31st Annual Automotive Insights Symposium | Auto Outlook Panel: Driving into 2025

MARTIN LAVELLE: All right. Welcome, everybody. My name is Martin Lavelle.

I do economic research here in Detroit. I'm on our Beige Book submission team as part of the Chicago Fed, and also on a team that helps brief President Goolsbee on current economic conditions before he goes to the FOMC meetings.

So, pleased to see you all here. I'm going to give you an outline of how this session is going to go, so that then you have a feel for, you know, how the next hour and 15 minutes or so is going to proceed. So I'm going to give a brief introduction of each of our panelists. They will come up here to the podium, and they each have five minutes to present on what their 2024 was like; how, at this point, they expect their 2025 to go; and then upside and downside risks that they see for the year ahead.

After that, we will move into moderated Q&A, for me. We will all come up here and do that for a little while. And then, while either they are presenting or we are going through our moderated Q&A, you will be submitting your questions via the program portal that you received access to when you registered, just as Rick was talking about before.
So with that, first, I'd like to bring up Stephanie Brinley, who is Associate Director with S&P Global Mobility, who will kick us off. So please welcome Stephanie.

[APPLAUSE]
 
STEPHANIE BRINLEY: OK. All right. So when we did our run of show, I thought, OK, let's start with me doing some global conversation, and then we'll have Mike, and then we'll have Pete. That sounded like a really good idea before. Right now, I'm like, Why did I go first?

So we've talked a lot about, a little, getting into what's happening, and agility is going to be the problem for automakers to work through right now. It's very uncertain. There we go.

In 2024, we-- actually, I've got a 2025 slide up. But 2024, we saw some improvement. We saw inventory settling down. We saw production settling down. Like Kristin said, we had a better year, that way.

And we also saw a lot of EV price challenges in Europe and in China. We saw sort of the concern about Chinese auto manufacturers coming into other areas really reach a crescendo. I noticed, in the last couple of weeks, there's a little bit more conversation about how Chinese automakers needing to get into Europe still have to gain some consumer trust. So that's still an issue, by the way. Just showing up is not quite enough.

So there is still some concern bleeding into '25, but consumers are still coming into that. When we look at 2025, we do see modest recovery prospects. And I will say, our forecast here, one of the assumptions-- some of the assumptions that we have going into this is that the Trump administration will effectively have a 10% tariff on everything outside of North America and outside of China, and an additional 30% on China. Those were the assumptions that we baked in at the end of December, early January.
 
The last weekend was interesting, at best, on the tariff scenario here. But that's where we're at. So we already do see some tariffs increasing in this expectation here.
Europe is declining a little bit, and part of that is they've got some really aggressive emissions standard hitting in 2025. And they're just going to have to manage through that. That's going to cost money. It's going to cost some sales.

In the US, at this point, we're looking at about 1.1% increase for 2025, and that's kind of where we're at there. So upside momentum here-- this is really far-- we do see that one of the side things of the regulations changing and the hesitancy, and some EV, is with a higher ICE mix, it could help the-- it could help affordability improve a little bit. The biggest downside is all this uncertainty.

Really, we're looking at tariffs. We're looking at inventory. We're looking at interest rates, as Kristin said, still remaining high. Affordability is still an issue. And so that's a lot of our downside space in there.

Again, in China, we looked at the fact that they are continuing their scrappage program a little bit, so that will help in there. As Kristin mentioned, in Europe, we're looking at some downsizing. We're looking at some changes there, partially on emissions, partially on these automakers just not having the share that they used to have.

I'm going to hit really quickly on tariff summary for this bit. I think that we're looking at three possible scenarios. We're looking at whether or not these-- assuming that they do. If they don't, then we've got a different story altogether.

But if those are implemented at the end of the month, if we have a quick recovery, if we have a quick process where they're in for a couple of weeks, the administration gets what it wants, and it pulls it back, there's a minimal impact, but you could see some production changes right away in that. And what we'll see is automakers trying to make sure that they have the right vehicles in the right space and the right time.

We think that as this goes forward, it could behave a little bit like we saw with the supply chain impacts after COVID when-- you can think of when we had semiconductors in short supply, and automakers were producing more high-margin vehicles because that's where the semiconductors-- where they needed to go. We'll see those kinds of things come into which vehicles they produce faster, trying to make sure that they protect as much from the tariff situation as they can.

If it goes on a little bit longer, then, clearly, there's more risk there. If it turns into what we were calling kind of a tariff winter, where it goes on for a couple of years, we're seeing those declines in the US and Mexico and Canada sales kind of settling in. As we've talked about, or what we'll probably talk about more, the changes to change the sourcing footprint can't be done overnight. That is part of this issue.

And I think, when we look at these, specifically the Canada-Mexico opportunity for tariffs, it's not clear how and when that tariff might be lifted. There's a conversation that it's about the national emergency and it's about immigration and it's about the drug trade. And those are important things, but there isn't a clear-- there's no metric.
 
It's just whenever they feel like they've got the problem solved, and there isn't really recommendation on how to solve it. So that, that's a very uncertain scenario. If you're an automaker, if you're a supplier, when do you start moving things, when you don't really know how long this is going to last?

And what we're going to see, too, and probably are seeing in January, February, March, we're seeing decisions being delayed. When do you start a program? When are you going to-- where are you going to build it?

You've got to hold off. You can't quite decide if you're going to do it yet, which means, in 2025, 2026, 2027, all of a sudden, the new car that you thought was in your product plan isn't in your product plan. The older car continues a little bit longer, so you have a knock-on effect on sales and marketing and the market all the way through. It's going to be interesting to see how badly and how long it takes to come to a resolution where automakers feel comfortable to make decisions again.

And the tariff situation is part of it. Automotive regulations for fuel economy and emissions are part of it. And I think that's a lesser problem, in some ways, than the tariff situation. And with that, that's my three minutes.

[APPLAUSE]
 
MARTIN LAVELLE: Thanks, Stephanie. So as a reminder again, as long as the presenters agree to it, all the slides will be available on the conference website afterwards. So, next, I'd like to welcome Mike Jackson, Executive Director of Strategy and Research with MEMA Original Equipment Suppliers. Please welcome Mike.

[APPLAUSE]

MIKE JACKSON: Thank you, Martin. Good morning, everyone. It's really a pleasure, a privilege to share the voice of the supplier community here with you this morning. And it's a pretty remarkable time, obviously, in the industry, and as we've already heard, a tremendous amount of volatility, a tremendous amount of uncertainty.

And so if we look at here, this past year, obviously, geopolitical impacts persist, and so a couple of wars remain. And so this coupled with, then, a tremendous uncertainty on the political side-- obviously, the election came to pass, and yet, still, obviously, that represents a tremendous amount of uncertainty relative to new policy and what those implications are.

What's really important, at MEMA, we're very privileged to represent some 900 member companies across the OE and the aftermarket space for both light and commercial vehicles. What's important is the supplier community employs nearly 950,000 employees here in the US, and so it does have a huge impact here on the economy, and yet, we know that it's a global industry. As much as we talk about North America or the US, it's a global industry, and so there are global factors.

And so the competitive pressures are very real, and so what's also important to then take into account is looking here at what that means relative to the trends and the shifts that we're seeing. I think Kristin did a great job here highlighting a number of those. But the reality is, it's not only the shift from ICE to BEV, and now a portfolio of propulsion solutions. It's not only geopolitical dynamics and competitive pressures. But it's also then taking a look at policy and what those implications are.
 
And so we know it's an asset-heavy and long-lead industry, and so this makes it incredibly challenging for suppliers to navigate in light of the amount of volatility that we've seen. And I'm reminded here, we're actually coming up on the five-year mark of the pandemic. And so what that has since ushered in is a series of volatility and a wide range of changes.

And so, well, let me just jump right into my first slide here. So if we look at the MEMA Original Equipment Vehicle Supplier Barometer-- this is a survey we ask our executive members, certainly, each quarter. We ask them here, How is your 12 month outlook, and how has it changed over the past quarter? And what's remarkable, in the fourth quarter, it came in at 36. 50 is neutral, and so that means it's decidedly negative.

