Auto dealers say electric car mandate — a cornerstone of Colorado’s clean air quest — is a threat to tradition

Source: By Tamara Chuang, Colorado Sun • Posted: Wednesday, August 14, 2019

Lowering emissions is a top priority in Colorado, but a look at how dealerships make money — parts, upgrades and financing — shows why dealers aren’t happy about the plan to get more zero emission vehicles on the road

During World War II when Ford stopped making cars to focus on war efforts, O’Meara Ford had to figure out what to sell instead. Founder Alfred O’Meara and his son Alfred Jr. shrewdly stocked the Denver dealership with every automobile part he could get. The parts store blossomed into a national wholesale business. And O’Meara, which started selling Model Ts in 1913, remains one of the oldest operating Ford dealers in the nation.

The family-run business, once located where the Denver Public Library is today, is now in Northglenn and has continued to adapt as political, cultural and industry change occurred over the past century. But the latest threat has O’Meara’s grandson, Brian, very upset: A mandate that would force automakers to sell more electric vehicles in Colorado.

On Tuesday, a state commission will consider whether to join California’s Zero Emissions Vehicle policy aimed at reducing greenhouse gases. That could mean Coloradans will get access to a wider variety of electric vehicles, including future electric SUVs and crossovers from Ford, Volkswagen and others. Major auto manufacturers have already agreed to support ZEV in exchange for earning credits for early sales.

Dealerships say they’ll bear the brunt of the financial burden if people don’t buy enough EVs, which dealers will be forced to buy from automakers. They face a double whammy because EVs need less maintenance, which is a dealer’s major revenue source. But perhaps the real concern is the disruption of tradition. As industries consolidate and national chains dominate regional sales, dealerships remain locally owned and active in the community. Dealers fear adopting ZEV could change that way of life forever.

“I said this the other day, everybody wants to go to heaven, nobody wants to die,” O’Meara said. “Everybody wants clean air in Colorado, but they don’t want to buy an electric car, or else we would be selling a ton of them.”

Under governors John Hickenlooper and Jared Polis, there’s been a push to clean up the air by switching to renewable energy and electric vehicles. The move to adopt ZEV started last year after the Environmental Protection Agency proposed freezing existing federal vehicle emission goals at 2020 levels. That meant the state wouldn’t meet its air-quality goals. So Polis ordered the state to adopt a ZEV policy.

Several individuals and organizations plan to speak for or against ZEV adoption at the state Air Quality Control Commission three-day hearing. The Regional Air Quality Council supports ZEV. The agency is tasked with getting the nine-county Denver region into federal air-quality compliance, which the Environmental Protection Agency dropped to serious on Thursday, from a moderate designation.

“The reason we’re for it is because we have a serious ozone situation along the Front Range,” said Steve McCannon, RAQC’s deputy director. “And we see electric and hydrogen vehicles as a way to reduce a huge piece of the emissions pie. We’ve been working on this for a long time to get under the 2015 standard. We’re close to the 2008 standard but to get there, we need to use all the tools in the toolbox.”

How dealers make money

There’s a wide-open secret in the automobile industry: Dealerships don’t make money on new cars. They also must buy the car before the manufacturer builds it. A car that sits too long on the lot means the dealer is still paying interest, rent and other expenses to keep the vehicle in new condition.

That’s a tough business.

“Someone comes in and says, ‘We’ll give you $100 over what you paid for the car.’ Really? We paid $35,000 for the car and you’ll give us a $100 profit?” O”Meara said. “How do I pay this guy? And the girls in the lobby? And the people who wash the cars? The rent? The security systems?”

According to the National Automobile Dealers Association, the average dealership had revenues of $61.2 million last year, up 2.6% from the prior year. Net profit before tax was $1.36 million, or 19.7% of its total gross (profit after goods are sold but excluding advertising and selling, general and administrative expenses). Dealers lost an average of $570 on every new car sale.

“Our business model has always been parts, service, used cars and new cars — in that order,” O’Meara said during a walking tour of the dealership that includes framed family photos, a Heidi’s Brooklyn Deli (“I wanted the place to smell and taste good,” he said) and a wood and rock gazebo to soften the sound and lower the high ceilings.

“We have in this store, a little over 200 employees. And over half of them have been here for over 20 years. That’s saying something,” O’Meara said, beaming as he walks by employee after employee and asks one question, “How long have you been here?”

“I’m older than he is,” grins Eissa Hizhley, 74 and an employee since 1977.

