Will Car Dealerships Survive the Coming Tide of Electric Vehicles?

The speed of disruption in the automotive industry is accelerating. In less than a decade, new on-demand services and connected cars have altered business models that had endured virtually unchanged for more than 100 years. But it’s at the dealership that one of the most profound disruptions may well take place, driven, in part, by electric vehicles (EVs). Here’s a look at how EVs may upend dealership networks and change the way we buy cars in the future.

It may be hard to believe that we are barreling full speed toward an electric car future. After all, according to industry tracking figures, the 695,000 EVs sold worldwide in 2016 didn’t even register as a blip against total vehicle sales of 84 million.

Dealer lots today are brimming with gas guzzling crossovers, SUVs, and pickups. There’s no way batteries can power those bigger vehicles anytime soon, right? Wrong. All-electric semi trucks made by Tesla may be hitting the highway as early as 2019. Walmart has already placed an order for the rigs, which will have a range of 500 miles on a single charge.

EVs are coming, in droves, and in all shapes and sizes. Sales are up 86 percent from last year in the U.S. alone. In just the past year, OPEC ramped up its long term forecast for EV adoption by five fold. Tesla, Toyota, GM, and Nissan have been early pace setters. But now most carmakers are placing their bets on an electric future.

For example, as soon as 2019, Volvo will stop selling cars with internal combustion engines. All new models will be electric or hybrid. Kia, BMW, Mercedes also have electrics either already on the road or in the works. Norway, France, the UK and China have aggressive plans to displace internal combustion cars entirely with electrics.

Indeed, in little more than two decades, EVs will make up more than half of new car sales worldwide and account for a third of all light-duty vehicles on roadways. That’s according to a recent study by Bloomberg New Energy Finance (BNEF). The reason behind the soaring estimates? Plummeting battery costs coupled with higher performance.

The BNEF report projects that battery technology that cost $1000 in 2010 will fall to just $73 by 2040, making EVs cheaper to buy than traditional cars. Right now EVs are already cheaper at the pump — or in this case the outlet — than gas vehicles saving car owners $300-$1200 a year on average.

Dealerships taking blows on all sides

From today’s vantage point, car dealers appear to be thriving. Sales are up across all makes and models. But just how prepared are dealerships for the coming wave of EVs? And more to the point, might the rise of electric cars spell the end of car dealerships as we know them? Here’s a look at multiple body blows dealerships face as electrics gain traction.

  • Declining service revenues. Car dealers today make the biggest chunk of income—44 percent, according to Forbes—from parts and service. When it comes to EVs, that’s a real problem, because they require very little in the way of traditional auto maintenance. Their electric motors and single-speed drive trains eliminate the need for oil changes, transmission fluid and radiator coolant checks, drive belt and air filter replacements and many other income-generating services dealerships now take for granted. As the shift to electrics picks up speed, dealerships will be under increasing pressure to make up those lost maintenance revenues.
  • Demand for dual expertise. Electric vehicles will most certainly grow in number in the coming years. But they won’t completely displace combustion-engine cars for many decades, if then. So for the foreseeable future, auto dealers will need to be adept at selling and servicing both types of vehicles. The challenge with EVs is that while they’re relatively simple from a mechanical standpoint, electronically they’re incredibly complex. Their battery systems rely heavily on software, smart sensors and onboard computers to keep things running smoothly. Fixing problems when things go wrong requires specialized technical chops. Might dealerships need to support two parallel service departments?
  • Direct selling. Tesla has taken the connected car concept to a whole new level. Because its cars have such simplified drive trains, new features can be added to an existing car through a software download sent over the air (OTA). No need to come in to a dealership. Indeed, with Tesla, there are no dealers at all. Its cars are sold directly. As other automakers roll out electric vehicles of their own along with OTA advancements that give them direct line of sight to car owners, will the need for traditional car dealerships become obsolete?

The end of the road for car dealers?

