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Car dealerships have become targets for cross-border investment

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DARREN GUIVER started out as a trainee at a Ford dealership in 1986. He moved quickly up through management, buying dealerships until he had created Spire Automotive group, a network of 12 across south-east England. Two years ago Group 1, America’s third-largest dealership network, made him an offer he couldn’t resist. So Mr Guiver joined thousands of small dealers selling out to global investors and dealership groups. 

Since 2014 around 1,000 such dealerships have been bought or sold in America. According to Kerrigan Advisors, a firm that helps sellers, around 200 more will change hands this year. The largest deal to date came in 2015, when Warren Buffett bought Van Tuyl Group, a network of 78 dealerships with over $8bn in annual revenue. Holding companies such as South Africa’s Imperial and Super Group have been buying showrooms across England. Penske, an American group, has become the largest dealer network in Europe by revenue.

Car showrooms might seem an unlikely asset class to go global. For decades manufacturers relied on individual franchise-holders to sell and repair vehicles in local markets. Carmakers liked this fragmented market, because dealers lacked the clout to demand large discounts. For franchise-holders, the advantage was having a local monopoly on the brands they sold.

But the car market is changing in ways that favour consolidation. The spread of ride-hailing means fewer young city-dwellers are buying cars. Larger networks will be better placed to survive, says Andy Bruce, the boss of Lookers, since they have the scale to offer better deals on high-margin financing and insurance. Moreover, says Gianluca Camplone, a partner at McKinsey, a consulting firm, only the biggest dealerships will have the capital to invest in the equipment and training needed to service high-tech electric and, one day, autonomous vehicles.

For manufacturers, consolidation may mean a loss of pricing power. But there is a consolation, says David Kendrick, who specialises in dealership transactions at UHY Hacker Young, an accountancy firm. Interacting with a few dozen networks will be more straightforward than dealing with lots of individual ones—though carmakers still usually seek to ensure that no retailer has more than 10% of a national market.

The appeal of dealerships as an investment is boosted by their location, generally on major roads near retail centres. Such prime plots lend themselves to repurposing as industrial warehouses or e-commerce fulfilment centres, says Tim Savage of CBRE, a property company. Although interiors are tailored to the brands sold, the structure is frequently made of steel portal frames with internal partitioning that is easily redesigned. And it is often a condition of franchises that car showrooms are refurbished every three to five years, meaning they stay in excellent condition.

For small franchises, the main reason for selling may be that they would struggle to find enough capital on their own. Carmakers want their products sold in bigger, more luxurious outlets than they used to, says Mr Guiver. This year he became managing director of Group 1’s British operations, overseeing 53 dealerships across the country. Though he no longer owns the business he built piece by piece, he will still see the investment pour in.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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