My new book is out (titled “The Future of Automotive Retail” and available here) and I’ve been thinking about the best way for the industry to track the probability and magnitude of future trends and then translate them into actionable steps to prepare.
As a result, I’m introducing the Automotive Ventures Retail Risk Assessment (AVRRA). Here are the trends that the AVRRA will track:
Will fully autonomous Level-5 robotaxis ever achieve mainstream adoption, providing a credible substitute to vehicle ownership for many consumer segments and dramatically reducing car sales? Will we see vehicle ownership shift from individuals to fleets?
The widespread adoption of Level-5 Autonomy was overhyped and has yet to be realized. The same can be said for the mainstream substitution of ride-hailing applications like Uber and Lyft for car ownership.
Big Tech Players
While industry advertising spend has largely shifted to digital, and big players like Google and Facebook have been the primary beneficiaries of this trend, we have yet to see any of the big tech companies get serious about participating in online car shopping. If this changes, it may change industry economics for both automakers and dealers.
Build to Order
The double-whammy of first Covid and then the microchip shortage has meant a protracted shortage of new vehicle inventory, which, ironically, has delivered record profitability across the supply chain as the consumer has been willing to pay MSRP or more to take delivery of their new vehicle.
OEMs have come to appreciate how much more efficient and profitable it is to limit supply to something less than demand, and to condition consumers to order and wait for their new car.
Pre-Covid, new vehicle incentives had reached 10% of MSRP. During the past few years, automakers have saved billions of dollars by not having to over-incent a glut of over-supplied new vehicles.
What a novel concept: cars sell at MSRP and automakers save billions on incentives. As a result, the entire supply chain is much more profitable and efficient.
But automakers shouldn’t have short memories. Just because EV introductions like the Hummer, Mach E and F-150 Lightning have been home run sellouts, doesn’t mean that EVERY new EV model is going to be successful. Keep in mind that we’ll see dozens of new EV models hit showrooms by early next year. Not every one of them is going to be a winner.
Connectivity & Over the Air Updates (OTA)
Nearly every new vehicle is now “connected”, and both OEMs and dealers will be able to collect vehicle and driver insights and communicate in real-time with the customer.
But we expect growing tension around who “owns” the customer.
Over-the-Air (OTA) updates will mean a dramatic decrease in recalls (up to ⅓ of which will be now conducted via software updates). This means fewer vehicles visiting dealer service bays.
But dealers may profit from connectivity in three ways:
Participation in connected services revenue
Additional insights on driving behaviors
Increased transparency into maintenance needs through connected vehicle sensors
It should be noted, however, that all three of these will be predicated on dealerships’ ability to partner with their OEMs, the latter typically controlling the access to the required data.
Finally, widespread adoption of Advanced Driver Assistant Systems (ADAS) should result in a reduction in frequency and severity of accidents. Great for saving consumer lives; not so great if you’re running a body shop.
Consumer expectations are being set outside of automotive (think Amazon and Netflix), and a renewed emphasis on convenience and omni-channel buying (marrying online and physical) has accelerated due to Covid.
How does this impact car buying? Expect higher standards of brand experience: a focus on convenience, transparent pricing, one-click shopping, monthly subscriptions, omni-channel sales journeys and free (and quick) home delivery.
A connected car can now collect 25 GB of data per hour, and through your connected phone and the computers built into your car, data about what time you leave the house, when you visit the gym, what music you like, and your favorite restaurant.
Data creates vulnerabilities, and as we start to experience full autonomy, there are likely to be more hacking events that potentially threaten human lives.
The public dealer groups have fueled two consecutive record years of physical dealership “buy-sell” transactions; this has also driven up valuations to all-time highs.
Size matters, and scale helps dealers centralize costs and implement best practices across a wider footprint of stores. It also gives them a “seat at the table” in conversations with OEMs as policies are discussed around EVs, direct selling and the Agency Model.
We are experiencing accelerating adoption of EVs, with many OEMs signaling 100% cut-over from Internal Combustion Engines (ICE); implications on dealers include lower front-end profit margin, less service revenue, more sophisticated tools and technicians required as well as more sophisticated salespeople.
OEMs are facing huge investment requirements to retool factories for EVs, combined with the reality that EV margins may not achieve current levels of ICE vehicles anytime soon. Automakers are therefore scrutinizing all major cost buckets for savings potential including adjustments to their current sales model.
Aftersales revenues and profits will come under pressure, as EVs have fewer moving parts and need less maintenance (no need for oil changes, for example). In the medium term, dealers will additionally face the complexity and cost of handling sales and service simultaneously for EVs and ICE vehicles. Technicians will need enhanced training and an entire new set of tooling.
New EV customers will be faced with significant selection complexity when shopping for EVs, and the dealer will need a different skill-set for both sales and service employees to be able to address these evolving consumer needs.
Since the CFPB was largely “de-fanged” during the Trump administration, there hasn’t been much threat about regulators squeezing dealer finance and insurance profits.
But, more recently, The Federal Trade Commission (FTC) has signaled that increased regulation may be coming to dealer F&I profits.
The FTC proposed banning finance and insurance coverage and physical vehicle add-ons that “provide no benefit" and requiring expanded disclosure and consent on such optional products — including a list of prices online.
The agency is also considering cracking down on dealerships' advertising related to the cost of the vehicle itself.
In addition to possible government regulation, we may see the OEMs control more of the online selling process, which will impact both finance and insurance products.