“Nobody leaves,” said O’Meara, who runs the dealership with his sons and wife, Bonnie, who has been the face — and voice — of O’Meara Ford in TV commercials for decades.

Profits come from elsewhere, including dealer financing, upgrades, resale of used-car trade-ins and future service, repairs and parts.

As more consumers buy EVs, those dealer profits will shrink. A cost-benefit analysis by the state Air Pollution Control Division estimated that over the lifetime of an electric vehicle, the maintenance and repair costs are about one-third to one-half less than a conventional vehicle.

Consumer savings mean dealers would see reduced revenues of $578 million when ZEV rules would start in 2023 to 2030, according to the report. However, the report notes that dealers “would continue to be free to market and sell all types of conventional vehicles.”

Colorado ranks well in sales of hybrids, plug-ins and electric vehicles. The Alliance of Automobile Manufacturers ranked the state fourth nationwide for EV sales. Last year, at least 10,362 new EVs, hybrids and plug-in hybrids were registered — or 4.9% of the 211,653 new car sales for 2018, according to the Colorado Automobile Dealers Association.

The state currently has 23,946 EVs registered as of July 12 and nearly every county had one (Boulder tops the list at 4,922), according to the state Division of Motor Vehicles.

If Colorado adopts ZEV and automakers meet the goals, a minimum of 129,615 battery or plug-in models would sell between 2023 to 2030, according to state data. EVs would still comprise a small portion of all cars if goals are met by 2030, making up about 2% of the 6.2 million registered gasoline vehicles today.

“This doesn’t restrict consumer choice,” said Shoshana Lew, executive director of the Colorado Department of Transportation, adding that the state aims to increase its own fleet of electric vehicles. “It just provides more options so folks in Colorado can find them.”

The state is also using some of the $68.7 million settlement it received from the Volkswagen emissions scandal to invest in vehicle chargers statewide.

EVs and plug-in hybrids are available at some dealerships in Colorado. At Boulder Nissan, EV specialist Nigel Zeid said 40 to 50% of the dealership’s new car sales are the electric Nissan Leaf.

“We sell a lot of them,” Zeid said. “The key is that if you sell an EV and you do it in the correct way and don’t sell them a car that doesn’t do what you told them it would, they come back. …Our industry is changing in massive ways and really CADA needs to get behind it. Everyone is going electric.”

More: Colorado is a top electric vehicle state without a mandate. So why can’t locals buy most of the EVs for sale?

Planet Hyundai in Golden can’t get any electric Ioniqs or Konas from Hyundai so General Manager Jamie Payne said he buys them from a dealer in Connecticut, which is one of 10 ZEV states. But he’s not a fan of more regulations.

“Probably 5% of my new cars this year have been EVs or plug-ins that I can’t get from the factory. I have to go around them,” Payne said.  “We will sell whatever car a customer wants to buy. But the problem comes when you start mandating a certain level of sales or a certain level of inventory.”

According to the latest data from CADA, hybrids and electric vehicles are nearly 8% of the Colorado new-car market, which is slightly down from a high at the end of last year (credited to Tesla owners cashing in on the federal EV credits before they started winding down in January).

CADA President Tim Jackson said EVs have been popular with early adopters. But what happens when tax incentives end? The $7,500 federal credits on EV purchases began phasing out in January on some models, including Teslas. Colorado offers $5,000 in tax credits on new EV purchases until Jan. 1. The program, which legislators extended this year, then drops to $2,500 through 2022 and then $2,000 through Jan. 1, 2026.

“At some point in time, incentives will go off of these things,” Jackson said. “We want a market-based automotive arena. Right now, this is artificially creating a market that is making manufacturers sell these cars even if consumers don’t want to buy them. They’re piling up on the Connecticut lot. Let’s fast forward. (Planet Hyundai) Jamie’s not going to have to bring them in from Connecticut, but they’ll be getting them on his lot. If they’re piling up, he’ll be paying interest on them.”

Future investment, fears of EV

A.J. Peterson is holding up what looks like a massive plastic fishing hook attached to a yellow pole.  Peterson, one of the few O’Meara Ford technicians certified to work on hybrids and electric vehicles, says it’s called a Ford service tool. But everyone in the garage likes to call it the meat hook.

“If someone was getting electrocuted, you wouldn’t want to just grab them because then you’d be electrocuted,” said Peterson, grateful he hasn’t been in that situation yet. “You hook them and pull them off.”

Peterson approaches any EV or hybrid cautiously — “I read the shop manual a lot closer for sure,” he said. Most of the cars he works on have nothing to do with the EV battery but other things like alignment or tire rotations.

