As fall approaches and school is back in swing, the Auto Team has completed our summer reading. Over the next two posts, we review the book The Future of Automotive Retail by Steve Greenfield. This book discusses changes in trends of consumer behavior and technology that will likely continue to shape the auto dealer retailing experience for decades to come. Additionally, the book makes numerous predictions about when and how those changes can pose both opportunities and challenges for auto dealerships. In our review, we discuss the content, trends, and predictions found in the book (and add a few of our own upon occasion).

The auto industry has adapted to numerous changes just in the last few years alone:  the introduction/proliferation of electric vehicles, online or partially online transactions of new and used vehicles, shortages in new vehicle production caused by the pandemic and microchip crisis, and threats of direct sales from the manufacturer to the consumer directly, to name a few. Moving forward, the auto industry seems to be on the precipice of change as it relates to these shifts and also evolving technology that will impact the ownership of automobiles in the future.

Regarding predictions of changes to technology impacting the auto industry, we can look to the big and small screen, specifically, the Jetsons and Back to the Future 2. This iconic cartoon and movie gave us a glimpse of life in the 21^st century. The Jetson’s debuted in the 1960s, and while no specific year was ever referenced, trailers for the original series mention that the setting is 100 years in the future, or approximately 2060. In fact, George Jetson’s birthday was just a couple of months ago, according to some fans. Avid viewers of the show will recall that the cartoon correctly predicted many technological advances that have already occurred today or are just on the horizon – video calls, robotic vacuums, tablet computers, robots, flying cars, smart watches, drones, 3D printed food, and flat screen TVs. In Back to the Future 2, Marty McFly travels into the future to the year 2015 where we see technological advances such as drones, tablet computers with mobile payment options, waste fueled cars, flying cars, and robotic/autonomous taxis to name a few.

In part one of this blog series, we review the discussions and predictions caused by the “convenience economy,” including changes to power sources and vehicle production. In next week’s post, we will discuss vehicle ownership, autonomous vehicles, connected cars, service and repairs, and the overall future of the auto dealership.

Just as auto dealers have proven their resiliency and adaptability to challenges over the last two years caused by the pandemic, they must continue to be aware of oncoming changes to technology and the retail model to stay competitive and not get left behind.

Convenience Economy

What is the convenience economy? Per the book, the convenience economy is all about consumer empowerment and control. Today’s consumers expect to be able to purchase and receive whatever they want, whenever they want, and however they want. Some credit (or blame) the shift to a convenience economy to millennials. However, the lion’s share of the shift can be traced back to market disruption. Market disruption, in this sense, refers to new service offerings or companies that cause a profound change in the existing business landscape in a particular industry that forces existing businesses to undergo significant transformation to stay competitive. Common examples of market disruption include:

1. Netflix’s impact on video consumption and the shift to streaming services that forced Blockbuster out of business.
2. Uber/Lyft’s impact on getting a ride displacing taxis if not car ownership altogether as initially proffered.
3. Amazon’s impact on ordering and delivering consumer products online. Amazon is most cited for the shift to a convenience economy and referred to as the “Amazon effect.”

The auto industry is also not immune to market disruption. Examples include Tesla’s impact on the introduction and popularity of electric cars as well as a shift to direct sales to customers, Carvana and Vroom’s impact on the way vehicles are purchased and delivered, and Lithia’s Driveway impact to mobile servicing and repair.

In the convenience economy, today’s consumer places value on convenience over price

In the convenience economy, today’s consumer places value on convenience over price. Historically, the convenience economy affected lower priced consumer goods. In recent years, the convenience economy is also shifting to higher priced goods, such as the purchase of an automobile. According to the book, research predicts that 80% of all car deals in urban markets will include some components of digital retail elements in the next five years, eschewing the old-school haggling process at a dealership.

Auto dealers have responded by adding digital elements to the transaction process to meet the demands of today’s consumer. According to Cox Automotive, this short list of digital changes also allows for dealers to operate more efficiently:

• Reducing the time that customers spend at the dealership
• Reducing the number of steps to complete a transaction
• Reduction of time dealership staff spend on completing a transaction
• Fewer staff required to complete a transaction

The shift to the digital retail experience doesn’t totally eliminate the physical dealership experience. A study by Deloitte indicates the following reasons why some consumers would not want to completely shift to an online purchase:

• Ability to see the vehicle before purchase
• Ability to test drive the vehicle
• Preference to negotiate in person
• Don’t feel comfortable purchasing online

In contrast, the same study lists the following as advantages listed by consumers for online components to an auto transaction:

• Convenience
• Speed
• Ease of Use
• Necessity
• Ability to avoid going to a dealership

How Should Auto Dealers React to the Convenience Economy?