And so that in and of itself is pessimistic. But the point is that this is the 11th consecutive quarter of building pessimism. So this simply means that suppliers are managing a series of challenges, costs, and as Stephanie highlighted, a wide range of product plans that change represent a financial burden, then, certainly, for a broad range of suppliers.
So let's continue on, and we'll look here at the top threats, top threats to the industry. Number one is poor sales of vehicle program supply. This simply means that many programs have come to market-- and in particular, a number of electric vehicles, clearly-- and they've fallen well short of plan. This represents a huge financial burden for suppliers.

And moreover, to Stephanie's point, if there are a number of program changes that occur, suppliers have already incurred those costs. They've already designed, developed. And if there's a six-month delay on that, that means they carry that, those investments, and they don't get reimbursed for that extended period of time while that delay occurs. And so this represents another significant pain point.

Additionally, then, if we look at, from a-- if we look at policy changes, clearly, weakness in the economy is really not a factor at this point, as we heard earlier, but changes in government policy certainly represents a significant point here going forward. And let me just jump ahead.

A quick point here, I just want to look at the top line. We're looking at a cost index, and so looking at a cost index for-- the producer price index for automotive parts, effectively. And so we see that even under the prior administration, even the previous Trump administration, under tariffs, there were cost increases, and yet, inflation had a much more negative impact. And so what's important here, though, is that parts are actually at a-- the producer price index is actually materially higher than the consumer price index for vehicles. And so this is a pretty important distinction to recognize, and we'll talk about that a little bit more.

The last point I want to highlight here is simply the risk of stranded capital. This is a really significant factor. Many suppliers have already made, as we heard, billions of dollars of investments.

We asked them last year. 20% of respondents indicated, hey, look, this is either a substantial or the utmost concern for our organization, and then, going forward, in the next 12 months, it's actually an even greater issue. And so this is something that's especially important.

And so we look at this and we say, clearly, the industry is eager to play an important role. The supplier community needs to be healthy, innovative, and profitable. And so we look forward to-- I look forward to your questions. Thank you.
 
[APPLAUSE]

MARTIN LAVELLE: Thanks, Mike. And certainly, last but not least, Senior Vice President from Group 1 Auto, please welcome Pete Delongchamps.

[APPLAUSE]
 
PETE DELONGCHAMPS: Thank you, Martin, and good morning, everyone. Martin, I always enjoy our quarterly talks. It's always good catching up, and it's always a pleasure to be here.

So I thought I'd take a minute to talk about our company. There are six publicly traded auto dealers in the space, and we're based in Houston, Texas. What makes us a little bit different from the others is that we have a footprint in the US that kind of follows the SMILE strategy. We have 259 total dealerships, but we also have a big presence in the UK. So as we talk about electrification, we have a pretty good handle on what's happened in the UK business with the electrification.

But the other thing is we consider ourselves a pure-play retailer. We own car dealerships. That's all we do. We have not branched out into finance companies or standalone used-car operations or any adjacencies.

So what we try to do is manage our business the very best that we can for our shareholders. When I joined the company, it was a $3 billion company, and we had 80 dealerships. 21 years later, we did $20 billion in revenue last year, and like I said, we have 259 dealerships.

Last year was very interesting because, you think about where we came from, and inventories were in balance after COVID, and we wake up and-- our largest group of dealership brand is Lexus and Toyotas, have 25% of our business, which is good. But we dealt with the CDK outage. So we were the-- we're power CDK users.

Everything we do is CDK. So we had 10 days of doing everything by paper.

We had a massive hurricane in Houston. Personally, I didn't have power for nine days. And we dealt with, you know, the uncertainty of the election.

But at the end of it, we came out and we had a terrific year. We grew the company by 20%, and it all turned out to be a really fine year for, I think, the retail car business. Consumer sentiment, as mentioned, was good.

So we're going to talk about parts and service today, and that's where we really focus on, the big part of our business. And so the last year for our company was very good. If you take a look at-- you know, here's the revenue growth.

Our EPS was certainly down from the records of '22 and '23. We had terrific free cash flow. But the difference about retailers-- it's a 2%-margin business if you're average, and it's 4% if you're good. So you think about, for every dollar you sell, you get to keep $0.04. It's a tough business.

But I just wanted to show everybody that chart just to say, you know, we were able to generate cash. As a result of that, we were able also to do $4 billion worth of acquired revenue. We were also able to buy our stock back. So we've had a nice stock run over the last three to four years, which I think really helps the overall economy, because this year, our company will spend $200 million building buildings. That's money going right into the economy.
 
Coming up this year, we want to continue to grow the company. As mentioned, parts and service is absolutely critical. We'll grow that business mid-single digits this coming year. Last year, little factoid, we wrote 2.4 million repair orders in our company. And we're power Xtime users, which is a Cox company.

And then, we just bought 55 dealerships in the UK. We doubled our UK exposure. And we believe that when you buy dealerships, you scale them immediately. So we're in the middle of combining two similar-sized companies into one in the UK.

So that is a huge priority for us this year. And then, moving down the list maximizing our full rooftop potentials, so you've got 259 businesses, you've got to maximize those opportunities. And you do that through proper cluster marketing, and we've got a lot of innovation, working with our digital applications.

So that's the overview for this coming year. What do we stay-- what do we worry about? Certainly, what happens with EVs, it's a small part of our business, based on our footprint, you know, 3%. Our day supply is good right now with EVs, about 40 days. So we're good with that-- the taxes, tariffs, everything that Stephanie talked about, and then the UK challenging backdrop with the economy and EV mandates.

Oh, new vehicle supply and-- new vehicle margin and oversupply, we finished last month with a 75-day supply of Chryslers, or Stellantis, down from 130; a seven-day supply of Lexus; and a 12-day supply of Toyotas. So trying to manage that business has been very interesting, to say the least.

And then, it's hard to find used cars. It's just, based on the pent-up demand, it's very hard. And it's going to be like that for the next two years.

And then, what we talked about in our prep, developing, retaining, and growing our workforce-- there's a serious shortage of technicians and skilled labor in the marketplace that I think, as a country, we've got to figure out. How do we get more trades into the business? We hired 300 technicians last year, and we could hire another 300 this year. So those are our risks, not being able to do that for this coming year. So thank you.

[APPLAUSE]

MARTIN LAVELLE: Thanks, Pete. I invite you to join us up here now. We'll get into our discussion.

So the way that my piece of the discussion is going to be structured is we're going to be very data-driven first, focusing on what surprised everybody about last year, and maybe how that's fed into your 2025 outlook, kind of getting to the momentum piece Kristin was talking about before. Then even more deeply diving into how the fourth quarter, and even the first couple of weeks of January-- or how January went, given the momentum we saw in vehicle sales at the end of the year-- and then we've hit January, and then maybe some feeling, some sentiments started to change. We picked that up from other contexts.

We'll talk about labor market. We'll talk about pricing. We'll talk about other metrics.

Then we'll start to branch out and we'll get into more of a policy-driven, "how you're thinking about things" kind of discussion. What are the mechanics around different policies, if they get implemented? So we'll get-- that's when we'll get into tariffs and thinking about brands and countries and so forth.
 
So, but first, I wanted to just start off, maybe with Stephanie first, just with 2024 and thinking about your forecast going into 2024, and how it either matched what you thought going in, once the year was all said and done, and maybe how that is guiding your thinking about 2025.
 
STEPHANIE BRINLEY: Yeah, 2024 did come out to be a little bit better than I think we expected at the beginning of the year, and that was-- we kept ticking things up just a little bit, just a little bit every quarter, which was nice. But when we look at, like I talked about, when we looked at-- when we look at 2025, we see a lot of uncertainty, and we see a lot of delayed programs still. We see decisions being held back a little bit.

Inventory, for the US, first-quarter inventory is a little low because December was so good. But we can see that pick up. And when we look at inventory, though, we have noticed that we see some discipline happening as well.

We talked about, and Kristin's talked about, the five-year average being lower than it was before COVID and before the pandemic, and how incentives are lower than they were then. But really, we were high. We had five or six years over 17 million units, and we don't really-- we're not seeing-- we've got maybe 16.5 out there.