In isolation, perhaps no one of these body blows stands to alter the landscape for car dealers. But fending off all three at once? That’s a formidable prospect. Especially when you consider that traditional dealerships and their associated OEMs still lack critical infrastructure to compete in the brave new world of electric vehicles. And the clock is ticking.

If projections for EV adoption are accurate, then clearly car dealerships won’t be able to remain who they are for much longer. As they scramble to make up losses from traditional revenue streams, look for car dealers to begin testing out new purchasing and ownership arrangements in the months and years ahead. Many, like Audi and Subaru, are already updating their backend systems to accommodate new per-usage pricing and other self-service options.

When considered alongside other disruptions roiling the auto industry—car sharing, on demand, connected vehicles, self-driving cars—electric vehicles just may be the domino that accelerates the upending of traditional dealership networks.

*Brendan O’Brien, chief innovation officer and co-founder of Aria Systems, a software company that provides cloud-based billing services for companies such as digital mapping platform HERE, ride-sharing provider Zipcar, Suburu, and others.

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How Will The Connected Car Change The Dynamic Between Automakers And Consumers?

Connected cars are expected to make up 75 percent of total car shipments worldwide in 2020, compared with just 13 percent in 2015, according to Gartner.

But unlike features added to cars like FM radio and air conditioning, the features and services associated with the Internet of Things will also pave the way for new ways carmakers and drivers will interact, notes Brendan O’Brien, chief innovation officer and co-founder of Aria Systems, a software company that provides cloud-based billing services for companies such as digital mapping platform HERE, ride-sharing provider Zipcar, Suburu.

In O’Brien’s view, much of the new opportunity for automakers in the age of the connected car will be “recurring revenue” because of the very nature of how these IoT features are consumed, measured and paid for. Some examples of those services and features include subscriptions to consumption-based recurring payment schemes for such things as ride sharing, location services, apps (from connected devices), telematics, wi-fi access, internet radio, among others.

GeoMarketing: Considering all the potential disruption of the auto industry from the connected car, how will the car companies derive revenue from these new IoT related services?

Brendan O’Brien: For the industry to fully capitalize on connected car services, they are going to have to do more than monetize in-car connected services. Connected services will be part of the deal, but cashing in is going to take a fundamental shift in how automakers think about selling cars. What is thought of as “loyalty” now—building and selling a car and hope that it’s good enough that the customer will probably buy another one from you in 5-7 years—has to evolve into building strong and lasting brand affinity.

Instead of building the car, they need to build the brand and the relationship with the customer. It can no longer be a point-of-sale relationship, it has to be constantly nurtured to develop a permanence. That is going to take a direct line of sight to the customer that cannot be maintained with the current dealer-driven sales structure.

Achieving this all-important brand affinity is going to be relatively easy for makers of luxury vehicles and work vehicles, where such affinity tends to already exist, but is going to be much harder for low-to-mid-market makers of passenger vehicles where they risk being commoditized – in these cases the consumer’s affinity and relationship are far more likely to reside with the provider of the service that puts them behind the wheel (think Zipcar, Enterprise CarShare, even Uber and Lyft) rather than the manufacturer of the vehicle itself.

Connected cars are hot, but it looks like industrial applications for connected vehicles could be just as—if not more—lucrative. Why are heavy vehicles and mobile telematics as much in the IoT fray as their passenger-wheel counterparts?  

Usage-based monetization models and IoT integrations are already popping up in the heavy equipment industry with leaders like Caterpillar and John Deere using the technology in many different ways. There is currently a lot of unanswered demand for data that can be used to create efficiencies and increase profit margins with connected industrial vehicles. This will be a fast-growing sector, and we have yet to see its breadth. Industrial applications also tend to contribute to bottom line in a more immediate and direct way than consumer. And for industrial customers, the machines are already a sunk cost and the connected features just become a huge value-add that has an almost instantaneous positive impact to their bottom line, solely based on the productivity gains and loss prevention these connected services provide.

Explain how new services offered from companies like Trimble, Arsenault/Dossier, and others are fixing problems that have plagued heavy construction for years?

