The electric cars (EVs) represent an epic transformation in the automotive industry. The car dealership model that has long been ingrained in the consumer life and is safeguarded by the franchise laws is scrutinized like never before. The question comes in, are electric cars really killing the car dealership, or are they triggering a much needed evolution?
This radical change affects all areas of the automotive industry including profit pools and operating processes. It used to be an outlier, with the companies like Tesla on the forefront, but it is now becoming mainstream. The discussion has changed not to adaptation, but to a quick change, making difficulties a chance and source of innovations and new significance.
Global Growth and Government Policy Driving EV Expansion
The electric vehicle market in the world, such as hybrids, plug-ins, and battery, has been incredibly resilient and growing. In spite of the economic unpredictabilities of the COVID-19 pandemic, 2020 recorded the highest number of EV sales, which was higher than the figures that were recorded before the pandemic started in the third quarter. The fourth-quarter sales increase in Europe and China was high, taking the global EV penetration to an all-time high of 6%. At the same time the US fell behind, it saw a massive growth, sales of EVs revived by almost 200 percent between the second quarters of 2020 and 2021, reaching a domestic penetration rate of 3.6 percent during the pandemic.
This is normally associated with threshold density and big cities. California was the first to follow as the light-duty EV registrations have reached a staggering 425,300 in 2020, which is approximately 42 percent of total EV registrations in the country. This is over seven times higher than the result in Florida that has the second-largest amount of registered EVs. This intensive adoption implies high scaling in case conditions are favorable.
In the future, the trend of EV adoption in the US will gain momentum thanks to a number of strong forces. The ambitious new administration ambitions, such as the half of all new car sales being zero-emission cars by 2030, by President Biden, are an indication of a definite policy direction. Proposed infrastructure investment of billions of dollars such as $7.5 billion of a nationwide EV charging system and, or $7.5 billion of low and zero-emission buses and ferries will directly stimulate EV sales and eliminating range anxiety. Congressional proposals to increase the tax credit on the purchase of new EVs to 12,500 and include used EVs will go a long way in lowering the cost barrier among consumers.
Regulations and the Shift in Dealership Profitability
The environments of regulations are also important. The California Air Resources Board (CARB) has established strict standards that have been adopted by several states in the East and West Coasts that more states are expected to adopt. These regulation, together with Zero-Emissions Vehicle (ZEV) credit schemes, will encourage the automobile manufacturers to produce more EVs. It is estimated that four additional states will implement CARB standards and ZEV credit initiatives by the year 2025 and three others are likely to fully eliminate the sale of internal combustion engine (ICE) vehicles by the year 2035. This political initiative, plus the fact that other large incumbent OEMs are declaring their own ICE vehicles sales elimination deadlines, gives a significant momentum in favor of EV proliferation that cannot be ignored. In our most probable scenario, we expect EV sales to represent an estimated 53 percent of all passenger-car sales in 2030, which explains the sense of urgency to dealerships to evolve.
EVs have a considerable influence on the profitability of dealers, both in the front-end sales and the back-end operations. The conventional profit pools are reallocating and a strategic re-evaluation of business models is needed.
New EVs are more costly to produce because of expensive battery pack, power electronics, and e-motor prices. Although it is likely that cost parity will be reached between 2024 and 2026, the current rise in the cost of production suppresses the average sales of dealerships. The consumers insist on transparency and uniformity in pricing at all the points of sale, thus it is difficult to keep the dealership at competitive prices.
Online Sales, Used EVs, and Maintenance
The Original Equipment Manufacturers (OEMs) are becoming increasingly strong in controlling prices and selling online. The dealerships were used to flexibility in end price negotiation, but this can be constrained. Online sales are increasingly based on models whereby a transparent and fixed price is followed and OEMs are increasingly pegging incentives to sales based on the suggested retail price (MSRP) by the manufacturer. Direct pricing models are already gaining momentum in Europe. The further desire of the traditional OEMs to increase their online sales or even go all-online, as is the case with Tesla, only adds to the landscape. Although there are still some direct-to-consumer models where the dealership is involved in picking-up, in a number of states in the US there is a ban on manufacturers selling directly to consumers online. The result of a series of legal conflicts over these limits is still unclear, but assuming the spread of direct-to-consumer sales, such dealerships may experience a detrimental effect on sales volume and their profit pools on the front end.
At a glance at used electric vehicles, the situation with profitability is complicated. At the moment, EVs are more likely to lose their value, as there is a concern about the long-term battery functionality. Nevertheless, this tendency will turn the other way. EVs will also have a better residual value since in the long-term, they will tend to depreciate slower than ICE car models and have a longer lifespan. This is because their capability of attaining a greater mileage during their lifetimes implies that they can be monetized over a long time hence creating a new market in the used car market.