But really, we're looking at US, through at least 2030, 2032, being in between 16.5 and 16, so we see a much more subdued market. But we don't see a lot of opportunity for that jump to 17, which makes some things challenging in terms of adding new brands. For example, if we get to the fact that whether or not Chinese brands come here, adding any new brand gets more challenging.

Changing your version from ICE to BEV and your mix to that, you're not seeing a lot of overall growth in the market. You're not seeing a lot of organic growth. So if you add something new, you're fundamentally taking something else away. So we're going to see that dynamic play into 2025 as well. And a lot of this really comes down to how the tariffs come into play, how the economic policies-- how quickly they affect the consumer.

Like I said, we do see potential for vehicle pricing to continue to settle down if we see a mix towards ICE and hybrids come up a little bit higher, and so it's an interesting way to get the affordability factor down. It's not really that they're getting any less expensive. It's about mix.

And if we do get interest rates to settle down a little bit, if that starts to flow through to auto loans, that can make a difference and help things a little bit as well. But there's still a lot of uncertainty, especially in this quarter.
 
MARTIN LAVELLE: I mean, it almost sounds like-- and I invite Pete and Mike, too, when I bring it around to you both, to answer this as well. It almost seems like-- and we get this from other contexts as well-- that there's a thinking about how 2024 went, and maybe even into the first little bit of this year, but then it almost-- is it wrong to say that you can't really go back and look at what happened in 2024 and think about how this year is going to play out?
 
STEPHANIE BRINLEY: Yeah, I would say there's a lot more-- there's just too much uncertainty right now to be able to be sure that it's going to play out quite the same. But, and also, in 2024, because production was more stable than it had been in prior years, I think we started seeing a little bit more stability in the supply chain second half in the last quarter of '23, and that fell down. So there was opportunity for Honda and Toyota to make up some lost ground, right, from their leaner years, and some of the others.
 
We don't have that. That's not part of 2025, because we're not seeing a lot of growth in production in 2025. So it's a little bit more different dynamic. Right, you don't have that increased inventory, in that regard, and we do have a lot more uncertainty in '25.
 
MARTIN LAVELLE: OK.
 
MIKE JACKSON: If I could just add to that, one of the things I think is really important is that when we started '24, there was an expectation-- look, production volume, production had been constrained for a period of time. And so we were expecting a bit of an uptick. And it didn't really happen, and so we saw stability. Fine.

But at the end of the day, there wasn't incremental volume. So without an incremental volume, and you still have program launches, ultimately, that represents a significant constraint. Right, and so for suppliers, they're making investments, looking for some incremental volume, hopefully. And so then, when you fast-forward-- and especially some of those programs, whether they're electric or whatever the program, whatever it may be-- you're trying to balance an entire portfolio, and so this represents a significant hurdle.

And so, if anything, it's been, you know, for '24, flat, and for '25, you're looking at effectively a plateau. And so this volume plateau represents a significant hurdle because, once again, you're talking about costs and cost pressures. Margins for suppliers have not returned to pre-pandemic levels.

And so as a result, there's this constant-- in a flat environment, in this plateau, suppliers are doing everything they can. And certainly, there's been a tremendous amount of resilience, but they're doing everything they can to try and cut costs and trying to optimize in order to ensure that even with a constrained volume outlook, that they can then be profitable and be successful.
 
MARTIN LAVELLE: It sounds like, from that answer, Mike, you're also thinking that 2024 doesn't really inform 2025 as much.
 
MIKE JACKSON: Well, I think, to the point that-- oh, I'm sorry. Go ahead. The point that Stephanie made-- you know, obviously a very strong December, and so that pulled down some inventory-- ultimately, looking at last year, inventories rose very significantly.

And again, aggregate for the industry as a whole, it varies by OE, and so that's going to be an important factor. But that could then-- that was a factor in terms of informing the overall level of production that might be needed for '25.

And so seeing a strong showing in December certainly helped, but inventories still remain strong. Inventories still remain heavy. And so as a result, that then represents a bit of a headwind for production levels here going forward.
 
MARTIN LAVELLE: OK. Pete, reflections on 2024 and, if at all, how they inform your 2025?
 
PETE DELONGCHAMPS: So at the end, it turned out good for us. As retailers, you've got to balance it out. We have seven Stellantis stores. We woke up in March with thousands of Chargers and Challengers and lost millions of dollars selling them. On the flip side, we couldn't get Toyotas and Land Cruisers-- and made nice gross profits on those cars.
 
So balancing out, in how you market the dealerships based on what those inventories look like, it was a challenge last year. And I feel for you on the supplier side, because we're begging for Toyotas and begging not for more Stellantis. So how do you-- that's really hard to balance out.

But I think Kristin said it best. It's a big country, and people have to buy cars. And if you look back the last 25 years, 16 and 1/2 million is kind of trend industry. So we feel that, you know, 16, 16 and 1/2, maybe, if things get-- the stars all align, we can get to 17 million SAR.

But for our company, we look at the parts and service business. And like I said, we wrote 2 1/2 million repair orders last year. Our average car on the shops is five years old and has got 68,000 miles on it.

And for us, that's a big opportunity. So we're, every day, talking to our clients about, How do we trade that 68,000-mile car in to get a new car? And the retention rates, because of the complexity of these cars, have gone from, a five, six-year-old car was in the 40%, and now we're at almost 60% retention rates on these older cars because they have to come see us because of the complexity of the cars.

And what we've done, which I think has been a catalyst to our growth, is we've priced right. We took the stigma out of, you go to the car dealer, it's too expensive. So you price right. You make it easy. We have digital applications that 40% of the people now make their service appointments on their phone, just like you would an airline, and we have a call center to make it very easy for our customers to come in.

So for us, what we have to do is make it as easy for the customer to do business as we want, this coming year, to hit our objectives. We can't control what happens with the SAR and the market, but we can control how we treat our customers and making that service experience as easy as possible. And we think that if that happens in the retail side, then it'll help perpetuate what happens with the new and used car markets.
 
MARTIN LAVELLE: Are you doing anything special to try to entice consumers to maybe trade that five-year, 68,000-mile, or plus, vehicle in?
 
PETE So it has to-- if we're doing our job, we know what the situation is. With Martin, you come in and we know what
DELONGCHAMPS:your equity situation is. We can talk to you.

Martin, you've got $5,000 of equity. We could actually lower your payment by X amount of dollars. So we have the information to talk about that business.
But we-- some people don't like to hear this, but we shy away from the auctions. We would much rather overpay for a trade with a customer, that we do business with every day, and take that trade and overpay. So 70% of our acquisitions come from trades or from current customers, where only 10% come to the auctions. And so that's something we think is-- we give our general manager of our dealerships the flexibility to basically overpay for the trade, recondition it properly, and then retail it to somebody within our marketplace.
 
MARTIN LAVELLE:
 
Focusing more now on maybe the last three months or so, I'll start with Pete, and maybe I'll go to Stephanie after this. I guess, first, how much pent-up demand do you think there is, given SAR's been below that 16 up until-- right around that 16 until breaking above that the last couple of months? And then, how much pent-up demand-- so how much pent-up demand do you think is there, and how much pent-up demand do you think was accounted for in that run-up to sales here at the end of the year?
 
PETE So I think that there's still pent-up demand. I think that incentives made a big difference in the fourth quarter.
DELONGCHAMPS:You look at our interest rates. Traditionally, our company, through our financial services business, we would finance 71% of our customers, so if you came to the dealership, we'd arrange your financing 71% of the time. And that was about 72% new and 69% used, and that's kind of where it landed.
As interest rates went up, new penetrations dropped to 69% and used to 62%. Customers weren't going to pay a high interest rate for a loan, so they accessed a HELOC, paid cash, went to a credit union. But what flipped was, as the OEMs started providing incentives to their captive finance companies, it shot up to 76% for new, but it's stabilized at 63% for the used piece of the business. So the incentives clearly worked for APR based.
And then, also, the amount of pent-up demand for high-demand vehicles is off the charts. You look at some of the Toyota and Lexus products, I mean, it's a three, six, nine-month wait.
A Camry-- like I said, we had 12-day supply of Toyotas. Most of them were Tundras. So if you want a Camry, you're going to have to wait a few weeks-- not forever, but you have to wait a few weeks. During COVID, it was, you know, wait a couple months.
The other thing that we did, I think, that was smart-- and then I'll turn it over to you-- is, during COVID, we didn't charge over sticker for our cars, and that's made a big difference in our business. At the time, our general managers weren't very happy because they could have made all that extra money.
But we took the long view and said, first of all, no one likes to be taken advantage of, and we believe in selling cars to people that are in-- right, we don't have a coast-to-coast strategy. We want to sell to people in our markets. Nobody wants to be taken advantage of. And they remember.
And then, the negative equity situation, if you charge $5,000 over for a Ford Explorer, guess what? When they came back four years later, they're upside down. And so it's, I think, really helped our business by taking that long view on what happened during the COVID days.
 
