Very little unfortunately has been published about the future of the automotive dealer. This series of articles is aimed to address this void and offer some insights and possible solutions towards a seamless integration of the old and the new.
The Circular Economy model emphasises an inclusive economy by designing the technical to work in harmony with the biological. In the automotive or mobility sense, the Circular Economy model holds many opportunities — not just for manufacturers but equally for existing dealers.
The future of the automotive industry
Most automotive dealers at this point have no clue as to what the future holds in the clean energy space for them. The manufacturers on which they depend to supply them with stock which they sell for profit are not giving clear signals as to their future behaviour.
The success of Tesla which has a unique business model without appointed dealers has influenced manufacturers to implement similar strategies. The likes of Geely who are implementing two new brands to this purpose are testing their new business models for future developments. Non-ownership business models such as pay-as-you-use options and single bill mobility solutions are here.
Just where will automotive dealerships that service markets such as cars, trucks, buses, and forklifts fit in? Clarity is needed now.
Is traditional automotive dealership dead?
The death of the traditional auto dealership is imminent, or is it? Manufacturers have set stringent standards for dealerships to follow to retain their supply agreements. Buildings of certain sizes, staff count and design elements have all contributed to long term cost structures that rely on a steady income to make the process work.
When Tesla employs a van and mechanic to go out to do service and maintenance work, it suddenly becomes clear that paying for a fully equipped workshop may not be the best way to ensure profitability. The challenge it seems lies in the old ICE technology. This new mentality towards traditional automotive trade and infrastructure will spill over to the established automobile manufacturers, or will it? What is the long term commitment from these automakers towards their franchises dealers? In the end, Tesla as an OEM has a business model towards supply and retail that is not innovative, it just operates without the dealer component. This has advantages and disadvantages.
It has been my experience that people outside the auto industry don’t fully grasp the professionalism, investment, and effort required to operate successfully in the auto industry. Consumers are generally only exposed to sales and aftersales personnel. Two areas where activities can sometimes be challenging and these are the areas where dealers’ customer service is generally measured in the form of a Customer Service Index score.
Just imagine getting home from work only to receive a follow up call from a third party about your service or delivery experience. No wonder auto dealerships are generally not seen as pleasant places to spend time. When you add the fact that auto manufacturers design and build obsolescence into their mass-marketed products and dealers are the contact point for consumers to sort out warranty and recall issues, the negative emotional stress towards a dealership just keeps on growing. Managing this emotional business model is a very human process.
The many hats of a dealership
Apart from the customer touchpoints, there are many activities a dealership has to invest in to continually offer stock and service to the consumer as required. It’s these activities that are mostly overlooked and they form the basis of the manufacturer and franchises dealer’s relationship. The process of building vehicles, shipping them, selling them and then maintaining them is a challenging task with many participants where processes need to be managed to create a value stream without too many hiccups.
Consumers in the EV space are bombarded with information that shows lower running costs, near-zero maintenance, mostly no traditional dealer involvement (curbside service as per Tesla service model) and environmental benefits. This perceived new eco-system holds many surprises for the consumer and it is where the traditional dealer in the author’s mind will continue to play a leading role, even amongst all the dealerless, pay-as-you-use business models out there.
With volume comes pressure, pressure to keep promises to customers and pressure on the value chain. As many motorists will tell you, air conditioners need gas, bearings need periodic replacement and many other functions on automobiles require some sort of maintenance throughout their lifetime. This includes electric vehicles. So unless it is a low volume manufacturer, an extensive service/after-sales network will be required.
New skills required
One thing is clear and that is that current ICE dealerships will need new skills in the EV space and with time ICE vehicles will become obsolete, making those skills commonplace. The process to arrive there will take a few decades, as planned obsolescence does not mean modern vehicles fall apart after only 300,000 kilometers. Different countries will adopt various strategies towards cleaner mobility and an acceleration in developed countries is evident as many cities are banning ICE vehicles already. What developing countries will do is up for debate, however clean air initiatives such as European automotive CO2 standards that penalise manufacturers for each gram of CO2 emitted per kilometer over prescribed limits will bring an end to many ICE models’ manufactured today. This will have a knock-on effect towards developing economies due to ICE model development being stopped by the parent company and ICE models being pulled following their CO2 penalty exposure.
In the current ICE automotive dealer business model, the deletion of models, especially popular, high volume vehicles spells disaster, not only for the manufacturer but equally for the appointed dealership. The truth is that the new automotive dealer business model will gravitate away from being locked in brand-centered supply and franchise contracts. The future will put power in the hands of the successful dealership operator. Traditional manufacturers who won’t be able to supply vehicles the market requires such as EVs at the right price and specification will go out of business. They will take some dealerships down with them, especially the ones that solely rely on the old business model for their existence.
The proactive dealer of tomorrow will already have an understanding of the new energy transport space. They will already have potential supply agreements in place to retrofit, service and maintain vehicles with technology such as batteries or fuel cells. They will be involved with renewable energy and have committed to selling current EV models even if it just used models with charging points at their premises. These dealers will already know how to enable their fleet of new energy vehicles towards their new business model in the foreseeable future that excludes a traditional manufacturer. The truth again is that very few industry players have progressed to this level.