Auto dealers should recognize that they are in another period of market disruption. In an effort to meet consumer demands, auto dealers should continue to offer and improve digital elements to the transaction process. This shift could also present downsizing opportunities for the auto dealership facilities and footprint, as the need for over-the-top showrooms may be less desired by the consumer. Of course, the latter will continue to be a debate and negotiation between an auto dealer and their manufacturer.

Power Sources

Of all the headlines in the auto industry in recent years, electric vehicles (EVs) continue to dominate. As discussed earlier, Tesla was an early market disrupter in this area, along with other recent start-ups like Rivian and NIO that have also joined the trend. Additionally, the legacy manufacturers of internal combustion engine (“ICE”) automobiles have also been producing electric vehicles with more models on the way. Auto manufacturers are also seeking to restore the balance of power regarding the profit margins on new vehicle sales, which have shifted to the dealers in the last year and a half or so. Several manufacturers such as Ford, Buick, and Volkswagen have expressed a desire to alter the traditional state franchise law system of the dealer network and explore direct sales models to consumers. We will discuss this trend in more detail in next week’s blog.

E&Y estimates that 30% of the group born between the years 1981 and 1997 express a desire to drive electric vehicles

McKinsey & Company estimates that EVs will comprise more than half of all U.S. passenger car transactions by 2030 if the early adoption momentum continues. Recently, California passed a mandate requiring all new car sales by 2035 to be free of greenhouse gas, aka a mandate pushing EVs.

Like the convenience economy, millennials are also being credited with driving the EV movement. E&Y estimates that 30% of the group born between the years 1981 and 1997 express a desire to drive electric vehicles. A study by OC&C Strategy cited the four main concerns that consumers are apprehensive about choosing an EV:

• Range
• Price
• Charging Availability
• Speed of Charging

Earlier, we discussed a theme in the book stating that millennials valued convenience over price in the emerging convenience economy. Apparently, there is a limit to the perceived value of convenience with regard to purchasing an EV. The same study by OC&C Strategy discovered that only 16% of consumers polled would be willing to pay $2,500 more for an EV over an ICE vehicle, while 70% would not pay more than a $500 premium for an EV. It’s important to remember that convenience works both ways. While consumers may prefer quicker buying transactions, which many have associated with EVs, they may give back that time and then some awaiting their vehicle to charge as compared to refilling a gas tank.

What Alternatives are Being Developed to Relieve Consumer Anxiety Related to Charging Availability?

In addition to other federal and state mandates calling for the build-out and development of charging station infrastructure, NIO is also developing a battery swap technology in other countries that might eventually lead to adoption in the U.S. NIO has sold approximately 120,000 EVs to date and has erected 300 battery swapping stations across China. These stations completed 500,000 battery swaps in 2020, and NIO is currently expanding the operation to Norway. Why Norway? Norway has enacted some of the most aggressive legislation against ICE vehicles, charging a 20% carbon tax on those vehicles. The results speak for themselves:  65% of all new cars sold in Norway in 2021 were EVs, up from 54% in 2020 and 42% in 2019.

We will discuss the disruptive nature of EVs on an auto dealer’s parts and service operation in next week’s blog.

While EVs have fewer moving parts than their ICE counterparts, there are a couple of underreported qualities of EVs that could present opportunities for a dealer’s fixed operations.

Another unintended consequence of the EV movement is the further reliance on China for various components in the EV supply chain. We have covered some of this topic in a prior blog. According to Benchmark Mineral Intelligence, China comprises the following in the EV supply chain:

• 80% of the world’s total output of raw materials for advanced batteries
• 90% of rare metals, alloys, and magnets
• 8 out of 14 of the largest cobalt mines are located in the Congo, all of which are Chinese controlled
• >60% of the world’s graphite, an essential raw material in electric batteries

Another important consideration is infrastructure. If the adoption of EVs continues, can the existing power grid support the added demand for charging these vehicles? While most believe utility companies have plenty of bandwidth to handle the extra load, some prognosticators point to the winter storm that besieged Texas in 2021 as evidence to the contrary. If nothing else, that storm and the resulting fallout should serve as a cautionary reminder that upgrades to existing grid infrastructure will be necessary and will not come cheaply. We further note that consumers in California have been urged to not charge their vehicles amid a heat wave.