MARTIN LAVELLE:
 
Stephanie, where do you think-- what do you think is happening with pent-up demand? And, I guess, adding to that, how much is the affordability piece playing into how much pent-up demand actually gets realized?
 
STEPHANIE BRINLEY:
 
Yes. I think there is still some pent-up demand left, but it is, it's offset by the affordability. And vehicles, you've got your five-year-old vehicle, you've got your six or seven-year-old vehicle, and they're still fine, if you don't crash them, you take care of them. So the quality of the vehicle actually enables consumers to wait a little bit longer if they need to. So that plays into kind of what we would think the pent-up demand would have been before.
I think, another thing, coming into '25 and a little bit into '26, too, we talked about being five years out from COVID. 2020 was clearly a poor year for sales. That means those people aren't coming back, or are coming back but there's fewer of them.
If you assume a normal five-year cycle, there's fewer people coming back in 2025 and in 2026 than there would have been five years prior to that, just because we had lower volume. So I think that plays into it a little bit well-- a little bit as well. There's still pent-up demand. But it's balanced by affordability, and it's balanced by the fact that vehicles do last longer and they do keep you safe and they do drive well and all of that.
 
So your length of model changes, and with the loans themselves getting a little bit longer, if you're in a negative equity situation, you've got a long loan, you're not moving. You can't move, not usually, anyway. And if you are-- even if you're not in a negative equity situation, if you've kind of got it in your head that you've got a seven-year loan, then maybe you're delaying coming back a little bit.
So there's some offsets in there. People wanted to buy cars in 2020 and couldn't. People who did might be keeping them a little bit longer. And it's a big mix, really, in that.
 
MARTIN LAVELLE:
 
And how is this off-lease gap going to play into that, with the intersection of five years ago, COVID, but then three years ago, leasing was "eh."
 
STEPHANIE BRINLEY:
 
It slows everything down, right, because your used car market, that Pete was talking about, that's going to be very difficult. You can't just say, oh, just buy a used car because a new car is too expensive, because you also don't have enough used cars coming back in. So, basically, it constrains sales for '25 and '26.
It's one of the factors that holds those years back. And that's been in our forecast for a long time because we could see those ebbs and flows, and that plays into it. That's one of the reasons we stay at 16 in that space.
 

 
MARTIN LAVELLE:
 
So, Mike, you hear Pete and Stephanie talking about pent-up demand and where sales activity seems to be happening. But I wonder, for you, hearing that, and then thinking about if you did your most recent supplier barometer now versus when you did that most recent one, just, how does that hit you? What do you think about-- what does that portend for suppliers?
 
MIKE JACKSON: Well, I think there's a couple things. Right, there's no question that our members are very concerned about the prospect of tariffs, as they should be. We don't support tariffs at this point.
I mean, certainly, our point of view, from MEMA, is we champion the business interests of our members, and that means healthy, innovative, and-- you know. And so many of our members are on the cutting edge, helping to make vehicles more affordable, more efficient, more sustainable, and safer. But I think the challenge is that-- again, I think many members, many of our suppliers, were very keen here last year, seeing a larger number of affordable EVs coming online and that ramping, and seeing volume come to fruition, so that was positive.
But then part of the challenge is, then, here, in the back half of the year, with the anticipation of the election, things cooled off. There was a chilling effect, and this cooling effect, it hampered the industry, to a degree, because decisions weren't being made. And so with this uncertainty, that creates a significant headwind for the OEMs-- you know, which way do we go-- and then also for suppliers as well.
And so suppliers are-- look, most of them have a portfolio of technologies, and they're able to provide solutions to whatever the customer is looking for. But the challenge is, though, is how to-- there's not a way to readily pivot in a very short time frame. And so this represents a significant constraint, from that standpoint. So I think, as we look ahead here to '25, there are some very real concerns, because I think one of the key pieces is this.
Right, you talked about stranded capital. And so what does it mean? Well, we know that even in an inflationary environment, suppliers had to go back-- because they deal with fixed-term contracts, they had to go back to their customer and say, hey, can you please reimburse us for higher costs? And there's a delay, and that means that suppliers are holding that burden and waiting, then, for that reimbursement.
 
The concern is that, again, a tariff situation could create, again, more pressure, which could then contribute to some sub-tier supplier distress, and that's the last thing we want, last thing we need. The industry is fragile. I would say the supplier industry has contributed and demonstrated remarkable resilience, but that said, as we saw with the semiconductor environment, the semiconductor situation, all it takes is one part in order for it to stop a facility, to stop a plant. And we know that we still have global supply chains, and so this underscores a significant amount of risk that remains.
 

MARTIN LAVELLE:
 

In our survey of economic conditions that the Chicago Fed does, for several months now, there's been a definite divergence in performance between non-manufacturers and manufacturers, and we've been-- almost that manufacturing is moving sideways. Does that accurately describe what you think is going on? Or is that even maybe a little too positive of what suppliers are experiencing?
 
MIKE JACKSON: Well, I think, clearly, it's going to vary. Right, there are some suppliers that are on the cutting edge and they're providing the latest innovation, and they're helping to make this transition as higher levels of electrification come to pass. And the other point, then, too, is we know, again, it's a global industry, and so, many of our members, they're actively engaged in China.
And so the point is, then, is that you could argue that China is effectively the de facto standard, if you will, or the Silicon Valley of the electric vehicle space, in terms of demand, in terms of scaling, and this critical mass that's there. And so what that means is they're actually learning and innovating to a higher degree, in some instances, right, to a higher degree, and they have the opportunity, then, to bring these learnings back to-- whether it's North America or Europe or wherever.
And so this can be positive, but it's an important element. And I guess the final point I would make is, if we talk about Mexico, it's really, really important. Obviously, the USMCA is fundamental for the industry, and so it's represented a tremendous opportunity for the industry and for the supplier community.
And so what's important, though, is we've seen a tremendous surge in activity. Obviously, we've seen labor rates rise dramatically, minimum wage, and the rest, and so that's contributed to some cost pressures there, but, at the same time, significant investment on behalf of Chinese suppliers, and OEMs looking at China, looking at Mexico as well. And so all of these contribute to a range of factors that add pressure here not only for Mexico, but for North America as well.
 
MARTIN LAVELLE:
 
All right, now we're going to start to think about 2025 more specifically. So thinking about labor market-- so I'll start with Mike again-- how are suppliers thinking about headcount levels and going forward for this year?
 
MIKE JACKSON: Yeah, no, it's a great point. But I think, again, from a production basis, if we're looking at a relatively flat outlook, it's going to be constrained. I think what's important, though, is it's remarkable, but there are very real cost pressures.
Just as an example, our fourth-quarter supplier barometer, there's a question there on turnover. And so voluntary monthly turnover, you might be shocked to learn that in the US, hourly turnover for suppliers, 7.5% is the average. There are many pockets where it's significantly higher, 10% or more per month. OK.
And so what does that mean? It means that the suppliers are constantly having to rehire and retrain and maybe even modify workflows. And so as a result, this has been a significant driver.
 
And I'm excited to hear a little bit more about the automation panel. But this is a very real situation that suppliers have had to contend with. They're like, well, what if I redefine the pattern of work so that I can leverage automation to a degree so that there's stability?
All suppliers want is stability. Stability provides an opportunity for profitability and for that return. And so this is where I think it's a significant factor. In Mexico, similar situation, almost 7% monthly turnover is the average here.
So I think, in terms of hiring, there's some constraint. I think, clearly, the shift, hardware or software, there's certainly a greater need in terms of-- for suppliers to continue to advance in areas of advanced technology. And so this is an area of focus, for sure, but a couple of points there.
 