A back-end services and parts are greatly affected by the effects of electrification. Afs parts revenue would reduce significantly in dealerships since EVs contain fewer mechanical components that are likely to fail. Our projection indicates that EVs will result in up to 40 percent of less aftermarket expenditure than their ICE counterparts which are of the same age. The greatest variations will be seen in the overall repairs, wear and tear items such as brake pads and consumables such as fluids and conventional powertrain items. New technology such as regenerative braking systems has been used to decrease the wear and tear of the brakes, yet other chassis parts, certain EV powertrain components, thermal parts as well as tires are set to increase spending because of the unique technical arrangement of the electric cars.
Although EVs generally need less maintenance and fewer touchpoints to service compared to ICE vehicles, thus less costly overall in terms of maintenance, the character of service work is shifting. Based on the nature of jobs that require high voltage systems, specialized capabilities are required, which results in more billable service hours and higher revenue per hour. The dealerships need to invest in trainings of maintenance personnel such as special training and acquisition of high voltages tools and gears with regard to safety. This initial expenditure is essential into exploiting the new service environment.
Automatic updates (OTA) typically found in new vehicles and EVs would also undermine the aftersales revenues of dealers. These wireless navigation, entertainment and software upgrade updates lessen the necessity of the physical visits, which affect the traffic of the service. The reduced number of moving parts, reduced maintenance, and remote updates pressures on the traditional aftermarket sales and profit, which requires the reconsideration of the service concept.
The future is ambivalent in the field of finance and insurance (F&I). Although the future of front-end gross margins when new EVs are sold appears grim, F&I provides a better source of opportunity to dealerships. EVs generally cost between 5,000 and 10,000 more than similar ICE vehicles, meaning that additional customers will probably require to finance their purchase through the dealer. This augmented financing requirement should lead to augmented financing and lease volume among the EVs. The proportion of lease transactions will keep on rising until the consumer confidence in the battery life and value of residues is established. Cunning dealers also have a chance to find funding deals on car batteries and home chargers, which they can arrange in collaboration with the local installation services.
The dealerships will be able to attract consumers that are more ready to add different F&I products and additional financing and leasing offers. Early EV owners, who are usually not poor, may be interested in choices such as long service agreements, particularly those that are battery specific. Guaranteed asset-protection (GAP) insurance, that is provided to cover the difference between the value of a vehicle and the outstanding loan in case of a complete loss, will appeal. Individualized electronics and battery-service are also new sources of income. Nevertheless, more mechanical part-based vehicle service agreements might not appeal to EV buyers, since nonhybrid EVs have fewer hardware. Furthermore, the unclear residual values of EV technology which could be different depending on the brand become a threat and dealers have to mind it in their pricing and discounting strategies.
The Informed Consumer and the Need for Expert Dealerships
The dealerships are challenged to change their frontline sales operations and skills to suit the needs of the EV-curious consumer. The sale of an EV is in a totally different fashion than that of ICE vehicle. New employees must be technical and not sales oriented. An example of this change would be a salesperson who moved over to the aerospace industry and as a result, did not have any background in sales but had an intimate knowledge of technology. People do not want to be sold but information told. It should have an EV expert in place.
The internet-educated consumers are demanding knowledge and skills at dealerships. Online discussions note the significance of a wonderful customer experience, and equate it with Apple and Tesla. This involves flawless ordering, enthusiastic product experts and continuous education. The consumers are also critical of the value where they would spend $99 a year with the dealer service but they would doubt spending 200-300 charges.
These expectations and dealership preparedness are however found to be at variance with research findings. In a 2019 mystery shopping survey of EV sales in the US, China, and Germany, the readiness of frontline sales personnel to sell key points such as TCO differences and battery technology were evaluated, and were found to fall short. As much as the US dealerships are good in product availability and test drives, the better sales experience is very important and this is lacking.
Customer Sales Journey and Frontline Transformation Journey
Consumer testimonials point to the discrepancy between online knowledge and sales in the dealerships. One of the respondents shared an aggravating experience of using old-fashioned sales strategies, as sales people pretended they are having consultations with a manager yet they talk about other irrelevant issues. Another one had disillusioning experience in a Hyundai dealership, where they were informed that they were ignorant about the IONIQ 5 and their inquiries regarding range were disregarded. These experiences are an indication that internet knowledge has rendered dealerships useless in the sale of cars. Nonetheless, there is an opinion in favor of the advantages of the traditional model, referencing the possibility of price negotiation and access to cars. It indicates a need to have a personal interaction and negotiating process, so a hybrid approach or a re-invented face-to-face experience would be essential. To stay afloat in the fast-evolving market, dealerships need to coordinate the existing expectations with the changes in the needs of the EV era.
