BMW of North America has stopped punching cars to artificially increase sales, said Timothy Kraemer, head of the brand's dealer group.
BMW dealers referred to the controversial practice as "punchgate," said Kraemer, 49, chairman of the BMW National Dealer Forum.
"BMW has acknowledged and addressed the issue and is not continuing the practice of reporting cars that don't go home with a retail consumer," said Kraemer, general manager of BMW Minnetonka in Minnesota.
Punching is the self-registration by dealerships of vehicles in loaner or rental fleets, usually because of pressure by automakers to reach sales targets.
BMW is working to help dealers unload that inventory, he said. Kraemer spoke with Staff Reporter Diana T. Kurylko.
Q: How was 2016 for BMW dealers with sales dropping after the brand won the import luxury sales crown in 2015?
A: BMW dealers faced some headwinds with inventory challenges -- excessive sedan inventory. We were working with the factory to have the right supply and the right model mix.
What vehicles were dealers short of?
We had too many sedans and not enough SUVs -- the X3 and X5. It is a matter of adjusting production and having the right amount of cars at the right time.
Didn't BMW add production capacity at the factory in South Carolina to remedy the crossover shortage, especially in the United States?
They are not just adding capacity but the model mix is great. They will make an adjustment on the SUVs and change their model mix from 40 percent to the 60s. They have diagnosed that they had the wrong cars and it made a huge adjustment not just on inventory but model mix.
For instance, what are you getting more of and what are you getting less of?
Less 3 series and 5 series and more X1, X3 and X5.
What major issues do BMW dealers face?
There is a declining margin situation where we are fighting for front-end margins. When that doesn't exist, we have to find another downstream opportunity for an end profit, meaning finance -- worthwhile products. And we are faced with building loyal customers and identifying true competition which should not be other BMW dealers but Mercedes-Benz, Audi and Lexus.
How do you fix that?
Not having such a heavy inventory supply -- too many of one model -- and we are all racing to sell that car regardless of where it goes. We need to work closely in our markets and BMW identifies that there is a real push in monitoring to make sure one is measured in the right set of data to ensure that. They have the systems in place.
BMW sales fell last year because of a bad model mix?
It is all inventory and supply related -- too much inventory in the marketplace -- and there is too much more competition. There are new SAVs [sport activity vehicles] from other brands. There is new product -- everybody's product is better. Benz came on strong and it was the opportunity that they had. It is this magic of what age your models are. BMW is at the end of the lifecycle on X3 and they need a large SAV which is a big part of the segment, and it's coming.
Have you seen the all-new full-size X7 crossover?
I have seen the X7. I sat in it and it is amazing, and I saw some of the neat things they have coming. But I am most excited about the X7.
Dealers don't get the X7 until the beginning of 2019. What do you do until then?
Find a way to convince people that they need an X3 with a third seat and it looks good.
BMW has one of the biggest product ranges in the luxury segment. Is there still something missing in the product lineup?
There is a small SUV coming -- the X2, maybe the size of Range Rover Evoque, and it looks very similar to that. Once you have that, you will have a real rounded group of X1, X2, X3, X4, X5 and X6. And with the X7 you will have something for all metrics, which means you can have enough conquests or step-up SUVs. If you have a Volkswagen Touareg or a Honda Pilot, what's next -- a BMW or a Lexus or a Benz? We have to have the right one that is competitive enough. We have the new X3 this year and the new X2 next year and as you go forward, the X7.
What are dealer expectations for the redesigned 5-series sedan? It's an SUV market, not a sedan market in the U.S.
There is a lot of competition in the sedan market especially in that price point. We are not living in sedan times. Mercedes-Benz learned that when they launched their E class. We will be able to get some of our loyal customers back because it has some great technology. This headwind on sedans as a whole, that is the one sector that will not grow in the United States. I am excited about the new car, I have driven it. I am really excited about the iPerformance 5 series. Fuel economy is incredible with that car.
What about the 7-series sedan? It also flaunts a lot of new technology, but sales are still below those of the older Mercedes-Benz S class.
There is a lot of pressure in that big segment and Mercedes-Benz S does a good job. The 7 is a great car and has great technology. I do not know if the changes were evolutionary enough to capture the S class or Audi A8 customer. Could be some are waiting for the new LS60 coming this year. It is hard to build loyalty, especially at that price point. It is an expensive car. It's $100,000.
Here's how BMW wins. If it is just a static display, it doesn't win. But if I can get someone to drive the car and when we get the car on the road, the way it drives and the ultimate driving machine is above the competitors in the class.
Is the electric i3 gaining popularity, especially with the increased range on the 2017 models?
It was a pioneer in the marketplace and a premium plug-in. It is very advanced technologically. The appearance to some is perhaps not the first choice. It is one of the only [hybrids] that drives like a BMW. It has a very aggressive appearance. The new 2017 got a little bit of a refresh. The range [between charges] is a really big part of the angst or anxiety. Tesla taught us a lot about range. BMW has done a heck of a job to address the consumer buying habits or desires with the new range.
What do you hope to accomplish as chairman of the dealer council?
I hope to accomplish open communication with dealers and the manufacturer, and participation. It is disappointing to have dealers having concerns and not openly discussing it with me or the factory. We are going to a new place. I just sent a communication to 375 dealers and heard back from over 90 of them. It is a huge change from when I first took over. Sometimes the topics aren't as exciting.
