which has been little more than break-even since its relaunch. Moreover, there are slimmer margins on the 1/2-series since they serve as conquest cars. The same goes for Mercedes-Benz with SMART, and the CLA/GLA being their (very aggressively positioned) conquest vehicles. For mainstream luxury brands, Audi has some of the highest gross margins at 10%. Yet their ultra-luxury brands -- Bentley, Lamborghini, and most importantly Porsche -- is where the real money is made (at least on a per-unit basis). I struggle to think of the last time (since their return to form 10-15 years ago) where Porsche's gross margins were under 20%. Porsche prints money.

Sorry for not taking JLR into account, as they're still restructuring. Infiniti is excluded because Ghosn has nearly killed the brand twice. As for Tesla, I've been saying for years that they were more likely to model themselves more after Porsche than Honda/Toyota, as that's where the real money is for a still growing company. When the Model X pricing was announced, that was all but confirmed.

From everything I've read about the industry for the last 15 years, this is all completely correct and serves to demonstrate why it's such a hard industry. Extremely high costs, low profit margins, fiendish competition, considerable regulation, and absolutely no guarantee that the new product you just invested billions in won't flop after you've done all the work.

True, but there are some low hanging fruit that have not been attempted yet... in the following areas:

Finance:

- why can't I rent a car for a month and if I like it sign up for a year or two or three? If I want to own it, why can't I just convert to a purchase? These options are not fluid and interchangeable which necessitates much more of a "sale" rather than a more flexible, value oriented approach. A manufacturer should always be willing to convert a purchased vehicle into a lease or rental again.

Inventory/Planning:

- trim levels are out of control and make inventory planning much worse. If the base model sells for $18K but is available in a $36K trim level, is it really the same car? Why not just keep it simple. Nobody wants the salesperson to exert pressure to make me buy some "touring package" that I don't care about just because that is what is on the lot.

Pricing/Selling:

Buying a car takes hours while you wait for the salesperson to try to sucker you into paying full MSRP and he/she pretends to be negotiating on your behalf with the manager, who writes with a marker on the sheet of paper the best price. This horrible practice is highly unpleasant for all involved. The dealer lobby prefers negotiated pricing over fixed price because it suckers poorly informed consumers (many of whom are elderly) into overpaying.

I'd like to walk into a dealership pre-approved for a loan and pick from among 3 or 4 exterior colors and be done with it in 10-20 minutes. Better yet I'd like to just order it online and have it delivered in a few weeks, or better yet (per the above suggestion) just rent it for a month on an impulse.

All this is probably a distraction though, since self-driving car tech will allow us to get by with a fraction of the number of cars on the road and likely few of us will choose to own a car in the traditional sense.

> why can't I rent a car for a month and if I like it sign up for a year or two or three?

You can, but if you don't buy it they now have a radically-devalued product they still need to sell. Some dealers experiment with this. Many of my customers had problems with buying a car with 100 miles on it "new". I can't remember the exact regulation, but at a certain mileage a car is no longer legally new.

> trim levels are out of control and make inventory planning much worse.

Absolutely. Honda attempts to address this (in the US market) by having very few trim levels and (when I was selling) no options.

> Buying a car takes hours while you wait for the salesperson to try to sucker you...

Yes. It's a terrible practice. One that is getting slightly better with internet shoppers who get the price negotiated before they step into the dealership. Most of my old-school managers felt that, within a few decades, negotiating over prices would end.

> within a few decades, negotiating over prices would end

It's interesting because often the trade-in value is mostly what is being negotiated, but the customer doesn't realize this. Or perhaps financing rate games are being played which the customer is unaware of.

I think many of the limitations come down to the way the car business is financed. Ford Motor Credit, for example, uses lease rates as an incentive to get more vehicles manufactured. So while the market rate for a customer might be 3.5%, there is 1% financing available for a limited time.

Similarly, Ford Motor Credit may prefer to incentivize leases vs purchases (or vice versa) because both look different on the company's books. There is arbitrage going on because the financing rate on a lease is partially due to the credit risk of the customer, and partially due to the residual price risk of the make/model/trim.

So the company may be happy to offer 0% financing on a sold vehicle, but only 2.9% on a lease, because the company keeps the residual price exposure.

This makes lease/purchase financings difficult to transform, because the accounting is only done relative to "new" vs "end of lease", so doing it on a vehicle someone rented for a month which has 2560 miles on is much more challenging, and the result of this is that the market value of the 1 day old "used" vehicle is often significantly below invoice, since when it is sold as used none of the new car incentives apply, lowering the value of the vehicle significantly, and disproportionately to miles driven, wear and tear, etc.