The majority of dealerships are content with the business as usual approach as they believe that their suppliers will continue to be relevant and so protect their interests as they have become very good at managing this value chain. A dealer, as an example, plans for 60% of their income from new and used vehicle sales, 30% from their service and parts departments and 10% from finance and insurance.
The automotive industry of tomorrow and especially in the change over phase will rely less on gross profit from new vehicle sales. There will be price pressure from direct sellers and this will put pressure on dealer margins to remain competitive. It is generally accepted that fewer new vehicles will be sold going forward. They will rely more on used sales, which will lead to more activity in their service and parts departments. The percentages of their business model could change to 50% service and parts, 30% new and used vehicles, 15% finance and insurance as this will include finance for retrofits and 5% from their mobility as a service operation. Energy generation, supply, and storage hold potential for dealerships and fleet managers in a certain context, but for this article, the above percentages will suffice.
The EV revolution could bring forth dealership brands that have more to do with drivetrain and battery solutions as these will ultimately be the benchmark of quality and be the building blocks towards consumer trust. Tesla and BYD are currently the only 100% vertical integrated electric vehicle manufacturers of note that have their battery and vehicle manufacturing capabilities. How competitive new electric-only brands will be is up for debate, especially when the current cost and supply restraints of battery modules are factored in.
Automotive brands playing catch up
All other brands are playing catch up in the BEV space and not all brands will make the successful transition to electric. Over the past ten years, many manufacturers focussed on fuel cell solutions — brands such as BMW, Daimler, Renault, Hyundai, Toyota, Honda, VW Group, Mitsubishi and a few others. These traditional ICE brands in the fuel cell space have an advantage going forward towards this segment, however, its success will depend on large scale adoption. But as a market-ready technology, it has a great chance to play a dominant role in future mobility, especially in material handling and commercial vehicle applications.
Many brands have invested heavily into clean fuel technologies such as hydrogen fuel cells — it is just that battery electric vehicles have gained traction faster in the passenger market, largely due to the Tesla effect. Nissan and its alliance partners did launch BEVs long before it was popular, but for reasons unknown don’t seem to have captured the market’s imagination as yet.
The positive for this alliance is that they have the experience and technology to drive this segment going forward. The negative is that this alliance like many other traditional manufacturers listed above, is now involved in petrol, diesel, hybrid, battery and fuel cell market segments. This unsustainable capital intensive situation needs to change to create a focused leaner strategy. One legacy auto company that has taken bold steps towards survival in the new energy vehicle space is General Motors. They have begun re-focussing their efforts toward developing a new strategy and it is evident that it is a painful and lengthy process for a traditional ICE manufacturer. After launching the EV1, General Motors had an advantage in the EV space, however, decisions were made to kill off the project and the world has not seen an EV2. This is an example of the wrong type of feedback loop being used in the innovation space.
In the electric world, the drivetrain is made up of electric motors, electronics and batteries and these are the high-value items in an EV automobile. This accounts for 50% of an EV’s costs as opposed to 20% in an ICE vehicle. Generally, the interior of an ICE vehicle costs more than the actual drivetrain at about 25%. EVs are a different type of proposition with a completely different value chain.
At this point when an electric motor goes, it gets replaced, not repaired in-house as with ICE vehicles, which is not very circular. Fixing stuff so they will be used longer is what we need to do. The problem with ICE technology is the emissions that we need to eliminate. But take a look at the many old simple ICE vehicles still on our roads and it is clear that there was a time when it was very relevant. Make no mistake – the ICE era assisted humans like no other technology to explore, innovate and create wealth towards our modern society. Just like steam power, it is now at its end. The end being relative to where you live.
The future is now
Brands have been spending billions over many years to build their image. Placing their ICE models at specific price points that either promoted application, value or luxury and status. The price of a vehicle and for that matter, the pricing of parts, has very little to do with the cost of production. It is all about market position. What legacy manufacturers now have to do is to realign their product positions concerning new energy vehicles into their existing model mix.
Factor in that some are selling petrol, diesel, battery, hybrid, and fuel cell vehicles around the globe and that electric models have a higher drivetrain cost, it becomes clear that positioning is a nightmare. Pushing an electric model way above the normal ICE model of similar size seems to make sense and could in the short term grow your ICE model sales. But when your battery electric competitor beats you on specification and price then obviously your brand value will only take you a short way.
The new consumer that considers BEVs is not the type that falls for brand branding anymore. Showing a car ad where a vehicle drives through mountains chased by wolves to avoid a bunny while the driver is adjusting his sunglasses is hardly relevant when a Tesla Roadster is floating in space.
The new consumer class creates their communities and is a passionate bunch that supports their chosen brand and or model. They don’t like being told why a car is right for them, they tell the manufacturer when they like a model if the manufacturer values them as people. For the traditional auto manufacturer being a bit more open and engaging with the market is a challenge. When one manufacturer tells you they are in production hell and they succeed, it builds trust and a sense of admiration with consumers, regardless of whether the consumer knows anything about the processes. They feel engaged and part of the process. There’s a lesson to be learned here for dealers who are also feeling the pinch.
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