Electric vehicles are a touchy subject at the dealership. Not a lot come in for service, partly because Ford doesn’t have many models and last year said it would shift all focus to SUVs, trucks and Mustangs. Ford has since invested $500 million in EV startup Rivian, which is making an electric pickup and SUV, and promises more electric vehicles are on the way, including an F-150 electric pickup.

“A lot of dealers don’t feel very supported when it comes to selling EVs. The training, the facilities can be very expensive for dealerships to set up, like EV charging stations that customers can use,” said Karl Brauer, executive publisher of Autotrader and Kelley Blue Book. “They know EVs are harder to sell so they sit on the lot longer. They don’t feel supported in servicing and have to spend money on infrastructure.”

Brauer said manufacturers may be coming around. “I think there’s more awareness at the manufacturer’s level. You can’t just produce these cars and not set up host and support systems.”

O’Meara Ford’s service shop focuses on fixing Fords, but if a vehicle from another brand comes in for service, well, the dealer obliges. Unless it’s a Tesla.

“No, absolutely not. Let’s ask these guys if we want someone else’s car in here that does not have a franchise,” O’Meara said to his techs. “That’s the key. If someone brings in their Pontiac here or their Chevy, we’ll work on that all day long. But if someone’s going around the system and going to deliver cars without (dealers) … they are not welcome.”

“We don’t work on Teslas,” another employee said.

Tesla is the most popular electric vehicles brand sold in the U.S. today. According to InsideEVs, Tesla Model 3 sales between January to July nationwide were eight-times higher than the second-place Toyota Prius Prime. But the way it sells cars right on its website makes dealerships fume. Most states don’t allow auto manufacturers to sell directly to customers. Car buyers must go through an independent car dealer.

But in Colorado, Tesla was able to bypass the dealer franchise law, which was passed to protect dealerships facing the loss of their franchises after General Motors filed bankruptcy. Tesla was grandfathered in and now operates a service center in Littleton. Other EV startups, like Rivian, had hoped to bypass the law, too, but proposed legislation failed this year.

The idea behind independent dealerships is they take care of area customers and offer repairs and service. Even if the brand goes away, the local dealership, which often operates several car brands, remains in the community. Dealerships employ local workers and become the place a buyer can go and complain or get help. In person.

When Saab filed for bankruptcy and shut down, one Colorado franchise owner heard from a long-time customer who had bought a Saab just months earlier, Jackson said. The customer felt the dealer should have known Saab’s end was near. The dealer bought it back at a loss to keep the customer, Jackson said, ticking off other brands that no longer exist: Daewoo, Yugo, Saturn, Suzuki, Oldsmobile, Pontiac and Hummer.

But if an automaker, like Tesla, doesn’t have independent stores in communities where customers live, and the automaker shuts down, the customers are stuck, Jackson said.

“If, and that’s a big if, and when, and that’s a big when, they go out of business,” Jackson said, “all the retail and service centers close, too. So there’s not a dealer to talk to in the community, there’s not a dealer to go back to and not only get the warranty handled or to buy the car back or to service the car but to even answer any questions on the car. And that’s why, for consumers, we believe that the franchise dealer model is still the best.”

Dealerships are in decline. In the 1960s, there were some 50,000 dealerships and today, there are 16,753, according to NADA. Competition from national chains like AutoNation and CarMax means no haggling on price, but fewer long-time employees like you’ll find at O’Meara Ford.

“Dealerships are big and visible. They’ve been on those lots for decades. People do notice when one shuts down or changes hands,” said Ivan Drury, senior manager of insights for automotive information site “They donate and work in the community. And people do associate certain family names with dealerships they’ve gone to. It’s not just nostalgia, but you trust these people not like you would when Acme Auto shows up down the street. Some of these guys want to keep this alive while others just want to hit volume targets.”

But in an era where buying goods online — even a house — can be done without face-to-face meeting, dealerships seem awfully antiquated, said Wilson Hitchings, a member of the Colorado Springs EV Clubwho owns a Tesla Model S.

“I bought a Toyota years ago. I’ve had a dozen in my lifetime. I own one right now. But when I went to buy one, I wanted one with a sunroof but I had to buy leather seats,” Hitchings said. “They (dealers) bundle them and then the dealer has to sell the inventory. I do not want that kind of seat.”

Hitchings customized and purchased his Tesla online, which he called a very pleasant experience.

“The argument they make is that dealers allow competition and have a better supply and repair model than direct sales,” he said. “If that statement is true, then they should have no problem with direct sales.”