So I think it's ultimately that there is insufficient sophistication on the finance/accounting side to allow OEMs or dealers to have any incentive to keep 1 month old vehicles with 2560 miles on their books. With a small adjustment to price and warranty, the customer should be completely indifferent to this vehicle vs a new one.

I think this is a legacy of the car business as an assembly line where everything coming out of the "finished" end needs to be sold ASAP before it goes stale. Consumers likely want a much more services oriented approach b/c cars are typically more of a long term asset.

I think these are legacies of the core reason why the car companies went with the franchising model in the first place: It takes tons of capital to bring cars to market and sell/distribute them nationally, and there is a fair bit of risk too.

> - why can't I rent a car for a month and if I like it sign up for a year or two or three?

Because of the massive depreciation on a new car the minute you drive it off the lot.

> - trim levels are out of control and make inventory planning much worse. If the base model sells for $18K but is available in a $36K trim level, is it really the same car? Why not just keep it simple.

There are a lot of trim levels in cars for the same reason there are a lot of models and options in Lenovo's computer lineup: https://en.wikipedia.org/wiki/Price_discrimination. When you're selling low-margin products in highly competitive markets, you do everything you can to eke out a bit of margin with price discrimination.

> The dealer lobby prefers negotiated pricing over fixed price because it suckers poorly informed consumers (many of whom are elderly) into overpaying.

This is another form of price discrimination.

> Because of the massive depreciation on a new car the minute you drive it off the lot.

Does the car depreciate? Or is it that it can no longer be sold as "new", making many of the incentives irrelevant. If the "new" car gets 0% financing, and the "used" car with one mile on it gets market rate, then of course there can be a higher sticker price on the new one.

You just answered your own question. The car depreciates because it is no longer new, a status which adds value for a segment of the market. Variables like manufacturer incentives may come into play for some makes, but that doesn't change the fact that it depreciates.

Sure but you are ignoring important information. The car itself has not depreciated. We are misattributing the depreciation. It's a different bundle of products. There is nothing intrinsically price-reducing about being driven one mile.

The lower price is due to various market failures or trust breakdowns, not b/c the car itself has changed.

That's a equivocation fallacy on the semantics of the word depreciate.

There are many different types of value that are reflected in the market price of a good. Cars that are no longer new lose value, thus by definition they depreciate.

The thing the customer initially bought new was a basket of several products: a vehicle and also a financing product. If a one-day-old vehicle cannot be bundled with the same financing product and must instead be bundled with a more expensive one, nobody would pay the same price for the vehicle so it must now be sold at a lower price, hence your "depreciation".

>a vehicle and also a financing product

Which is the false equivocation. You're ignoring that a vehicle market price reflects more than just financing value - a car isn't a basket of bricks.

At this point I feel like your efforts to tenuously redefine depreciation are indicative of a cognitive dissonance. Why do you really want to change how people define "depreciation" for cars?

I'm not sure I understand your critique of my last point. I understand that many goods depreciate in value over time as a function of use and wear and tear.

I'm describing specifically the dynamics that cause a car that has been sold and driven 3 miles to be worth less on the market than if that same care had been test-driven 3 miles but not sold.

My argument is that while we tend to view the sale of the car as triggering a drop in value, that is not entirely responsible for the price drop.

The price drop is also a function of available financing options, since the vast majority of cars are purchased alongside a financing product... and the specific product used is not typically available to a customer wishing to purchase the vehicle that was sold and driven one mile.

Since price is a function of supply and demand, the price lowers (depreciation occurs) because there is less demand for the basket containing the car without OEM financing than there is for the basket containing the car with OEM financing.

This is what you'd expect, which is why OEMs offer financing incentives to increase demand.

My argument is not that depreciation doesn't occur (because that is the way we typically describe the "sold" one selling for less)... Just that without the financing incentives demand is lower and since price is a function of supply and demand, price is also lower.

The causality is important, since the topic being discussed was the mysterious way in which dealerships work.

My point in making this distinction is that consumers are buying a physical product and a finance product bundled together, thus there is room for significant innovation in the automotive industry simply by getting more clever/creative with how the car + finance + insurance are packaged...

> not b/c the car itself has changed

It has nothing to do with that particular car, but rather the "unknowns" about that car. It could be a very nice car in about the same condition as when it was brand new.

When it is new, the car is a fixed entity. There is nothing unknown about it. Once you drive it off the lot, there is something unknown about the car - Where did you drive it? Was it in an accident? Did you drive it too hard? Did you change the oil when you were supposed to? Too much wear and tear? Did you spill something on the seats?

Because of that, once it is no longer new, the car has more risk associated with it, and thus loses value (in addition to value lost due to normal wear and tear). You could have driven only one mile, but that one mile could have been off a cliff for anyone knows.