MARTIN LAVELLE:
 
OK. Pete, how are you thinking about headcount and also wage and compensation increases for the year?
 
PETE DELONGCHAMPS:
 
If you think about our business, we have accountants. We have HR staff. We have salespeople.



We have service advisors. We have technicians. So it's across the board.

So the way we look at it and are looking at this year is we want to increase the headcount for revenue producers-- technicians, service advisors. Salespeople, we now have technology-- for as long as we've been in the industry, the average salesperson would sell 10 to 11 cars a month. With technology, when utilized, it's increased to 14 units per month. That's a big difference. So what we're striving to do now is use technology to make it easier for the salesperson to sell.
On the transaction side, we have a US accounting center that's got 400 people in it doing all the transactional accounting for all of our dealerships, and we've been able to eliminate a lot of folks because of bots. So an invoice comes in from the OEM. It used to be manually recorded, put it in the system. Now we have bots reading it, accurate.
So the answer to your question is, revenue producers, we want to increase. Staff, if we can automate, then we will decrease. As far as wage goes, we've got to-- we have to pay people-- we like to pay people a little more than fair. And love them, and you keep them.
From a technician standpoint, we have to overpay them, have to, because we feel that overpaying a technician keeps them. And we can keep the shop full through all the things we do from a marketing and access standpoint. If you went to any of our dealerships today, you'd get an appointment today or tomorrow or the next day, everyone.
And we invest heavily in equipment, so we've got the nicest equipment. All of our shops will be air conditioned by the end of this year. So we want to make it the place to work.
But if you put all those things in place, we'll keep the techs. We need to hire 300 to 500 technicians this year at our dealerships. So we're not afraid to pay, but we're also going to be very efficient in utilizing technology to maximize speed and efficiency.
 
MARTIN LAVELLE:
 
And for you two guys, for the worker pipeline, where are they coming from? Where are you recruiting from? Where would you like to hope to recruit from? What's the outlook on trying to find that future workforce?
 
MIKE JACKSON: I think, from our perspective, I mean, the suppliers are-- you know, it varies, right, but obviously, they recognize the importance. And I think, particularly within the engineering function, maybe, as an example, it's very important to recognize that at the university level, at the internship level, and even beyond. But it's the exposure to the industry, especially important, and yet, we also know that there are different pockets.
The industry, it's remarkable. We talk about the industry as a whole, and yet, we know that there are pockets across the country where some states are-- the scarcity is very real. And so that's one factor.
The other point then, too, is, I think, on skilled trades, and looking at-- skilled trades are a significant pain point, great scarcity there as well. And I think the idea is that looking beyond kind of this traditional educational model, and the idea of, Where are there ways that we can train up folks even more quickly and to bring them on and to be able to engage them even at an earlier stage?
 
MARTIN LAVELLE:
 
Pete?
 
PETE We're looking for people wherever we can, and whether it's universities, for staffers, technical schools. But the
DELONGCHAMPS:quality of the shops that we're equipping, we get a lot of defection from other dealerships. It was very interesting, when the CDK meltdown happened, we were open within a day, and we were writing things on Big Chief tablets and number 2 pencils.
But there were dealerships that closed, just said, we don't have computers, we're closing, and then those technicians didn't get paid. We were open. And then we actually grossed up our technicians and said, OK, here's how much you earned this week, here's how much you usually earn, and we made the difference up. It wasn't their fault.
And so when you do those things, it's amazing the traction you get from people wanting to work for you. So we think that investing in people, process, equipment makes a massive difference at the retail space.
 
MARTIN LAVELLE:
 
Yeah. Stephanie, when you're thinking about putting together your production forecasts and you're thinking about labor market, but also other things, how is the labor market informing your production forecasts North America and globally?
 
STEPHANIE BRINLEY:
 
Yeah, the labor market usually hits more of our economic forecast, I think, a little bit more so than production. And particularly in the US, we see the immigration problem and the potential for more strict immigration rules and for the deportations and things like that. And right or wrong about the policy, not judging the policy, but it's fewer people.
It's fewer people that want to work. It's fewer people that are spending money after they get done working. It hits GDP. It hits labor. It makes it much harder for these guys to get people to work.
 
And I think it's been several years that we've talked occasionally about a mismatch of labor. Sometimes, you've got people that are either not geographically where they need to be or don't have the skill set for what's available, and that seems to be a situation that hasn't really improved that much. It'll be interesting, too, to see how the pressure to return to the office is growing.
And I chuckle, because I do remember when, 2020-ish, people were like, oh, I'm never going back to the office. I'm like, uh-huh, just you wait and see. Uh-huh. You're going back to that office. Nobody's giving that up.
Now, and it is-- I mean, we've learned hybrid is interesting. But that's going to play into the effect of it as well, because we're going to have people who did make choices to work a little bit more remotely and now have to go back to work or not. [LAUGHS] So there's things like that are going to come into play as well.
 
MARTIN LAVELLE:
 
Now I'm going to go more to some policy, potential policy implications. So I want to start with EVs. So with the potential for rollbacks in policy, what do we think happens with EV production and EV infrastructure investment? So, Stephanie, I'm going to start with you on that one.
 
STEPHANIE BRINLEY:
 
Delay. We're going to have programs delayed. It's really interesting, if you think about the policy under Biden versus the policy under Trump and the emphasis on electric vehicles, the Biden sort of target of-- you know, because it wasn't a mandate-- the target for 50% by 2030, one way to look at that is it never really mattered if we made that target.
It was a matter of saying, this is where we want this to go, which told congressmen, it told everybody, Where are you going to focus? If you have a bucket of money, if you have a project that you're trying to evaluate, which is the best way to go? Then you go to EV, because that is what the policy says and is directing.
And now we have a different view on that. But I think that this view is probably a little-- it's going to be difficult, but I think there's a little bit more reality to where consumers are. I think consumers are coming along to EVs, but I think there's still a lot of problems for getting to a mass level and getting a little bit higher.
We're seeing about 11% EV rate, BEV rate, in 2025, which is still growth. It's still happening. And more affordable vehicles matter. More choice in the market matters.
I think affordability on EV is hugely important. It opens up accessibility. But the barriers to adoption don't change.
So if you have a $30,000 EV, that more people can buy, it doesn't mean that more than 11% of the people want them, because you still have-- especially if you go into a more affordable, you still have your home charging network issues, you still have infrastructure issues, you still have education issues. All of those hurdles are still there. Affordability will help EVs grow, but that's not the only problem. So making them more affordable is just part of the solution.
So coming back, we're going to see-- I think we're going to see-- and we would have seen it anyway, regardless of which administration, whether it was Democratic or Republican administration, we expected to see the '28 through 2032 model year regulations ease back somewhat, somehow, because it wasn't going to happen. We aren't able to do that and meet those, with the consumer demand the way that it is, because consumers are the wild card.
 
I think we've said on this panel, we've said it multiple times, it's going to be up to the consumers. The regulations will change, and they're going to have to a little bit. So some of what's happening with this administration is rightsizing to a consumer adoption pace that was overestimated in a certain time period.
But if you're going to have any EVs-- we talked about global and China sort of driving things a little bit-- you can't build EVs tomorrow. You need to develop that technology over time. It's iteration, it's iteration, it's iteration, just like it has been for everything else.
So some of those investments, even if they were-- even if they were a little bit higher than consumer adoption rates were going to be, needed to happen. You need to invest. You need to build a plant. You need to do these things.
Now we've got to catch up. So it's going to be delayed programs. And suppliers are going to take a lot of the brunt of this, I think, and OEMs will as well.
But I think the change to regulations is likely to have been necessary, to some degree or another, and we'll kind of work through that. But there's underlying demand for electric vehicles as well, so it's not an either/or. I think a mixed-propulsion system, a mixed-propulsion market is what we'll see for a good another decade.
 
MARTIN LAVELLE:
 
Mike, it seems like you'd be naturally next to have the next response to EV rollbacks, and if that happens, how do suppliers respond?
 
