Published Tuesday 15th October 2019

Already for quite a few years, car dealers have felt the strain of increasing competition. Most of them do not make money on the sales of new cars. Their source of income is the service and repair they provide to their customers. And especially these business activities are under pressure in the near future as the car market is changing rapidly into a mobility market.

A hurricane of developments

Currently we see several radical developments occurring at the same time that revolutionise the car market. Each development on its own would already have impacted the market heavily, but combined they are really changing the playing field. They are described with the acronym ACES:

  1. Autonomous Driving
  2. Connectivity
  3. Electrification
  4. Sharing

Autonomy

Driving a car is changing. Therefore, the American Society of Automotive Engineers (SAE) made a framework within which they describe levels of car-driving, from level 0 (full driver control at all times) to level 5 (full-time automated driving under all road conditions). Level 3 is expected to arrive in cars within the next few years and level 4 is expected to arrive in commercial long range applications soon as well.

Connectivity

The first automobiles that can use a driver’s personal profile to access services on external digital platforms have already arrived. Improvements that change the connectivity experience from reactive to predictive will follow soon. Then it will be possible to create a dialogue with the vehicle in order to receive proactive recommendations on services and functions. And artificial intelligence (AI) will develop into a ‘virtual chauffeur’.

Add to that, that also the road will become connective: sensors in vehicles will communicate with traffic lights, streets signs and each other, allowing cars to travel closer together.

Electrification

Batteries are improving significantly, the cost per kilowatt-hour continues to fall and regulations are imposing carbon limits. The combination of these trends will likely lead to the end of the Internal Combustion Engine (ICE) dominance. Electric cars have far less moving parts compared to an ICE. And battery life is already enough to cover over 450.000 km.

Sharing

Today, the cost of the driver is still excessive compared to what consumers are willing to pay for a ride. But as soon as autonomous vehicles are possible, this problem will be solved. It is foreseen that autonomous public vehicles will drive over 100.000 km/year, compared to around 20.000 km/year for a privately owned vehicle. Include the redesign of cars to narrow its capabilities. All this will greatly lower the total cost of ownership due to lower variable cost. ‘Pay per mile’ can become the norm.

Consequences for car dealers

The margins on new cars will remain small. New market approaches such as private lease, reduce the margins even further.
Dealers are more and more dependent on OEMs and importers, which deliver cars under retention of title, making it impossible to use the stock of new cars as collateral for a bank loan. This increases the dependency on importers or OEMs. And this in turn leads to an increase of the power of these players in the chain to enforce changes. A power they will most certainly use.

Direct sales through the internet will pump up the power of the OEMs even further. Why would they use dealerships if they can sell the cars directly?
Electric cars require far less maintenance than ICE powered cars. Not only the amount of maintenance will change, also the way maintenance is done changes dramatically. From bridge to computer. From wrench to software. And from tinkering to replacing modules. Therefore: less maintenance means fewer workshops and a different level of personnel.

Connected and autonomous cars are safer to drive and will result in a more efficiently and effectively utilisation. This all reinforces the trend towards less maintenance. Also it will cause fewer accidents and therefore fewer repairs, reducing the need for body shops.

Finally, sharing reduces the volume of cars even further.

So, the end of the car dealer?

Not yet! Expectations are that it will take 10 to 15 years before the majority of cars is not powered by an ICE anymore. However, the number of dealers and garages will continue to decrease and the market will see a continuous consolidation.

There still will be a place for dealers, but we are also sure that a number of them will not survive the next 10 year.

New business models, adjusting to the changing repair and maintenance demands, and excellent entrepreneurship will be able to prolong the life of a dealership. But in the long term, the position of this part of the retail market appears to be very uncertain.

About the Author: Henk Postmus, To learn more about Henk and his professional background, please visit his profile page or contact him directly.

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