These companies are providing usage-based pricing models to get people to use the vehicle, as well as “add-on” services that dramatically increase productivity (e.g. automated fleet management and predictive maintenance alerts) and decrease loss (e.g. geo-fencing that eliminates overnight equipment theft). The add-on services are instantly attractive for their immediate bottom line impact per my response to the prior question, and the pay-per-use model is finding traction because it more naturally aligns with how these businesses measure their own success, which is the same reason so many enterprises have moved toward the use of cloud-based IT infrastructure (like Amazon Web Services) rather than building and hosting their own IT infrastructure. It can also reduce extremely high costs of entry and gives industrial users a whole lot more flexibility as they are never stuck with machinery sitting idle that they bought for project X that won’t be used for project Y and Z.

What are the likes of Ford, Audi and GM doing that they have never dreamed of before?  

Just take a look at recent actions by OEMS like Audi, General Motors and Ford. Audi is currently offering two different types of “lifestyle access” programs including on-demand cars, and pooled usage. Ford just picked up San Francisco crowd-sourced-commuting company Chariot (which uses Ford vehicles), and they have also promised fully-autonomous vehicles by 2021.

The autonomous cars from Ford will only be offered (at least initially) as a commercial mobility service, and not for traditional purchase, pointing to a shift to usage-based, recurring revenue models. General Motors is also getting into the autonomous ridesharing fray, and they say they will be launching a fully autonomous vehicle with its partner Lyft in about five years. GM has also started its own car sharing service called Maven, in addition to its partnership with Lyft. Previously, automakers were content with a very hands-off fleet sales model where rental companies and then ridesharing and car sharing companies like Uber and Zipcar were sold vehicles at volume discounts or provided with special offers for exclusivity.

But it seems they see the writing on the wall when it comes to the changing tastes of millennial consumers—they are less likely to participate in traditional purchases and more likely to buy “experiences”. Automakers are not about to be left out. Though it is a massive culture-shocking change from measuring success to margin-at-sale to long-term annuity and recurring revenue from services, the opportunity is too large to take a pass.

What can businesses do now to develop their connected vehicle go-to-market strategies?

Mainly, they have to prepare for that massive culture change. Automakers, their dealer networks, the wholesale model—it is built on and relies on long-standing traditions and agreements. Today’s customers are used to self-service, to doing their own research and making purchases on their own terms. To these consumers, the dealership model is archaic, painful, and unnecessary.

While upscale and boutique, Tesla is proving that the current dealership model could virtually be a thing of the past if the industry can break down its own bureaucracy. Tesla is the model, and ignoring this model will be done at the peril of mainstream OEMs.

Although it won’t disappear entirely, the current dealer-centric model is a dead man walking. It will and should be more like, say, an Apple Store, where the purchase is made online, the transaction handoff, value-adds, and continuing service happens in the store, and tech upgrades happen over the air.

The dealership becomes part of the relationship, not the entire relationship. There is also a major technical infrastructure aspect of this for OEMS—they have relied entirely on a one-time sales revenue model for the last 110 years. They just don’t have the back-office capability to handle selling, billing, and provisioning products and services outside the dealer network and with a recurring revenue and customer lifetime value model. If this is to scale, they need to prepare their billing and accounting systems and practices today, not after the next launch or acquisition. Internal evangelism for this shift needs to start in the finance office. Recognizing growth and revenue is going to change—margin models cannot be counted on for much longer.

The CFO has to be on board. The best path to getting this new thinking socialized for many OEMs is more likely to be their in-house financing divisions (if they have them), as concepts like “annuity-based returns” (where profit is realized over time rather than at initial point of sale) is far less likely to feel “foreign”. Many of the explorations at OEMs of non-traditional “transportation as a service” ideas are originating from these finance divisions for that very reason.

You cite four main business offerings for what you call “IoT on Wheels” which includes cars and other vehicles. Can you give us some examples of companies that have successfully adopted these models and what they are doing right?