MIKE JACKSON: Sure. You know, obviously, it's difficult, because, again, we talked about stranded capital earlier. And the idea simply is that you've got a product plan, a life cycle, and then a build volume rate that's expected, and so that is a-- it's a huge factor. And so I think there's maybe-- you know, there's good and bad.
Right, the idea on the good side is that ultimately there are many suppliers that make more money, they're more profitable providing ICE vehicles, building, supplying components and systems to ICE products or hybrid products. And so that, I think, is certainly a higher share of hybrid. I think that many, many automakers are leveraging hybrid to a higher degree and kind of making that pivot, if you will. And so I think suppliers are certainly going to leverage that, and it's something that doesn't fundamentally rework the entire supply chain for the EV, an EV product.

And so that's more manageable, more doable, more knowable, and more profitable. And so all of these things are positive on that front. But on the flip side-- and again, this is where it comes down to your portfolio, and so what does that book of business look like for a supplier?
And so some are going to be-- and, look, some OE automakers are very strong in the EV space, right, and so that could be, actually, still a very positive component. And it's really important to-- we tell our members, certainly, we encourage a policy of diversification, right, and I think part of the challenge is that even on a policy front, right, is picking one technology represents a risk because it doesn't offer that optionality. And so this is what is challenging for suppliers to try and navigate or align with. And so if that changes every four years, that puts leaders, business leaders, in a very difficult place to try and align and to continue to-- rather than have a longer-term kind of planning horizon.
 
And so I think that is particularly important. Obviously, it would be very-- it would be difficult for-- on the tariff front, would be a significant hurdle, no question. And ultimately, we know that-- look, USMCA is absolutely crucial. And we certainly are hopeful that that is recognized and that is ultimately the endgame here, to draw an even closer relationship across North America.
 
MARTIN LAVELLE:
 
Pete, going back to one point that Stephanie made about, you know, it's going to all be about the consumer, when it's all said and done, I wonder if you could share what the interaction with a consumer is who maybe is all in on buying an EV, or maybe someone who's thinking about it but hesitant? What are those interactions like? What kind of prep has that consumer done as far as what questions they're asking when they come into the dealership? How does that go?
 
PETE Well, first of all, it's interesting, based on brand and geography. So you mentioned the 11%. Large majority of
DELONGCHAMPS:that 11% is in California.

So our company, which, I showed you the map earlier, we're 3%. Last quarter, we sold 1,800 BEVs. We sold 8,200 hybrids, and we sold 34,000 ICE vehicles. And our BEVs, those 1,800, our average profit was $300.
Now, we spent tens of millions equipping all of our dealerships with chargers. The OEMs came out and said, we're doing this, so we said, charge ahead. And we have a full-time staff that's been doing nothing but equipping our dealerships with chargers, parking lots and in the shops, and running underground electrical.
And quite frankly, it's not been a very good return on investment. But to answer your question, it depends where you are. And Mercedes, for instance, their electric vehicles are terrific, but they're not particularly attractive.
[LAUGHTER]

And so the salesperson's got to work through that. And at that point, you're selling leasing and the status symbol of driving a Mercedes. BMW, on the other hand, they took their traditional 5 Series and said, we're going to build ICE, we're going to build hybrid, we're going to build BEV. And it's worked, because they're pretty darn good-looking cars.
Hummer has come on lately. You know, it's a really cool car. But most of them are being leased.

So what's going to be really interesting is, in the next three to four years, what happens with these cars coming off lease? Because, in my experience, if they're not popular new, they're usually not very popular used, except for when you get to a certain price point. So somebody is going to have to pay the piper here in three to four years with some of these EVs.
But for us, it's across the board, how they're received. I mean, even the Toyota and Lexus is not that hot. Hybrids-- don't have any-- sold. But the BEVs, people are concerned.
I had a neighbor, we gave him an electric 5 Series as a loaner, and he says, What am I supposed to do? I don't have a charger, and I'm not going to stand in the parking lot charging it for an hour. I said, well, just don't go anywhere for a while, Jim.
[LAUGHTER]
 
But, you know, if you don't have the charger in your garage, then it makes it very difficult. So as you see on the advertisements, Ford will give you a charger, and we have a couple companies that we have strategic relationships with that will come and put the chargers in. But it's an uphill sell right now, for sure.
 
MARTIN LAVELLE:
 
Just remember that Pete's comment about Mercedes is his and doesn't necessarily reflect the opinions of the Fed.
[LAUGHTER]

So, just so we're clear about that.
 

PETE DELONGCHAMPS: Well, I told Dimitris, the CEO of Mercedes, that-- because I share our BEV report with them every month. And they always have the highest day supply and the lowest gross profit. And so this is nothing I wouldn't tell the executives at Mercedes, either, so.

[LAUGHTER]

Anybody that has an EQS, I apologize. [LAUGHTER]

But your child's not that pretty. [LAUGHTER]
 
MARTIN LAVELLE: So, so one broader question, and I'll go to Stephanie first with this, is, So with these potential rollbacks on EVs, does it favor anybody? Is somebody going to benefit? Is somebody going to be on the other side of this?
 
STEPHANIE BRINLEY: It's not very clear. Where it comes down is, still, you have the consumer demand side of it, I mean, I think is the bigger issue, because consumers don't really care if you meet regulations or not. They're not thinking about it. Like, that's your problem. [LAUGHS]

They're just going to buy it or not. So it comes back to the product, not necessarily whether the regulation supports it or not. If you've got the good product, then you can get it and you can evolve it and you can do the iterative process to get the sales where you need them to be.

So I think that's a bigger deal. And I think-- I know we're probably going to start talking Toyota and Tesla in a minute or two. I'll get ahead of that, and thinking about this, and thinking about the narrative coming in a couple of years ago, the mythical, everybody needs to be electric, and all luxuries need to be electric and everything, because Tesla does everything so well and they're so amazing-- that was the narrative.

'24, sales are struggling, incentives on everything. They're having a much tougher time. Now that the competition is out there, now that the early adopters have gotten what they want out of it, it's very difficult.

On the flip side, in '23 and '22 and little bit of '24, everybody was just knocking Toyota for not having enough electrics and not being good enough at them. And now, in '25, the narrative is a little bit different. I would maintain both of those companies have stayed very true to what their strategic objectives are and don't necessarily respond to the narrative that's played out.
 
And I think that is what automakers need to do. You need to adjust demand, adjust timing on a product, if you need to do that, but you need to have a strategy. You need to stick with it, because the six-month news cycle, the year, those aren't-- you're going to be at the top of the cycle or you're going to be at the bottom of the cycle. You're going to be somewhere in the middle.

And you're going to have a good year. You're going to have a bad year. You're the darling, and then you're the stepchild.

It all happens over time. And you're here for the long run, so you need to stay consistent with what your goals are. And I think maybe that's in sort of those narratives, is where, when you see Ford and GM kind of have to pull back and feel a little bit less certain about what their goal is, that's where they end up getting a little bit more criticism.

And how they manage those changes is how it affects their business. I think that both of those companies understood that the EV adoption was not going to necessarily be as fast even as they projected, and tried to prepare themselves for it anyway. So I'm not saying they have bad strategy. But you're going to be at the top, you're going to be at the bottom, one year to the next. Stay clear to what you need to do.
 
MARTIN LAVELLE: Real quick-- since you went ahead and jumped into brands, which is where I was going to go next, which was perfectly fine-- your reaction to Honda and what they're planning to do at Marysville and East Liberty and that platform?
 
STEPHANIE BRINLEY: Yeah, it's interesting because now they're talking about it being a little bit more agile than just EVs to begin with. You know, Honda is-- not necessarily slow, just a little bit slower to the market. I feel like they really just want to own it now.

And it's interesting, I was at CES when they were talking about Honda 0, the 0 Series prototypes, and it was the second time they showed the prototypes. But the conversation was much more about the fact that they're building their own batteries, and they've got their own software system. And it's the story that we had heard from a number of automakers three or four years ago, that are all struggling with the software.

So they're not late, but they very much want to rebuild their own. And I think that is part of what's driving the Marysville situation. And it's not that it's good or bad, but they really want to figure out how to do it. And I think some automakers, when they start and say they want to do their own software, they want to do their own batteries, it's partially a matter of needing to understand what it is.