As more of the buying process migrates Online in general, consumers will be able to price compare and cross-shop F&I products, which is likely to drive margin compression.
Finally, it’s expected that EVs will experience high lease penetration and will have longer service intervals. More leases and more reliable vehicles may mean less demand for protection products.
Pre-COVID we were in an environment of accelerating margin compression. We’ve had a short-term reprieve, and the last thing dealers are worried about right now is any shortage of margin.
But, as inventory levels inevitably get back to normal, the industry should expect to get back to an environment of squeezed margins. As a result, dealers will develop a renewed focus on removing operational expense.
New Sale Models
Tesla and Carvana have established new sales models and set consumer expectations around the car buying experience. Tesla has now successfully negotiated 12 states that allow direct sales to consumers (at the same time, 10 states have outright banned the direct sales of vehicles).
Direct sales, with their tightly-controlled consumer experience, have opened the eyes of the OEMs, who aspire to have more control over the consumer buying and ownership experience.
“I feel like when that second quarter last year profit came out for Tesla and they showed like a $15,000 premium, it totally changed my world. It was an epiphany. It was like the angels sung, it was like, 'Oh my god, we can make more money on EVs than our ICE.'”
- Jim Farley, CEO, Ford Motor Company
OEM Direct-Selling/Agency Model
In last month’s Intel Report, we noted a general movement towards more of an “Agency Model” in other parts of the world.
OEMs evolving their business models quickly, anticipating a dramatic shift in demand for EVs, necessitating billions of dollars of R&D and factory retooling costs to prepare for entirely new technologies and models.
Automakers are attempting to redefine themselves as technology players, as the vehicle’s operating system, software-enabled over-the-air (OTA) updates and subscription services, and enhanced autonomous ADAS systems are going to increasingly differentiate how consumers decide on which makes/models to buy.
OEMs are also concerned about the hundreds (literally) of new automakers that have emerged in markets like China over the past few years, many of whom will have global brands and may bring the fight into markets where legacy OEMs have enjoyed defensible market share.
The “Agency Model” is an evolution away from a more typical franchised dealership model to “Agents” who sell products on the OEM’s behalf. This model is attractive to the automakers because they see the potential to reduce operating costs (primarily marketing and inventory expense), eliminate discounting (theoretically, consumers pay the same price at every dealership), and normalize the customer experience.
Retail partners often remain involved, but in a new role as “agents” that receive a commission or handling fee for providing certain services. OEMs interact directly with customers and take responsibility for the sales transaction. The dealer remains the face to the customer but is no longer the contractual partner and acts as an agent.
The agent model offers OEMs the chance to control the sales channel, gain direct customer access, control prices and increase sales efficiency
Rather than a full “Direct to Consumer” (DTC) model like Casper or Warby Parker, which is what new EV automakers like Rivian seem to be executing, an Agency Model is a bit of a hybrid between full DTC and the historical franchise model.
“We believe dealers need to fiercely resist any changes to the existing retail model unless the dealer is clearly protected. Otherwise, dealers of those franchises will see lower incomes but also low blue sky values as buyers will focus primarily on OEMs who promote dealer friendly changes.”
- Alan Haig, President, Haig Partners
OEM Tech Influence
The automakers generally desire to have more control and influence over the consumer experience and want a consistent, high-quality buying and servicing experience for their customers as a differentiator against other brands.
The OEMs also intend to leverage real-time connectivity into the next generation of cars to build relationships with drivers.
Finally, collapsing the complexity of the technology stack that dealers use means that automakers will have better ability to understand dealer performance, consistency of interaction with customers, and leverage data to build better cars and better software/subscription services.
Servicing of Vehicles
Pre-COVID, half of a dealership’s profit was driven by parts and service. The combination of EVs and OTA threatens to dramatically decrease both service and parts revenue.
What new services (for example software subscriptions) might substitute some of this lost revenue? Will we see less “defection” at the end of the warranty period if these new EV/connected vehicles are too complex for the average independent repair shop to touch? What will happen with “right to repair” bills?
Automakers believe that revenues will shift away from traditional volume sales and aftersales and move towards high-margin software-enabled subscription services. Think unlocking additional horsepower, rear heated seats, and enhanced in-cabin experiences.
Billions of new high-margin revenue should be available as consumers unlock features, performance and in-cabin experiences. But it is way too early to gauge how revenue from these services, much of which will be activated post-sale of the vehicle, will be shared between OEM and dealer.
By 2030, these new services may account for more than 30 percent of total automotive revenues, and their contribution to OEMs’ profits may grow to become the largest source of profit in the mobility industry.
Does the subscription model catch on as a substitute to car ownership? What is the impact on car sales and dealership economics?
So far, what was going to be an ownership model that disrupted vehicle ownership as we know it, hasn’t amounted to a threat. But it’s worth keeping an eye on.
Introducing the AVRRA
The goal of the Automotive Ventures Retail Risk Assessment (AVRRA) will be to:
Track the trends above and provide the industry with regular updates
Continuously readjust both probability and potential magnitude of these trends
Re-Plot the issues on the Risk Matrix
We aim to work closely with the dealer body to develop roadmaps for action: to prepare for and neutralize some of the bigger threats exposed by the AVRRA.
Monitoring these trends on behalf of the industry should allow participants to be better informed and prepared for the future. Staying vigilant and on top these trends will help industry players stay competitive and ultimately thrive in this accelerating period of change.