What I hope to accomplish is that the dealer body sees the value in the forum and sees that dealers have a great deal of influence and can work with the manufacturer. If no one voices concern about problems, they do not believe it is a problem. I get people to engage. And I have something to say every time on the podium when I am speaking -- silence is not acceptance. Too many times people are afraid to speak up because I am trying to get an ad point or I don't want them to come audit me. You need to separate the two. My goal is to make the relationship a partnership, and by pushing and getting people involved asking the tough questions of the manufacturer, I could drive that involvement from the dealer body.
Has the relationship between dealers and BMW improved? They were a bit sticky a few years ago.
The lines of communication have opened. They heard the voice of the dealer that we don't like some things and when we don't, we finally have opportunity and an outlet to voice them and get them in front of people. The relationship has gotten better and I still think there is some room there. I see a different attitude about trying to make things better.
How is the new BMW facilities program working? Do dealers still have concerns?
The dealers' concern is that sometimes the facility requirements are perhaps too stringent and specific, and it requires us to do things that other manufacturers aren't so specific about.
Like on the color of the tile or flexibility on a furniture vendor. There needs to be a center, we get that. It depends on the facility or the location or marketplace. That the facility requirements are weighing on dealership profitability, that's the concern.
Has BMW stopped punching cars? This was an issue of great concern to dealers for the past few years.
It has gotten better. The punching practices, or punchgate as we sometimes call it, have gotten significantly better. BMW has acknowledged and addressed the issue and is not continuing the practice of reporting cars that don't go home with a retail consumer. It takes time to right-size it because you can't make those cars go away overnight. But the overall idea of not punching cars is to report real actual sales and not have a two-tier price environment and they are working toward that. I applaud their efforts to fix something that was not particularly desired by dealers.
BMW cut the free maintenance plan offered to customers by one year. Are you feeling it?
The change has not affected anyone yet but some of the cars are coming up for a second service. What BMW can do to help dealers with the reduction in warranty claims is help us with conquesting customers that are in our area and help us with cars that are out of warranty and offer services and packages that are not so value priced that there is nothing left in it. These cars are very advanced and sometimes customers don't understand that you can't just take it to Goodyear and put a battery in it. So there is communication and we need to work together to balance the customer pay work, the warranty work, and to balance the loads in our shops and make sure we are not pricing ourselves outside of the market with expensive parts and unnecessary test plans to fix cars correctly.
As a lot more BMWs come off lease is the BMW certified plan flexible enough?
They are evaluating their certified program to potentially make some changes to make it more exciting to customers. The increased throughput that hits in March is significant.
The dealers are doing two things. We are making sure that we are taking those cars and making sure the CPO program is robust enough with maintenance and aggressive interest rates. We are working with the CPO committee in re-evaluating the Full Circle CPO bonus program and the warranty and what it includes and what the limitations are on mileage. There is a potential change coming that will be beneficial that will help.
Do you expect to see more or less leasing for BMW in 2017?
I do not think leasing will go away. It is too important for the BMW business. I also know the risks and the exposure the manufacturer takes with a high lease portfolio and the risk the manufacturer has with taking those cars. It is a short-term yield for us. Some of the payments we have come up with are outstanding and I am excited that they are committed to the loyalty numbers via lease. It keeps us in front of the customer and to build a relationship with the customer as we go forward.
BMW's new CEO has made a commitment to more electric vehicles and autonomous driving with the iNext program. How do dealers feel about that?
The electric or iPerformance has been rebranded to be in line with the M brand. The iPerformance technology is a reason we're all gravitating toward the 54 mpg in 2025. BMW has done a great job talking about the autonomous safety features. I do not know if the United States is ready for autonomous driving in all markets -- it is not our tag line like others are making it their tag line. We have the technologies in our cars, but the world is not ready for it.
Does BMW need and will it develop a larger i electric car than the i3?
There is talk about development of the i4 and the SUV but it takes a lot of time and money. That is the issue. There needs to be a bigger car, maybe not as big as the Tesla X. I am on the product committee and they are involving dealers for the first time with product development. I have had conversations about what works in the United States. I am excited they are building cars to more markets and listening to dealers.
How long has BMW been involving dealers more in development?
There has always been a product committee but I do not know if they always had the opportunity to have upstream conversations about development. It was more a matter of "Do you like more the black interior or the saddle?" Now it is more a matter of saying, "Should this car do this and what should this car look like and what size engine should it be and what do customers like?" Of course, we all go over there and say bigger engines, bigger wheels and tires, and bigger SUVs -- that is what sells. And they say, "Oh, you Americans."
Are they listening to you?
We have meetings and I believe they are listening. I am a sharp guy and I can tell when someone is asking me a question just to ask me a question or that they want the answer. The last meeting that I was at they were listening to me because they wanted to hear an answer. These are high-level meetings in Munich. The product committee is meeting with engineers and high-level people. They are not only letting us see under the tent but they are at a point where we are having some open discussions, even if it is not always popular.
Did this start in time for dealers to talk about the X7?
The one we saw was pretty much done. We had some involvement with details like hitches and wheel sizes.
What is the most important thing BMW can do for dealers?
They need to be concerned about eroding margins and compression of profitability on new cars. They can be a partner with us in the aftersales area in developing great programs and competitive pricing in service and parts.
Are they headed in that direction?
They are aware of the dealer concerns on return on sales. Every meeting that I run or attend or am involved in, I talk about the overall profitability and the concern the dealer network has. They do not have a choice but to listen to us.