The next generation, they may use more supply or innovative-- but they need to-- especially a company like Honda that's so engineering driven, it wants to know how to do this. Once it figures out a better sense of how to do this, then it is more willing to work with the supplier community and share in a little bit that way.

So I think that's a little bit what's going on with Honda. And I think they really want to get out of-- they've had a lot of good relationships with General Motors, but I think they're really into the idea of being able to prove they can do EVs on their own. I think it's a little bit of-- not ego, but a little bit of a source of pride-- look, we can do this, we will be able to do this-- because they have dabbled in it up until now. And I think that's a lot of what's happening in Marysville.
 
MARTIN LAVELLE: OK. Mike, potential winners, losers, from what you see, and how it-- from these potential rollbacks?
 
MIKE JACKSON: Well, I don't know about winners, but I think what's important is, if we look-- look, it's really, really important to learn and develop the capability. To the example here with Honda, what's remarkable is-- you know, call them slow. I would say they're deliberate. And you could say, yeah, they may have missed some EV sales.

At the end of the day, one of the reasons-- what is the reason why Tesla has been successful? Tesla has a very narrow portfolio. And so as a result, if you build 1.75 million cars on the same architecture, you're going to be incredibly profitable, between a Model 3 and Model Y sharing the same underpinnings, and so as a result, you're in a really, really strong place.

Honda obviously recognizes, look, it's a global industry, whether the US adopts at a slower rate, but if Europe adopts at a faster rate, or China, obviously, whatever, how things play out there. But the idea is that this competency is going to be a tool in the toolkit, and, I need to know this, I need how to leverage it.

And so from a supplier standpoint, look, I mean, I think Honda and Toyota, all the manufacturers certainly have their own strategies, and suppliers, their job is to do their due diligence. I mean, look, and I don't think it's a bad thing to take some calculated risks, right, to look at some programs and to size up or assess, look, we need to pursue this opportunity and to maybe win that opportunity.

And maybe it's not a home run. Maybe it's not a complete success, but the idea is that as the supplier and the supplier community continues to gain competency and to continue to enhance know-how, so that they're even better equipped to be in a stronger position to contribute to a more competitive, more viable offering, next time around.
 
MARTIN LAVELLE: OK. I want to get to tariffs before we get to audience Q&A. So--
 
PETE DELONGCHAMPS: By the way, we love Honda.
 
MARTIN LAVELLE: OK.

[LAUGHS]
 
PETE DELONGCHAMPS: Great dealerships, great cars, and we were talking last night, no matter how good things-- the market is good or bad, the Honda business is always steady and accurate. It's terrific. So they'll get it right.
 
STEPHANIE BRINLEY: Definitely.
 
MARTIN LAVELLE: So, so thinking about tariffs, from announcement to implementation, maybe starting with Stephanie again first, just thinking about, How are the mechanics of this going to work? It gets announced. How do you see it get passed on? If it gets passed on, where do you see it potentially getting absorbed as it goes down through the supply chain?
 
And I'll ask the same of Mike, who's in the middle, and Pete who then gets to be on the consumer end of this. So starting with Stephanie first, how do you see this all-- how do you see the mechanics of this potentially working and being passed down the supply chain?
 
STEPHANIE BRINLEY: It has to be passed on to the consumer, ultimately, especially-- we're just talking about tariffs that are too high. And not judging whether they're too high to be effective, but we're talking about tariffs that are high enough that no one can absorb them. You just can't.

But you're talking about a tariff on the cost of the vehicle, the cost of importing it, more so than the retail price. So it doesn't turn into a direct line. And if it's 25% on Canada and Mexico, then it's 25% on the vehicle, and everyone is going to ultimately have to pitch in and figure out how that does translate to a consumer.

I wish there was a really simple answer and just go, oh, OK, it's going to be X percent. But as we know, we've got components going back and forth. We've got things being produced in different places, and who's going to be more exposed and less, there's a lot to play in there.

And I'd say, too, our expectation is that more tariffs are coming for other markets that are outside of Canada and in Mexico. So if Canada and Mexico end up with 25% or 10% or 15% or whatever it is, we're expecting more to come from others. So, ultimately, we're just seeing more tariffs all the way across, and they're going to have to be pulled down.

In the immediate term, you could see scenarios where, if you look at BMW and Mercedes manufacturing, for example, in the US, their engines aren't necessarily coming from Canada or Mexico, so their cost burden is going to be a little bit difficult-- or a little bit different from Ford, who has a lot more engines coming from Mexico and from Canada, even on US-built vehicles.

And so they're going to have to manage that, that tariff, in a little bit different way. And those are the ones that are further down, to see Toyota RAV4, straight out of Canada, you can't-- 25% on that is going to be really difficult to work through, because you're just not going to put $6,000 on top of the hood and be able to move that thing.

And when we're looking at these, and especially when we talked about three different scenarios for tariffs, if it's just for a couple of months, if it's just for eight weeks, if it's just for three months, you just find a way to buckle down and kind of bare through, and it's lost production. You do reduce your production because you're not going to build it if you know you can't move it.

But you've got to balance out having enough to move something, because we're in America and we need cars. People are still going to buy something. That balancing act is going to be difficult. When you look at it further out, then you start looking at your sourcing.

The stability that Mike referenced earlier, and the uncertainty that I was talking about, and the agility, it's one thing to say, yeah, we've got to be agile, we've got to be able to react, but stability is what's needed. Some certainty in knowing what's going to happen is what the automakers and suppliers need to decide where you're going to move your manufacturing. Where are you going to put it?
 
If it's worthwhile to move a plant or move production from one country to another or change your sourcing, it's not a simple decision. How long that tariff is going to be in play is part of it. If you do decide to build a new plant in the United States to be able to get around the tariff, it's going to be more expensive. You've got inherent costs that are higher here.

And one of my colleagues said it the other day, look, the global sourcing environment is the way it is because it works. The stuff that's being built in Mexico and Canada or Japan or China or wherever, it's where it makes the most economic sense. And so changing that environment inherently increases costs for everyone, and it's going to have to come to the consumers.

What happens after that? [LAUGHS] Sales, I mean, the short-term sales go down. Production goes down. We lose GDP. How do people react to that within the system then changes or doesn't change what the policymakers do.
 
MARTIN LAVELLE: Mike?
 
MIKE JACKSON: Yeah. Look, I think Stephanie did a really nice job kind of highlighting the fact that it's not clear, but there are just-- there's only downside. I mean, of course, one could argue that the desire, the intent would be to increase local sourcing here in the US. But the reality is that doesn't happen on a dime. That can't happen instantaneously.

And so as a result, this represents a tremendous amount of uncertainty. And again, it's not necessarily the tier 1, but you could have the tier 2, tier 3, tier 4, that's a smaller organization that doesn't have the carrying capacity to-- and so all of a sudden, there's risk, and risk across the supply chain is not going to be conducive in this situation.
So, obviously, we have this month here to try and-- look, of course, suppliers are trying to examine and explore a wider range of sourcing scenarios and windows, things like this. But again, this is not something that can be done immediately. And so it's a huge tripwire, no question.
 
STEPHANIE BRINLEY: I mean, I would-- the month, I would add a little, only that the month delay in whether it's going to be implemented or not doesn't actually help any industry. All you're doing is waiting to see what happens. You need to know an answer in order to move forward. Whatever that answer is, whether you like it or don't like it, you need to have an answer.

And the time gets the countries time to negotiate, but it doesn't actually help suppliers and automakers and dealerships and everybody. They've been thinking about this for months and have not necessarily a decision made, but have a decision tree out there to say, if it's going to be this, it's going to be that. So I don't think the delay really helps any industry, automotive or otherwise, in this process. Sorry, Pete.
 
MARTIN LAVELLE: Pete?
 
PETE DELONGCHAMPS: Well--
 
[LAUGHTER]

Kristin mentioned that our average transaction price is almost $47,000. Our company is actually $51,000, based on brand makeup. So if you do the easy math, and 10% tariffs get pushed down, all of a sudden, you're at $51,000, $52,000, on an average.

And on a monthly basis, that's another $75 to $90 per month in costs to the consumer, which, I think there was a slide earlier that showed $750 was the average. So now we're at $820, $830 a month for a car payment.

When I got in the business in 1980, it was $200. So I think it's a real effect.

