Editor’s note: This article is part of a Monday special section on the latest challenges to profitability in the F&I office and potential future hurdles.
Ford told investors this summer it plans to focus more on build-to-order vehicles amid what Safe-Guard Products International called a greater interest in online retail among automakers.
CEO Jim Farley said Ford replaced a reservation system with an order bank format for models such as the Bronco. The company then wondered, “ ’My God, why don’t we do this for all the vehicles, not just those vehicles?’ ” he said during the July 25 earnings call.
Farley said the company had order banks of 1,000 to 2,000 per month in the years following the financial crisis last decade.
“We are now at 70,000 units on our way to 80,000 units,” he said. “That gives you the order-of-magnitude difference in the way we’re looking at this order bank change for the company.”
Farley said many people are making a big deal about the move, “but for Ford, we think there’s massive benefit across all stakeholders for going to an order bank system.”
Kelly Noren, Safe-Guard spokeswoman, said build-to-order gives her company — which offers white-label F&I support to a variety of automakers — an advantage.
Noren noted that while 2020 might have had a focus on “Tier 3” dealership digital retail, now “you can really feel the shift to Tier 1 [automaker] digital retail.”
She said some automakers were working on build-to-order initiatives, and manufacturers have recognized there must be a connection between their platforms and dealerships’ offerings.
“That’s a big initiative” many automakers are pursuing, Noren said.
Build-to-order would seem to present an opportunity for manufacturers to place their own captive finance and insurance products before customers. Morgan Stanley analyst Adam Jonas raised this issue during the Ford earnings call.
“I am talking to some dealers that are freaking out, that some Darwinian forces could be at work where you’re not, let’s say, directly infringing on the franchise laws but you’re dancing close as you probably should, given all the technological changes over the past 70 or 80 years since these laws came,” Jonas said. “So what’s your message to them? What if order book goes to 80 percent of your units or the majority and then the dealers are just the delivery centers, and then you’re going direct on all the other wonderful services?”
Farley replied by stressing the role dealers would have in servicing vehicles and explaining features to customers.
Ford Credit spokeswoman Karen Hampton said the company’s order bank process still requires the actual sale to occur at a dealership and allows the dealer to engage in the traditional F&I process there.
“The customer still consummates the buy or lease transaction through a dealership and can purchase any voluntary protection products (Ford Protect, DentCARE, etc.) from the dealer as they take delivery,” she wrote in an email.
The only exception is the Mustang Mach-E, which Hampton said can be ordered online with Ford Credit financing and services attached.
“If you wish to finance through another institution, that becomes an ‘online to offline’ transaction, but still takes place as part of the buying process,” Hampton wrote. If the buyer doesn’t have financing, the electric crossover can’t be ordered online, she said. But the dealership retains a role.
“The customer picks an EV-certified dealer as part of the online buying process,” Hampton wrote. “Then ‘behind the scenes,’ the dealer is actually the entity placing the order, taking delivery from the factory and delivering the vehicle to the customer.”
Asked about any plans to change the F&I status quo for other build-to-order models, Hampton replied: “We’re not going to talk about our future plans at this point, but it is important to note that the Ford+ plan outlined in detail last May is transforming the customer experience and you can expect Ford Credit to be fully engaged in that transformation.”
According to Eric Chase, a franchise law attorney and partner at Bressler, Amery & Ross, state laws typically prevent automakers from selling either a vehicle or add-ons such as F&I products directly to the consumer. However, automaker captive finance companies are generally permitted to cut a loan directly to the vehicle buyer, he said.
Asked about the prospect of automaker build-to-order emphasizing captive finance and products, and costing dealers an F&I opportunity, the National Automobile Dealers Association said the transactions still end up at the dealership.
“Even in a build-to-order or reservation system, customer orders are still placed by the dealership on the customer’s behalf, and the customer sale itself still takes place between the dealership and the customer,” National Automobile Dealers Association spokesman Jared Allen wrote in an email. “As a result, customers are still able to benefit from a wide range of possible financing options, either obtained on their own or through the dealership.”
Elliot Schor, JM&A Group vice president for sales operations, said he felt build-to-order was more done “out of necessity” because of the limited inventory and rare from a customer demand perspective. He also doubted dealers would lose the opportunity to sell F&I products should automakers focus more on the order bank model.
“Most roads still end at the dealership,” Schor said of build-to-order sales. Even if automakers seek to bring the ordering process further online, he didn’t anticipate they would take F&I out of dealers’ hands.
“The dealers need to be viable,” Schor said. And dealers would have a “significant problem with the manufacturers” if F&I performance fell because of an automaker’s practice.
Noren said questions remained about what role the retailer will play under a future with more build-to-order sales. That role could even be different by make or model, she said.
However, franchise laws are “very hard to get around,” and she doubted dealerships would be eliminated from the sale.
“Retailers still play a critical, critical role” in both the sales and ownership experience, Noren said.
Brian Finkelmeyer, senior director of new vehicle solutions for Cox Automotive, said he felt attempting to cut out the dealerships would engender an “extraordinarily high degree of strife.” He doubted automakers would pick that fight.
He also pointed to the experience of a Ford dealer with whom he had spoken. Despite trends such as online retailing, few of the dealer’s customers had engaged in build-to-order transactions, according to Finkelmeyer. It was far more likely that customers simply requested one of the vehicles the dealer had ordered but not yet received, he said.
Thus, it would be “financial suicide” for Ford Credit to undercut that dealer on the minuscule percentage of sales conducted using build-to-order, Finkelmeyer said.
The dealer would just say, “ ’knock yourself out,’ ” and retaliate by funneling the overwhelming proportion of volume remaining to an indirect third-party lender, Finkelmeyer added.