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Monday, August 27, 2007 

Vol. 3 No. 14

A Short Primer on the Vernacular of Buying Fleet Vehicles…

Be sure to use your FIN/FAN, compare various vehicles Fast Start, Front Money and Back-end Money, go for all Rifle Shot Cash that you can, and then, of course, negotiate from Dead Net…


My business now is in remarketing fleet and institutional vehicles, that is, selling them at the end of term, not buying them, but for a long time I was on the new car sales end of the business (both as a franchise dealer, and at the manufacturer level, in piloting smaller fleet buyer sales programs), and given that its the time of year for annual ordering, I thought it would be interesting to highlight some of the unique language and process associated with the fine art of fleet purchasing. So below is a summary of an “inside look” at the incentives, and language, of fleet buyers.


The Basics

First, in order to qualify for all of the fleet incentive goodies, you need, in fact, to be registered as a fleet with the manufacturers. In fleet buyer lingo, you need a “FIN/FAN,” that is, a Fleet Identification Number (Ford) or Fleet Administration Number (GM and Chrysler). In order to get this designation, a company must apply to the respective automaker, and must have purchased, registered or leased five or more new vehicles, any make or model, in the company name within the last 12 months, or alternately, the company must have a minimum of fifteen vehicles in its total fleet, any make or model, registered or leased in the company name. Once registered as a fleet, on any vehicle purchase or lease a company can take either the factory fleet incentives or discount, also known as “National Fleet Incentives” and “The Street Program,” or whatever retail rebate is available for the particular make and model in that region… you can take whichever is greater at the time, but never both – note: retail incentives tend to fluctuate monthly and can be regional, while fleet incentives are typically set at the beginning of the model year and stay constant nationally throughout the year.


The “Extras”

But the fleet incentives don’t just end with one simple rebate, if they did it would be a much easier world for all. First off, while all new vehicle fleet purchases except federal government units (remember all fleet falls into one of three large categories: commercial or corporate vehicles, daily rental vehicles, and government & municipal vehicles) must be sold through a manufacturer’s franchise dealer (I always thought it ironic that this federal government mandated rule carves out one exception, indeed, for federal government purchases which can go “direct”), unlike a retail sale that typically starts at something off of MSRP, these purchases start at “Dead Net” or “Triple Net” and, after all factory incentives, work there way up with a “Dealer Mark-up,” that is, the amount that the franchise dealer charges, over dealer cost (less all factory incentives), for preparation and profit. “Dead Net” or “Triple Net,” is defined as the original factory invoice, less the dealer “Hold Back,” which is a percentage amount of the vehicles cost that the manufacturer “holds back” from the invoice and refunds to the dealer after a new vehicle is sold (paid out annually, quarterly or monthly – a “Clean Invoice” refers to a manufacturer’s invoice where this Hold Back money is stripped out of the net invoice, as it is specially done with large, multi unit fleet deals, its normally included in the invoice price for all other vehicle orders), less “Floor Plan” assistance money (a number of days interest cash the manufacturer usually rebates back to subsidize the dealer floor plan charges) and “Supplemental Floor Plan” assistance (usually a set amount of additional floor plan/interest rebate to the dealer), and any other dealer discount money – in other words, it’s the actual net (net/net) amount the dealer ends up paying the manufacturer for the unit, less all arcane hold backs, floor plan finance rebates, etc.

So, as a fleet buyer you now are paying Dead Net invoice, less either the National Fleet Incentives or Retail Rebates (whichever is the greater deduction), plus some Dealer Mark-up… Of course, the “extras” usually don’t end there, its not that easy… Now we get into what used to be the “secret” financial rebates and incentives…however, given how often they have been used over the last twenty years, with the domestic manufacturers at least, they aren’t that secret any longer. On a side note, to give you a clue of how long ago I entered the fleet business, these extras, “Back-end,” “Front Money” and “Rifle Shot” or Shotgun Money” were, indeed, kept secret back then, even to the selling dealer, who simply negotiated his mark-up above Dead Invoice with the buyer, and the extra money was sent directly to the fleet account without the dealer’s knowledge or contribution. The automakers even had a special prohibition that neither party, the fleet buyer nor the manufacturer, was to disclose these extra incentive amounts to anyone outside the parties involved (to this day I haven’t a clue as to whether this non-disclosure provision was in a written document or simply a handshake deal, I was only the dealer and not privy to these negotiations).