I think the idea that a new car is a fixed entity is a common misconception. Unless you built it yourself, do you really know anything more about this than a used car? In either case, it is a good idea to drive it, listen carefully to the car, and look for signs of damage (contaminated fluids, etc.)

The new one may have an advantage because of the warranty, but taking advantage of the warranty can be a huge hassle.

If you just want no-hassle car ownership, it may make more sense to buy an old beater that's running good, and when it starts to give you trouble, buy another one.

There's nothing intrinsic about prices, period. It's all about what people are willing to pay.

People are willing to pay a substantial premium for a car that is completely brand new, as compared to a car that is very nearly new but has been driven by another person for a short time.

That's all it takes to be able to say that a new car depreciates substantially the moment you take it home.

In the case of electric cars, the state and federal incentives that help to make them attractive are available only when they are "new".

> only when they are "new"

Ahh yes, they must benefit the environment only when new :)

Thinking only of the environmental impact, I'd expect any new car regardless of energy source to be far worse than a used car.

Given the increased prices in the used car market (arising in part due to better durability and quality), I think I might be able to make an interesting argument for incentives towards purchasing used cars as being better for the environment than incentives for purchasing brand-new electric cars.

Incentives on new vehicle sales can change the fleet mix. I don't see how incentives on used sales can do that (there would be some more focus on resale value, but people already consider that).

I think in the US we would get the most mileage out of reforming CAFE to make it less friendly to daily driver trucks.

Much of the total environmental impact of a car is in the initial manufacturing. The idea would be to increase the average age the fleet. It is plausible that this might actually have more of an environmental impact than increasing mean fuel efficiency. However, I doubt subsidy would actually defer the age vehicles are scrapped unless it is structured to encourage certain types of repairs. Implicitly this already happens somewhat with registration and property taxes taking into account market price and in some states car age, so perhaps a cross state study could be done to assess impact across states empirically.

Yeah, I assume that people are already mostly making economically sensible choices with used cars, so incentives there would mostly just shift prices.

Incentives on used car sales would be redundant, because the incentive gets baked into the price of the used car. A new Tesla gets a $7,500 tax credit when purchased in the US right now. If you turn around and sell it, you'll have to discount it by about $7,500 to account for the fact that you're competing with new cars that have that incentive.

Redundant yes, but nonetheless helpful to the environmental goals of the policy. It's just a subsidy on green products, which would increase demand for green products whether they are new or used.

How would you avoid loopholes, for example getting a free subsidy without doing anything of interest by "selling" your car to a friend and then buying it back from him again?

If I buy an Apple laptop, use it for a month, and return it, it'll be sold as a factory refurb, because it would no longer be "new." The discount on that will be 10-20% of the retail price. That's the depreciation just due to being "refurbished" versus "new." People would flip their shit if Apple resold 1-month used laptops as "new" at full retail price.

Applying a similar discount to cars, a 1-month "try before you buy" rental would cost the dealer $1,500 to $3,000 on a $15,000 car for each one that was returned. Apple because their products have large markups. A dealer can't, because they probably make less on each car (in absolute dollars) than Apple makes on a laptop or iPhone.

This is all true; I kinda wonder what prevents dealers from doing this with used and "certified pre-owned" vehicles...

To respond to the grandparent first, suppose the laptop had been used for a day and then returned. We really don't know for certain what criteria Apple uses when it decides whether to have a returned item go on the shelf or into the refurb process. The important thing is that we trust apple that when we buy one labeled "new" we are getting an unfettered piece of hardware with a fresh software load and no measurable wear and tear beyond what is typical for a new device.

The certified pre-owned programs are a way that the automotive OEM tries to add respectability to the used car business, which is often a bit shady. When a vehicle has been certified it's been looked over by a mechanic but most importantly it comes with a warranty that rivals a new car warranty.

The OEM is taking on financial risk by insuring the vehicle against defect, in order to increase the market price of its used vehicles, which improves leasing residuals and makes it possible for the firm to lease new vehicles less expensively.

You've hit upon the key issue, which is that it takes the OEM being willing to (in some way) embrace the used item and take responsibility for it the way it does with a new vehicle. Because of the focus on sales numbers financing that is actually a marketing program, once the vehicle has been sold once the OEM has no incentive to own/sell it again, since it is already "sold" as far as wall street is concerned.

So in order for this to change, OEMs would have to make financing and warranty products available that addressed the consumer concerns with a vehicle that someone else drove for a day, week, month, etc.... such as, for example, insurance against the realization a few weeks after purchase that the previous owner had spilled milk on the rear seat and it's now going sour (essentially giving the vehicle a permanent bad smell unless the seat is replaced).. etc.

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