FOX LAKE Ill. (Reuters) - The news about deadly crashes linked to a faulty ignition switch, followed by wave upon wave of recalls, did not bode well for General Motors dealers earlier this year. It conjured visions of worried, frustrated drivers pouring onto lots like Raymond Chevrolet, outside of Chicago.
But according to Robbie Long, service director for the dealer and nearby Ray Chevrolet, what looked like “great adversity” has turned into an opportunity.
The hundreds of customers bringing old cars into the family-owned dealerships leave in clean cars with a bucket of goodies. Some drive home a newly purchased car.
And the repairs, paid for by GM, are modestly profitable, dealers say, helping to pay general expenses as well as bringing in customers who might have been lost.
“In many cases these are customers we haven’t seen in a long time or have never met before,” said Long. Although the script is not what the dealership would have written, GM is delivering sales and service prospects to her door.
Certainly, there are dangers if the dealer doesn’t give good service or if parts are backed up. Some cars are being called in for more than one problem, and Long says her dealers are careful to schedule only one visit per car.
“People just don’t want to see us that often,” she said.
But as of early July, the two dealerships run by brothers Ray and Mark Scarpelli are humming. Ray’s sales were up 13 percent on the year and Mark’s were up 20 percent. GM as a whole posted a 2.5 percent increase in sales in the first half of the year, just a step behind the industry average of 4.3 percent.
Interviews by Reuters with dealers across the nation found similar attitudes, for GM, Chrysler and other brands, several of which have now announced multi-million car recalls.
Don Lee, president of Lee Auto Malls in Maine which has 14 new-vehicle stores, mostly Chrysler and various Japanese brands, as well as GMC, said recalls provide “an opportunity to look over the customer’s car at no cost to them,” which often leads to more repair business.
More importantly, he said recalls lead to more sales: he estimates that 15 percent of new car sales at his Chrysler stores come via the service department. GM this week said that it had sold 6,600 cars to customers who traded in vehicles with defective ignition switches.
“Aside from the bad publicity, which is never fun, we welcome recalls,” Lee said.
The General Motors recall offers at least four opportunities for business: fixing the recalled part, a roughly $250 cost for the Chevrolet Cobalt ignition switch fix which led the recall wave; other service and repair work; selling new cars; and, for those dealers with loaner car fleets, providing transportation to some waiting customers, paid for by GM.
Several factors have combined to turn what started off as a pure public relations disaster into a strong sales year for some GM dealers.
Dealers say GM has responded well to the crisis, with Chief Executive Mary Barra publicly apologizing for failures and distancing the “New GM” which emerged from bankruptcy in 2009 from the “Old GM” which made many of the recalled cars. The automaker has also benefited from a growing economy, and the highest profile recalls, for ignition switches, mostly affect discontinued models.
And last but not least, auto recalls have become so common with 29 million cars called in globally by GM and millions more by other brands, that consumers are suffering from “recall fatigue” and are not paying attention, dealers say.
“I think perhaps people worry less about the recalls than the newspapers do,” said Herb Chambers, CEO of Herb Chambers Cos, the 14th largest U.S. auto dealership group with dealerships covering several brands in greater Boston.
Rummaging through a box in his office, Mark Scarpelli pulls out packages containing parts for recalls, including a simple-looking gray plastic sheaf with a piece of black foam. It is a fix for a seatbelt in the Chevy Traverse, a large SUV. In a comprehensive safety review that followed the Cobalt recall, GM found the Traverse seat belt connector could fatigue and separate over time, and it recalled the vehicles.
The automaker pays the dealership for 45 minutes of labor to install the new part, said Scarpelli.
AutoNation, the largest U.S. auto dealership group, had already planned to hire 400 additional auto technicians for its 273 franchised stores in 15 U.S. states. Because of the GM recall, it will hire “hundreds” more, said CEO Mike Jackson.
However, while analysts had expected recalls by GM and other car companies to boost AutoNation sales and profits, Jackson said the overall financial impact of the GM recall on his business would be negligible.
GM’s legal liability from the recalls is unclear, although it took a $400 million charge this week, which could rise, to set up a victims fund. It has taken $2.5 billion in charges for recalls announced this year, which is an average of about $85 per vehicle recalled, although fixes vary in complexity and the labor needed to implement them. Many of the recalls involve adding a piece of plastic to a key.
GM declined to discuss recall cost details. The company, which says it typically repairs 85 percent of cars within two years of a recall, also pays for campaigns to contact customers, such as sending a postcard every three months for two years to remind them their car is part of a recall, managing the fix, and rental cars.
Analysts say the largest share of the cost is labor.
In the case of the Cobalt ignition switch recall, GM pays for 0.6 hour of labor for the ignition switch replacement, and a further 0.9 hour for a related lock cylinder and key replacement, according to Ray Huffines, owner of the Huffines Auto Group in Lewisville, Texas, near Dallas.
Labor rates vary by dealer, but at $100 per hour, that would be $150, with another $89.68 for parts, he said, for a total $240. Dealers make a profit on the parts and technician labor, and the work helps pay for other service staff and overhead, Huffines said by email. A service manager at Raymond Chevrolet put the total cost of a Cobalt recall fix from his lot at $260 for GM. GM said the repair took 90 minutes and declined to comment on the cost.
Huffines concluded, “Does the dealer lose money on recalls? Generally, no. Does the dealer make a very nice profit on recalls? Generally, no.”
The biggest cost to GM, Huffines said, was car rentals offered to ignition switch recall customers, which could be $1,000 to $2,500. GM said 83,000 cars had been loaned to customers.
Dealers with their own fleets of service cars love the loaner car option. Mike Bowsher, co-chairman of the GM Dealers Executive Board and president of the Carl Black Automotive Group, based in the Atlanta area, said his four stores sold 10 cars in one week to people who came in for recall repairs. Some bought the loaner cars.
Meanwhile, his parts and service business has set records three months running, thanks to the chance to upsell customers who might otherwise bypass the dealership for repair work. “I would have never had a shot at that,” he said.
RECALLS, THE “NEW NORMAL”
A massive recall by Toyota in 2009 and 2010 had an immediate effect on the Japanese auto maker’s U.S. sales, in contrast to GM this year.
GM’s recalls have come at a time when the economy is healthier, and the company has benefited from the fact that the recalls linked to fatalities are from discontinued models, said Kelley Blue Book senior analyst Karl Brauer.
There may be a bigger issue, as well: recalls have become commonplace for almost every auto maker, turning into “white noise” for consumer, say analysts and dealers alike.
Ray Scarpelli said that with all the other recalls from other automakers, “customers just see this as the new normal.”
Additional reporting by Tim McLaughlin and Jim Forsyth; editing By Peter Henderson