In any event, it’s a rare fleet buyer today that doesn’t get many additional posted and negotiated rebates, incentives and discounts, over and above the standard fleet discount. Even the smallest guys seem to get some of the extra benefits, at least from the domestic manufacturers. First you have your extra “Back-end Money” in various shapes and sizes - this is the blanket term for manufacturer’s incentive programs, beyond the Street Program, where money is paid to qualified fleet buyers on selected models after the vehicle is delivered. This can include volume discounts, that is, the volume rebate for ordering a certain number of units all at the same time – note: this is a per unit payment and sometimes can be negotiated so that the buyer does not have to take delivery of the ordered units all at once, but in staggered intervals over a few months. You have various “Front Money” programs as well, which is defined as cash paid on a per unit basis by a manufacturer to induce the purchase of product. This can include extra rebates or refunds for specified options purchases, as well as “Early Order” or “Fast Start Money” sometimes offered for factory orders placed far in advance of the beginning of the model year by buyers. There a valid economic reason for the manufacturer to offer Fast Start cash, beyond the normal volume sales advantages, in that these orders allow the factory to fill their order bank up and obtain discounts, in turn, from their suppliers.


The Extra “Extras”

Finally, if it isn’t all confusing enough, “Rifle Shot” or “Shotgun Money” is often available. This is an unpublished volume discount or incentive that is negotiated directly between the fleet buyer and each manufacturer as an agreed upon special rebate on every make/model vehicle either leased or purchased by that company from the specific automaker during a given model year. It can be negotiated as a credit off invoice or a lump sum quarterly, semi-annual or annual payment, with the amount on each unit dependent upon make/model, volume and the manufacturer. Although usually reserved for higher volume fleet buyers (and still the specific terms and numbers of each deal are supposed to be kept very quiet by both parties), there is usually some extra cash available if a fleet buyer is considering switching brands. Manufacturers frequently offer “Competitive Assistance Allowance” or “CAA,” a special rebate incentive to encourage fleet buyers to switch buyer loyalties.


...And Then There are Daily Rental “Program” Vehicles

Now, all of the above applies to every sector of the fleet business, but, as readers of this blog are aware, up until very recently the vast majority of daily rental fleet units sold in this country where sold under each domestic manufacturers “buy back” program, more commonly referred to as “Program Cars.” I explained about the buy back Program Car phenomena and a gave a short history in the blog entry just prior to this one, but suffice it to say that on top of this program guarantee, of course, many manufacturers paid lots of the fleet incentives outlined above on every unit ordered, so it served a rental operator well to churn as many new units through the system as quickly as they conceivably could throughout the course of a model year. Of course, these extra sales exacerbated the automakers losses on the program, the “lose money on every unit, but make it up in volume” reality, detailed in my prior blog entry...



On Something Completely Unrelated, A Special Thanks…

For a blog such as this, on a rather specialized topic that does not talk about things that invite regular outside commentary, its difficult to figure out whether or not anyone out there is reading at all or noticing what is said (I sometimes think maybe I should add some flaming political commentary or a racy picture of Britney Spears just to see what would happen). So it makes comments such as those by EJ Lawless, in his Auto Industry Start Ups blog, all the more gratifying and welcome. It proves not only is someone reading this on a regular basis, but it is being read by an educated industry veteran who is also an auto blog author. By the way, its apparent from reading his blog that EJ is a much better and more entertaining blog author than I am, I might add, which make his observations on a topic long ignored, current and new opportunities in tech start-ups in the auto industry, and entrepreneurship in general, all the more interesting and habit forming, at least for this car guy.

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John,

Interesting post, definitely full of a lot of new information that sheds light on a side of the industry with which I've never been involved.

Thanks for the mention as well.

-EJ

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