Let me break it down by offering:

  1. For transportation as a service – Audi and BMW are doing a great job building and capitalizing on brand loyalty and the exclusivity of their brands with their white-glove on-demand car services. They took the functionality of Zipcar and turned it into a luxury service that perfectly matches their luxury brands by leveraging the pre-existing brand affinity that is typical of many luxury buyers. Ford is also on board with FordPass, which is the first automaker-produced app that can provide services even to drivers who don’t own a vehicle from that brand. The app can help find parking, lock and unlock the car—all great—but what it really does is help build brand affinity without the customer even having to get into one of their cars.
  2. For post-sale/lease secondary services – While OEMs are all making several forays into services like roadside assistance (e.g. GM’s OnStar), on-board entertainment and navigation, etc., the companies with the most traction and in better market position tend to be after-market providers. Verizon HUM is a great example that leverages the sophistication of the comprehensive data streams provided by modern, ubiquitous OBD ports, and like the many services provided natively by smartphones from Apple and Google, these services go where the consumer goes and are vehicle-agnostic.
  3. For Usage Based Insurance and Taxation – Metromile is a great example of millennial-focused UBI, and Progressive has provided an attractive way for telematics data to directly reduce premiums for safe drivers. Oregon’s OreGo pilot program is determining how effective usage-based-taxation, again derived from telematics data, can more equitably distribute the road-use taxation load in an era of electric and hybrid vehicles. Oregon is finding a way to replace income can no longer be counted on coming from taxes applied at the gas pump.
  4. For secondary data stream monetization – We’re still in the “wild west” to some degree here, where OEMs who are suddenly the beneficiaries of “direct line of sight” data about the users of the vehicles are figuring out how those streams can be analysed and utilized for secondary direct and indirect monetization. But, we’re getting there. Whether used for influencing broad-market decisions like determining which vehicle features should be developed and highlighted in upcoming models, or for targeted individualized offers to consumers for new vehicles that better serve their personal driving habits, or for downstream sale to third parties like insurance companies, there is a sense that there is great value here, even if the exact application of that value isn’t predetermined by the OEMs up front.

You’ve said the challenges currently facing connected vehicles have little to do with the technology itself. What are the main hurdles standing before companies seeking to capitalize on a connected vehicle business?

The answer depends if we are talking about OEMs or aftermarket providers. OEMs face myriad challenges, stemming from their lack of infrastructure to deal with recurring revenue and usage-based models that need to be employed to monetize connected car services.

They have always operated on one-time sales models and they just don’t have the back-office capability to handle selling, billing, and provisioning products and services outside the dealer network. Not to mention that the structure and culture of the dealer networks just does not jibe with how connected services and vehicles are provisioned.

Not to mention the inherent complexity of manufacturing a car—development cycles are long and the lifecycle is even longer. Tech becomes outdated before a car even hits the sales floor. This is where margin accounting comes into play and becomes a problem—though recurring revenue can be derived from services and sales-alternative models like car sharing and shared leasing—automakers still focus on margin at point of sale. Continuing to do this will hinder innovation.

Non-OEMs, the aftermarket, does not face any of these hurdles, and their barriers to entry are typically pretty low. They can still leverage vehicle systems (using OBDII) to provide connected services, and they are not tethered to margin-based accounting. Not to mention that they are far less burdened by regulation, that while beneficial to consumers, constrains OEMs in ways that don’t apply to the aftermarket.

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How VR And Mobility Are Influencing Ford’s Marketing

When the Ford Motor Company made the leap into Virtual Reality in August 2016, its goals were firm and clear: this was not an experiment. It would not be a one-time ad campaign designed to “generate buzz” and then disappear. And Ford’s VR experience would not be housed on another company’s platform.

Ford, along with its dedicated agency, GTB, partnered with integrated production company Tool of North America, to create what they say is the “auto industry’s first dedicated branded VR app and recurring content series.”

“It wasn’t about selling vehicles,” said Lisa Schoder, Integrated Marketing & Media Lead at Ford, during a panel session with the company’s VR allies at the IAB Mobile Symposium. “This was more about building the brand. This was about telling Ford’s story of innovation in our products and engineering development.”

