GM's Recall Woes a Boon for Some Car Dealers

GM recalls far from calamity for some dealers who find new customers, business
Daniel Acker/Bloomberg via Getty Images
By Nick Carey and Bernie Woodall

FOX LAKE, Ill., -- The news about deadly crashes linked to a faulty ignition switch, followed by wave upon wave of recalls, didn't 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 (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 isn't 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 multimillion 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.

Sales Leads

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.

%VIRTUAL-pullquote-Aside from the bad publicity, which is never fun, we welcome recalls.%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 Officer 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 aren't 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.

New Hires

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 (AN), 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.

%VIRTUAL-pullquote-Does the dealer lose money on recalls? Generally, no.%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 (TM) in 2009 and 2010 had an immediate effect on the Japanese automaker'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 automaker, 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.

The 10 Vehicles With the Highest Resale Value
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GM's Recall Woes a Boon for Some Car Dealers
  • MSRP: $26,495
  • Resale value retained after five years: 50.5 percent
Even under Fiat (FIATY) ownership, some elements of Dodge's mouth-breathing, knuckle-dragging, He-Man-Woman-Haters-Club approach to auto sales managed to survive. The built-by-car-guys-for-car-guys Challenger and its rebooted muscle car aesthetic still lingers to lure meatheads who value racing stripes and rims over, oh, just about any other element of their vehicle.

Ordinarily, that alone wouldn't make one of these vehicles worth a second look five years from now --  even among the most superficial gearheads. But Fiat helped the Challenger smarten up a little bit by coupling a 305-horsepower V6 engine or 375-horsepower 5.7-liter V8 Hemi with loads of interior space, real-time touchscreen navigation, traffic updates, Bluetooth connectivity,  Sirius (SIRI) XM satellite radio, keyless entry/starter and a whole lot of Harman Kardon audio upgrades.

Long after Harley goes electric and all the other performance ponies start closing in on 35 to 40 miles per gallon, these updates will make a 2014 Challenger worth a half-price look.
  • MSRP: $25,575
  • Resale value retained after five years: 50.6 percent

It's not as American-made as the competing Ford F-150 or Ram, but it did just get a facelift in 2014, its first since 2006. That tells you just how little GM likes to fiddle with the third-best-selling vehicle in the country.

Its new V6 engine increases the base Silverado's brawn to 305 horsepower, but only increases its highway mileage from 22 miles per gallon in the old model to 24 mpg in the 2014. Adding updates such as Chevy's MyLink audio system with color screen, USB ports and an audio jack on top of features including Bluetooth connectivity, OnStar telematics and Sirius XM satellite radio bring the cab up to date, though. The Silverado's payload and towing capacities have never been the problem. Its antiquated features were, and the updates are far easier to resell half a decade down the road.

  • MSRP: $23,120
  • Resale value retained after five years: 50.7 percent

For all of you just catching up, the five-passenger SUV is this generation's station wagon/minivan/super-sized SUV that it's going to drive to college with, throw kegs in back of and basically sully all fairly G-rated memories of its childhood with. T

To today's parents, however, it's almost as big a step toward parenthood as actually having a child. It represents the end of freewheeling youth and light packing and ushers in an era of school, soccer practice, summer vacation and snow days. After the popular crossover's 2012 overhaul, it's only made that transition easier by adding a leather interior, heated seats and rearview windows and navigation system with controls mounted on the steering wheel. Honda also trimmed fuel efficiency to a combined 27 miles per gallon while leaving all 70 cubic feet of cargo space untouched.

  • MSRP: $23,555
  • Resale value retained after five years: 51.9 percent

Let the gearheads fight over whether the Camaro or Mustang provide more power for the money. Among those two, the Camaro gets the upper hand with a 323 horsepower, 3.6-liter V6 engine that still gets 28 miles per gallon on the highway. It also comes with fog lamps, a rear spoiler and a top that drops in 20 seconds.

A color heads-up information display on the windshield, the MyLink app center with 7-inch color touchscreen and Pandora, a rear-vision camera and Apple (AAPL) Siri Eyes Free that lets iPhone users send text messages through voice commands are just some of the perks behind the muscle. With apps for roadside assistance and diagnostics, available navigation and a remote starter, the Camaro's a whole lot more than just looks and a motor.

