Dealerships make their revenue and profit from selling extended servicing and warranty plans through financing.
The new year started off with a proper bang as one of the biggest car dealerships in South Africa retrenched 86 staff members and packages paid by the company for another 900 staff members were reduced by 30%. This basically in a nut shell those having their packages reduced by 30% means if they want to maintain that lifestyle of private health benefits, cell/mobile phone allowances will have to pay the difference thus their cost of living has increased considerably.
The company blames cheaper Chinese car imports which has affected their operating profits locally and internationally by around 6%. This did not make much sense as their sales had only dropped by 1% which is minimal, but what came to mind immediately was they would have to be offering a longer extended service and warranty plan to match the Chinese car brands. The operating profit is down R6 billion or roughly $350 million.
Prior to the Chinese car brands entering the market the standard service warranty plans were 100 thousand kilometers or 3 years and now we are witnessing offers with 7 years or 200 000 kilometers. One manufacture has already raised the stakes by offering a lifetime warranty on their engines which local manufacturers could never match.
Car dealerships were designed to make money from the sale of the car which was not their biggest profit spinner as services and parts is where the real money was made. With the car brands now upping their service and warranty period the dealerships are the ones who are losing out. Moving a free service from 2 years to 5 or 7 years will have major repercussions as the turnover they would rely on would now be lost with every new car sold.
Those of you that have purchased a car at a dealership will know about all the extra packages and add ons they try and sell you.
Card dealerships when you think logically make their money from the financing of the vehicle services and parts which are what the business is built on. the profit from selling a new car is nothing in comparison to what the sale of the vehicle offers with regard to profit over the next 5 years of financing and services. A dealership will earn around 40-60 percent of it's yearly profits from financing and services with a mark up of at least 50% on labor and spares when services are completed. Sales of new vehicles are not the business and they only make around 2-5% of the new vehicle price.
The cheaper Chinese vehicles can be matched if the government subsidizes the local manufacturers, but the service/ warranty and financing is going to be where the real ramifications come into play as this was the dealerships golden egg that instead of being a profit center is turning into a cost center. Dealerships have lost their profitability and there are no other areas where they can replace this and why this is the first announcement of retrenches and guaranteed there will be many more. The 900 who have had their packages reduced would be advised to get out of this industry and those involved at other dealerships would be thinking along similar lines.