GTB’s Christian Colasuonno, Ford’s Lisa Schoder, and Tool’s Dustin Callif at the IAB Mobile Symposium

VR: It’s Where The Customers Are Going

The deep dive into VR reflects Ford’s recognition of where potential customers are consuming content. Plus, it reflects the desire to move to a mobile-first strategy,” Schoder said.

“The VR app made sense for us as a way to pursue original storytelling through  in a thoughtful way,” she said. “We avoided thinking of this as a ‘one and done.’ This was about building a new channel for us to distribute content on.”

The first piece of featured VR content during the launch was the story behind the Ford GT’s return to the 24 Hours of Le Mans, 50 years after the car’s original victory. The underlying message of the content was to showcase “the power and efficiency in Ford’s EcoBoost engine” as well.

“On top of sharing virtual reality stories about our innovative products, we are also looking to bring mobility issues to the forefront,” Schoder said at the time of the launch. “As we expand our business to be both an auto and a mobility company, we are pursuing emerging opportunities through Ford Smart Mobility.”

From the final installment of the Gymkhana NINE virtual reality and 360-degree video series.

Initial Results Are Strong

The idea for focusing on VR as a branding tool had been “kicking around  the agency for a while,” said Christian Colasuonno, director of Digital Production at GTB.

For example, at another IAB conference last year,  MINI USA’s Lee Nadler showcased that car company’s use of VR as well. The  main goal was not just to share arresting visuals. He wanted to demonstrate that, even though “VR isn’t mass yet,” the ability of immersive, 3D visuals are able to lift brand favorability by 11 percent after generating 4.2 million views.

For Ford, the initial results of its VR efforts were even stronger. The VR experience for Ford’s participation in Gymkhana, the Australian and New Zealand motorsport race, last October drew over 17 million-plus views, as well as drew widespread coverage from media outlets both general and automotive-focused.

During the IAB presentation, Dustin Callif, Tool’s managing partner, noted that Schoder started her career on the engineering side and then moved to marketing.

“The story we’re telling is how that reputation for performance can be stepped up into something larger for the brand,”Callif said before turning to Schoder. “Is [this use of VR and mobile] analogous to the relationship between the auto-enthusiast books and the mainstream advertising were back 20 years ago? Is this an advanced version of that?”

“Maybe,” Schoder responded. “At least in the way we approached it, if we were saying we wanted to deliver stories with the Ford brand onstage, those key moments are in our performance portfolio. And we also knew that when we dug into the audience insights with our performance fanbase, we knew they were largely into tech and identify as early adopters. Now, we’re looking to go beyond performance to see what other stories we can tell to a broader audience.”

Smart Mobility And Connected Cars

Following the panel, we caught up with Schoder and asked her about other emerging channels that can offer both a branding experience as well as drive performance to local dealers.

While the IAB panel discussion was about the role of Ford’s VR app as a branding and content distribution tool, does Schoder see VR as something that can work at the local dealership level to create an omnichannel experience intended to drive sales?

It certainly could be,” Schoder told GeoMarketing. “This particular app was initiated to build brand stories. We’re also looking at VR within the shopping experience. It could provide education about new features, for example, ‘How do you experience the all-new Expedition from the inside-out?’ That is certainly a part of how we might approach the overall use of the VR technology.”

Aside from VR, Ford is also exploring ways of using voice-activated, artificial intelligence-powered digital assistants like Alexa or Siri or Okay Google as part of a wider smart mobility strategy, she noted.

“We want to understand how to work with Amazon on Alexa, so that if someone asks a question about one of our cars, they can have the right answer, the best answer for them,” Schoder said. “We are already working with Amazon on our connected vehicles and see how Alexa fits into what we’re doing and what our customers want. For example, it would be exciting for someone to say, ‘Hey Alexa, start my car.’ The car is a piece of the Internet of Things ecosystem and we want to explore all of it.”


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