  • MSRP: $26,200
  • Resale value retained after five years: 52.3%

Even with only 6 percent of the U.S. truck market compared with nearly 30 percent for Ford, General Motors and Chrysler, Toyota accelerates past the Detroit Three's pickups when it comes to resale value.

Toyota's created a niche market for pickups such as the Tundra and the Tacoma and has seen its U.S. truck sales grow almost 10% year-to-date. The Tundra, much like the Silverado, hadn't had an update since 2007. It got a makeover for 2014 that mostly involves giving it a bigger grille and sprucing up the interior with more comfortable seats and touchscreen-driven tech toys. A backup camera now comes standard, as does the Entune audio and information system with touchscreen and Bluetooth connectivity. The 4.0L V6, 4.6L V8 and a 5.7L V8 engines remain, as does the pokey combined 18 miles per gallon, but the payload, towing capacity and — above all — reliability are what give the Tundra such a huge following a half-decade after its release.

  • MSRP: $53,000
  • Resale value retained after five years: 53.5 percent

Chevrolet hadn't produced a Stingray version of this vehicle since 1986, but bringing back that iconic design for 2014 just boosted this car's resale value right through its retractable roof. The pace car of last year's Indianapolis 500, the Corvette delivers on its looks with a 6.2-liter small-block V8 engine that cranks out 455 horsepower.

Unless you're the one buyer who strips this beauty down to its absolute base, chances are you're also enjoying a package that includes a Bose 10-speaker surround-sound audio system; Sirius XM satellite radio with one-year subscription and HD radio receiver; color head-up display; memory package; navigation system; heated and ventilated seats with power lumbar and bolster adjustment; and a leather-wrapped dash.

  • MSRP: $32,820
  • Resale value retained after five years: 56.2 percent

The cars with the highest resale value are almost exclusively SUVs. The 4Runner are great examples of why. It's a mix of the big school and soccer shuttle families want and the bike and kayak hauler weekend warriors crave.

Sure, it only gets a combined 20 miles per gallon, but it's a tailgater's dream with a power outlet in the cargo space for hooking up a television or other electronic devices, nearly 90 square feet of cargo room and an optional sliding cargo deck. That last feature basically takes out the need for a folding table by providing counter space strong enough to hold 400 pounds of food and beverages.

  • MSRP: $22,395
  • Resale value retained after five years: 59.1 percent

It's loud, it's not terribly reliable, it sucks up gas at a combined 19 miles per gallon and it doesn't store a whole lot unless you get the stretched out Unlimited version. That said, nothing looks quite like it and nothing's an acceptable off-road substitute at this price.

The ground clearance and four-wheel drive come in awfully handy in miserable winter weather, while that removable hardtop makes it a sweet open-air ride in the summer. Car-buyers don't pick up a used Wrangler because they want to truck the kids around or make grocery runs. They buy it because they want a Jeep and all the frivolities that go along with it.

  • MSRP: $18,125
  • Resale value retained after five years: 61.9 percent

The Tacoma has taken this award 10 times for one big reason: You can pound on it all you want and it just keeps coming back for more. Durability is a big deal in the Tacoma's world, where car-buyers who don't feel they need all the size and strength of a Ford F-Series or Chevy Silverado are drawn to its off-road agility, flexible cargo options and easy handling.

At a combined 23 miles per gallon, the base model Tacoma gets the mileage of a small SUV without sacrificing any of its midsized truck power. When you're content with fetching big items from the hardware store or taking a load of leaf litter to the dump without flashing chrome or flexing muscle, this is the understated truck to buy, even if it's secondhand.

  • MSRP: $27,680
  • Resale value retained after five years: 70 percent

No other vehicle comes close to the ridiculous resale value of Toyota's odd-looking, amphibious landing vehicle of a midsize SUV.

Its available four-wheel-drive system, hefty 260-horsepower 4.0-liter V6 engine and 5,000 pounds of towing capacity are beastly, while its interior is made for messy adventures. Rubber floors and water-resistant seat fabric are made to withstand mud, ash and anything else you track in. Meanwhile, its has enough gauges to make sure you never get too lost on your backwoods outings. It's an outdoor workhorse without equal, which is why buyers will still pay dearly for it after a half-decade of rugged outings.

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