And then you also have to look at the trickle-down with used cars and what happens there. So we already have a shortage. And if these new cars are getting more expensive-- I'll give you an interesting stat for our company, with used cars, and it will only get exacerbated with these tariffs, is in 2019, 11% of our used cars were
$35,000 or more-- today, 30%. 57% of our cars were less than $20,000. Today, it's 30% on used. So the affordability for the consumer, it's becoming untenable.

Now, the interesting thing that we learned is that nobody wants to pay more for the cars, but they all want more equipment. So when customers are having to order cars during the shortages, they were equipping them with far more equipment than we would have ever equipped them for if we were ordering them. Everybody wants lane departure warnings and active cruise control and all the infotainment and connectivity.

So it's very interesting. The consumer doesn't want to pay more, but they want more. I guess that's the American way. I don't know.

[LAUGHTER]

So as a company, when all this was coming up last week, we were just kind of going, well, I guess we're going to just have to wait and see, and try and price accordingly. And maybe we'll have a pre-tariff sale or something. I don't know.

[LAUGHTER]

MARTIN LAVELLE: I mean, so how quickly would you respond? How quickly would pricing that's under your control adjust?
 
PETE DELONGCHAMPS: Well, I don't-- until you know what the answer is-- it's like when an OEM comes out with a price increase. You have some on the lot that are at $40,000 and some that are now $42,000. How do you-- you just kind of deal with what you have, what's the market on that car like today. But as retailers, we just have to see how the whole thing plays out. I just don't know.
 
MARTIN LAVELLE: All right. So we're going to go to audience questions now. And this was actually one that we had talked about but weren't sure we were going to get to, but China.

And maybe I'll just-- China, Stephanie? What role do you see China playing here? I think we talked about, you know, domestically, what role they might play going forward.
 
STEPHANIE BRINLEY: Yeah. I think that the autonomous and connected technology ban is the one to watch, to see if that sticks. That was a Biden-era ban. It says that in model year 2027, no vehicles, no connected vehicles operated by or with technology that is controlled, influenced by, owned by, related to, next to China or Russia can be sold in the US, and model year 2029, it includes autonomous, the hardware for autonomous vehicles, and for lane departure and vehicle sensing systems.

And it says it doesn't matter where it's built, is what that ban says. That's the critical part of that ban, is it doesn't matter where it's built. So that if that holds, then that means you don't just build a car in Mexico and ship it up under NAFTA-- under USMCA tariffs. You can't get around the tariffs. That'll be interesting.

I think that another factor I alluded to earlier, about Europe starting to see that perhaps consumers don't automatically trust a Chinese brand just because it's cheaper-- and it has to be even cheaper than what they're doing in order for consumers to even think about it-- the US is a mature market. We've talked about how it's not got a lot of organic growth. Somebody has to lose for them to come in. It's a long path.

Look at Genesis, is doing very well, but it's taken them a decade to get where they are now. VinFast is struggling mightily. Now, I would argue BYD products are probably in a better shape than VinFast products are, but still.

When you look at new brands coming in, it's not that it can't be done, but you're looking at a 15-year process, and who is going to come back and who else is going to be cut. And they're coming in with a-- they're trying to make money on a lower volume, because it's going to take forever to get to a volume where-- it's just a much more difficult market.

Yes, we've had several automakers enter the US starting with a lower-priced vehicle and kind of learning their quality along the way. And the Chinese-brand vehicles that I've seen are very, very competitive, so it's not that the product itself wouldn't be competitive. It's the market is so difficult.

And I think it doesn't-- I think consumers won't get hung up necessarily on the manufacturer origin and that it's a Chinese company. I think you can get a lot of people that won't really care about that. But just getting them to consider it is going to be the problem, and I think that's a much longer win-- it's a much bigger, it's much taller mountain to climb. I don't think very many of them are able to do it, and it will be a 15-year process, a 20- year process.

We just-- the market just doesn't need a lot more brands, and consumers get exhausted trying to think about five new vehicles. Compact crossovers have 40 to choose from, easily, right now. You up that to 44 or 45 by adding a couple more brands, and consumers, they're going to be fatigued. So somebody is not going to get sold. So I just think it's a much more difficult process simply by the way this market is, independent of where you've built it or how much tariffs are or how good it is.
 
MARTIN LAVELLE: Pete, I'll go to you next because, I mean, given Stephanie's answer, but then we talk about affordability at the same time. So it's an interesting-- two interesting forces there.
 
PETE DELONGCHAMPS: So we've spent quite a bit of time researching it, and we've had BYD in our offices. And we've had BYD cars that we've driven, and they're terrific products. And I think if one wins, it's going to be BYD.
 
But then, you know, for us, what we-- our retail model is service throughput. So if we take on a Chinese brand, we don't have any service throughput. So we sell 40 or 50 cars a month, and it's probably not accretive to our business.

On the flip side, gosh, what if we had turned down Lexus when they came to market? So we have to weigh out long-term possibilities, geopolitical. I think some consumers do care about--
 
STEPHANIE BRINLEY: Some do.
 
PETE DELONGCHAMPS: --driving the Chinese car. But, so we're open to the idea, but it's going to be a very difficult decision that we will deal with on a management basis and with our board to figure out how this all plays out. But you're absolutely correct, it will take-- look how long it took Toyota.

STEPHANIE BRINLEY: Yeah, this isn't an overnight thing.
 
PETE DELONGCHAMPS: I mean, it takes a while to integrate a brand into the US market.
 
MIKE JACKSON: The only say that-- the only point that I would make to that is, if we look at Mexico as an example, Mexico, and China has taken 20% of share, I mean, in a very short amount of time, because they've offered something at a deep discount. And so as a result, they dominate a tremendous amount. They have an incredible scale advantages, and so cost advantages, for a wide variety of reasons-- if there are some subsidies, if there's some access to capital, if there's different benefits there.

So the key point is that I would submit that there's-- it depends. I mean, look, we have a cash cow in our pickup category. And the full-size pickup category dominates, and it represents the vast majority of profit for our industry here in North America. And so BYD would be happy to sell their Shark right here in the industry, here in the market. And I'm sure, if priced appropriately-- here's the concern.

The concern is that China, it depends, right? It depends. But they've shown, in some cases, they're not necessarily concerned about a profit up front. They're concerned about taking out their competitors.

And so what's important here is that it's really, really-- of course, we have to be mindful. We have to recognize, OK, from a competitive standpoint, what's the opportunity? There's been the Chicken Tax for a good long time, and so that's been there for a reason.

And yet the reality here is that, I think, priced-- look, if the BYD Seagull can come in at $11,500, there could be-- that could shore up a tremendous amount of used-vehicle buyers. They're like, look, I need a new vehicle, I need something. Now, obviously, homologation, it wouldn't fit for that price point. But certainly, if priced accordingly, there's a reason why people buy deeply discounted offerings.

And so is reliability there? Look, BYD has made tremendous inroads. And so there's a lot of opportunity. I think the bigger question is, What do we do, then, for the industry if China is right now flooding the zone everywhere, in South America, in Europe, around the world, right?
 
And so as a result, they're offering attractive products at a very, very competitive price on a global basis, and so even exports out of North America, exports out of Europe come under pressure as a result. And so this puts some-- it represents a very significant threat here going forward, and I think it's something to be aware of.
 
STEPHANIE BRINLEY: And I think one of your points is maybe most important, in that they're not necessarily concerned about near- term profit, and they are patient. So I can say I think it's difficult to get into the US market. I think it's going to take time, and I think it's going to take energy.

But they have time. They have patience. They have money. So to say it's going to be difficult doesn't say it's not going to be done.

Affordability and coming in at a low price, again, that's a playbook we've seen before. Every automaker who's come in at a price point has kind of built that up, because while Americans need things they can afford, Americans don't generally just go for the cheapest thing they can all the time. They go for the most that they can afford, not the least that they can afford.

So over time, if you're just known as the cheapest brand out there, that's not the best way to grow your volume As a brand, you have to grow and evolve. But again, that's a playbook that's been done before, and it can be done again.
 
MARTIN LAVELLE: With that, we are going to have to leave it there. So let's give our panelists a big round of applause.

[APPLAUSE]