Published on May 27, 2014

GM dealers fret about brand damage, prep for service windfall

By Jamie LaReau, Crain News Service

DETROIT (May 27, 2014) — For auto dealers, General Motors Co.’s record barrage of safety recalls is a startling, confusing, aggravating logistical headache.

It’s also potentially lucrative.

Much of the $1.7 billion that GM has carved out to cover the cost of 30 recalls so far this year will flow to its dealerships for repair work and reimbursement for loaner vehicles. As millions of customers pull into service lanes for recall fixes, service advisers will get the chance to sell, say, new brake rotors to a customer waiting on a replacement seat-belt cable or steering column.

“There’s no question that the dealers have a big upsell opportunity here,” said Richard Gonzales, service director at Vera Motors in Pembroke Pines, Fla., which sells Cadillac, Buick and GMC vehicles.

Even so, GM’s recall wave has been jarring for car dealers. Over four days this month, GM disclosed 10 recalls ranging from the 2004 Chevrolet Aveo to its glitzy redesigned 2015 Cadillac Escalade. So far this year, the company is calling back a record 13.8 million U.S. vehicles—some are counted more than once because they’ve been recalled for multiple repairs. Among those are 2.6 million Chevrolet Cobalts, Saturn Ions and other small cars recalled to fix faulty ignition switches linked to 13 deaths.

Many dealers are frustrated by delayed repair parts. They have been forced to stop deliveries on several key models, tying up lot space with unsellable vehicles. And many dealers worry that the recall onslaught is turning GM into a punch line. A recent USA Today cartoon showed a GM dealer trying to sell a pickup loaded with papers: “It’s great for hauling recall notices,” he tells the customer.

“This is a weird thing. We haven’t had this many recalls in history,” said Cort Johnson, service manager for Larry H. Miller Chevrolet in Murray, Utah. He thinks it will be a few months before the effect on GM’s brands becomes clearer.

“My concern is that two years from now, I’ll feel the impact in service due to a negative impact on sales,” Johnson said.

Higher-margin work

Still, dealers agree that the recalls should boost showroom traffic and service business in coming months.

Toyota dealers benefited from a windfall of warranty work and related service business in 2010 after the auto maker called back more than 10 million vehicles for problems related to unintended acceleration. After seeing warranty revenue shrivel for years because of better vehicle quality, many large dealership groups saw spikes in lucrative recall work.

On a July 2011 conference call with analysts, Group 1 Automotive CEO Earl Hesterberg said the dealership group “had a massive amount of that Toyota recall business” the previous year.

“Those recall operations were almost entirely labor,” Mr. Hesterberg said. “And, of course, labor has a much higher margin for us.”

Duane Paddock, owner of Paddock Chevrolet in Kenmore, N.Y., expects the extra recall work to boost the number of repair orders in the second and third quarters 15 to 18 percent.

“We’re getting a steady flow of Cobalts and Pontiacs and Saturns that we wouldn’t normally see,” he said.

Bumper to bumper

The extra business comes with tedious paperwork and lots jammed with Cobalts, Ions and other vehicles in need of replacement parts.

Paul Lynch, general sales manager of DePaula Chevrolet in Albany, N.Y., is scrambling to figure out where to put the 60 or so customer-owned cars his service department has taken in for the ignition switch repairs.

He expects the cars will be around for 30 days on average awaiting parts from GM.

“They’re on my wholesale lot, but they’re parked bumper to bumper, like four rows deep,” Mr. Lynch said of the logjam of Cobalts and Ions. “The parts come in slowly, one or two at a time.”

The ignition switch recall is particularly time-consuming, dealers say.

In a typical recall, GM ships batches of repair parts for dealerships to stock as needed. For the ignition switch and related lock cylinder repair required for 2.6 million vehicles, dealers must submit a vehicle identification number for each car.

Each order absorbs the service department’s time and attention far beyond the 70-minute fix that GM has set for technicians to complete the repair, said Mr. Gonzales, of Vera Motors.

The former Saturn dealership has about 400 open repair orders for Ions and other cars in need of new switches. Turnaround time for receiving parts is about three to five weeks after the VIN is submitted, he said.

“At this point we’re not building a lot of traffic. We’re building a lot of phone calls because the parts are not coming in quickly,” Mr. Gonzales said.

GM said last week that just 47,000 of the cars with faulty ignition switches have been fixed.

‘Can’t sell it to him’

The promise of future service revenue wasn’t helping to placate dealers last week, when 2009-14 Chevrolet Traverse, Buick Enclave and GMC Acadia crossovers were sidelined because of a recall to fix a seat-belt cable that is prone to wearing out. Heading into the busy Memorial Day weekend, dealers were unable to offer test drives or let customers take delivery.

The stop-sale order frustrated Tommy Brasher, owner of Brasher Motor Co. in Weimar, Texas, which sells Chevrolets, Buicks and GMCs. He had a customer who wanted to trade his 2012 Enclave for a ‘14.

“And we can’t sell it to him,” Mr. Brasher said with an exasperated laugh. “He’s going to have the same problem.”

Some dealers say they’re worried about the long-term hit GM and its brands could take from the skewering the company has received, from a recent CNBC documentary to parodies by “The Daily Show” and “Saturday Night Live.”

But so far, many dealers say their customers generally are taking it in stride.

“The sentiment from the customers and most dealers I know is that GM is erring on the side of safety,” said Chris Haydocy, dealer principal at Haydocy Buick-GMC in Columbus, Ohio. “The shock value of a couple months ago has worn off some.”

Meanwhile, dealers appreciate the busier showrooms and service bays.

“Normally we’ll spend 10 grand to do a 10,000-piece mailer and get a 2 percent response rate,” said the owner of a large Michigan Chevrolet dealership who asked not to be named.

“Now GM is paying to send us these people, the turnout rate is way better, and we’re being paid for the recall work,” he said. “That’s a heckuva marketing deal.”

Reporter Arlena Sawyers contributed to this report this report, which appeared on the website of Automotive News, a Detroit-based sister publication of Tire Business.

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