Other items to consider with EVs are as follows:

• Charging Time – currently, most battery ranges top out at approximately 300 miles; the fastest charging technology takes 40 minutes to charge to an approximate 80% level.
• Pollution – Part of the value proposition of EVs is to reduce the greenhouse gas effect of ICE vehicles. One unanswered question is how/where will the disposal of batteries take place at scale, and will there be environmental harm caused by that disposal? Some experts just see it as a shift of pollution in urban areas where ICE vehicles are currently operated to battery production/disposal sites in more rural areas.
• Used EVs transparency – As the EV movement continues to evolve and more used EVs hit the market, how will the consumer be able to discern how much battery life is remaining on the current battery before it will need to be replaced, which is a material ongoing cost with EVs?
• Margin Compression – If dealers will be allowed to sell and participate in the margins on new EV transactions, how will compressed margins impact the dealers’ bottom line (especially in lieu of heightened margins in the last couple of years)? Many of the legacy auto manufacturers are currently selling EVs at a loss which does not provide much incentive to auto dealers.

Vehicle Production

The vehicle production model has changed dramatically in the last three years because of the impact of the pandemic, followed by the microchip shortage and resulting supply chain issues. As a result, auto manufacturers and auto dealers have grown accustomed to operating with less inventory. Both have thrived in the short term, but how will vehicle production be impacted in the future as ICE and EVs continue to coexist for at least another few decades?

The convenience economy shows up again with vehicle production. Consumers want total choice over the trim package, color, features, engine size, infotainment, and other components of their vehicles. This priority has been a struggle for consumers with lower levels of production and inventory over the last few years. As the book highlights, American consumers are not willing to wait weeks/months for customized vehicles in the convenience economy, sacrificing choice for convenience and showing that preferences can be dynamic.

How will manufacturers handle vehicle production going forward in a system that most believe will maintain lower inventory levels? Historically, auto manufacturers have relied on crude data to form production decisions. If the manufacturers could anticipate the wishes of their consumers, they could save money by not overproducing the wrong model of cars or by shipping a preset number of vehicles/models to the wrong market. According to Cox Automotive, auto manufacturers and auto dealers need to focus on 12% of vehicle combinations that ultimately comprise 75% of the sales. Further, JD Power estimates that approximately 88% of manufacturers’ combinations sell fewer than fifty units each and account for only 25% of net sales. The consumer and the statistics say it all….give the people what they want.

According to Intel, microchips will comprise nearly 20% of the components in premium vehicles by 2030

Another technology advancement that could impact vehicle production is 3D printing. Just as the Jetsons predicted 3D printed food, 3D technology is now capable of printing an entire vehicle. Local Motors has focused on a project to 3D print an autonomous electric shuttle called Olli. With current technology, the Olli takes nearly 10 hours to 3D print and is not cost efficient.   Perhaps the shorter-term adaptation for 3D printing in the auto industry will be on replacement parts, particularly for later date models where it becomes less economically viable for dealers to hold a significant inventory of these parts.

Finally, how will the ongoing impact of the microchip shortage affect the auto industry? We all learned just how important and how many microchips are involved in new vehicle parts and production in the last two years. According to Intel, microchips will comprise nearly 20% of the components in premium vehicles by 2030, representing a 5X increase in their proportion in 2019. EVs will only add to the demand for microchips in the years to come. In a previous blog, we highlighted the timeline and costs involved with building new microchip plants in the U.S. to attempt to relieve some of the ongoing demand.

Conclusion

Auto dealers have proven that they are an adaptive, resilient bunch; able to navigate the challenges in the economy and consumer behavior in the last few years. Today we seem to be at a crossroads of emerging technology and continual changes to consumer behavior that will impact the future of auto retail. Just as past market disruptions have proven, auto dealers that are resistant to change might be left behind.

I attended an auto meeting this week, and one participant made the remark that the auto industry has seen more change in the last five years than the previous 25 and more change in the last two years than the previous five. In part two of the blog next week, we will continue to explore these changes and the potential challenges and opportunities facing auto deals in the coming years.

In the meantime, we highly recommend The Future of Automotive Retail for anyone in the auto dealer industry. Readers will be both educated and entertained.

Mercer Capital provides valuation services (for tax, estate, gifting, and many other purposes) that analyze key drivers of value. We also help our dealer clients understand how their dealership may or may not fit within the published ranges of Blue Sky multiples. Contact a Mercer Capital professional today to learn more about the value of your dealership.