The car business is at a crossroad, and it requires a paradigm shift of the traditional dealership. Although there exist challenges, there are never before opportunities. The successful dealerships in the electric era will be innovative and will reevaluate their value chain and carefully rebalance operations so as to be in line with the requirements of the electrified future. This needs a strategic transformation, both in improving the customer experience and in reconsidering service models and revenue streams.
The transition to ICE to electric vehicles requires a radical change in the sales floor, with the departure of the traditional sales strategy in favor of the educational and consultative strategy. Customers do not want to be sold to, but to be given all the information and professional advice on a product. Dealerships need to turn into a knowledge center, where the people want to be informed rather than sold to, which needs a specialist on EV on the premises. Such a paradigm change is reflected in the successful examples of the other technologically-oriented industries, which is why the vision of the Apple and Tesla experience includes the focus on the smooth ordering process, devoted product experts, and the possibility of continuous customer training.
Dealerships have an opportunity to digitalize the sales experience, and it would be a truly omnichannel experience that is not limited to the vehicle itself but consists of the whole ownership ecosystem: charging options and service expectations. The whole experience of EV includes a holistic approach to the showroom, including the presentation of the fast-charging experience, and offers a complete package. As an example, charging equipment that can be sold and installed preferentially at home makes it easier to own an EV by eliminating a major obstacle on its way to adoption. Community and expertise are promoted by regular classes on the use of new features.
Strict and ongoing training on the sales associates is essential to make them bona fide experts in EV. They need to have an understanding of the important purchasing considerations such as range, performance of the vehicle, service expectations and day-to-day functionality. The test-drive experience may be restructured to be EV-centric, such as demonstrating vehicle charging in real-life and taking performance tests. The dealerships must thoughtfully manage their car stock and include more new and used electric cars, and use data and analytics to trim their inventory at the trim level, aiming to target their most demanded and most profitable models. The new models of ownership, including full-fledged subscriptions or leasing out of EVs temporarily, may also be proposed as the form of an affordable access to the EVs, which would eliminate the existing higher impediment to purchasing the vehicle.
The dealerships may assume an agency approach, whereby product specialists lead a customer through transactions with prescribed OEM prices. This open pricing serves the need of consumers to have uniformity and reduce the hated negotiation. New and used EV dealerships of the multi-make format and the so-called drive days when the electric models can be tried increase accessibility and inform the population, which are already successful projects of motoring associations and EV associations.
EV Offering Finance and The Future of Service Models.
Even though the new EV front-end sales margins could be compressed, the dealerships have a big chance of increasing their profit due to the financial and insurance (F&I) industry. EVs generally sell at a premium (5-10,000 more than similar ICEs) and result in higher financing and lease transactions. This is likely to persist until the consumer confidence on battery life and long-term residual values are proved satisfactorily.
Smart dealerships will have the opportunity to be innovative with their F&I product portfolio to serve EV owners. This involves providing longer batteries to performance-specific warranties, emergency charging programs as a roadside service, and tires-as-a-service with monthly subscription plans to address the increased price of EV-specific tires. The latter services reduce the apparent cost of ownership, target the particular EV maintenance requirement, and make the overall ownership cost much lower. Dealerships also can enable end-to-end EV leasing or financing plans which package the vehicle, installation of home chargers and access to commercial chargers in a single monthly bill. They might also provide financing agreements on car batteries and at-home charging devices and probably collaborate with local installation companies.
The dealers should also review the residual values of both ICE and BEV vehicles. With the increasing EV adoption, the accelerated depreciation rate of EVs associated with battery performance issues will turn the other way. EVs will have a slower rate of depreciation and have a longer lifespan compared to ICE cars in the long-run which substantially increases their residual value. These dynamics will play a key role in pricing and discounting decisions to consider, given that low resale values may lesser the appeal of ICE vehicles in the future.
The effects of electrification are immense particularly in the service and parts departments. EVs contain fewer moving components and need less maintenance, and may cut aftermarket expenditure by up to 40 percent. Nonetheless, the service work is becoming specialized and able to fetch a greater amount of revenue per hour. The dealerships will be required to invest in EV aftersales preparedness, such as new point-of-sale procedures and high-voltage system equipment, to transition.
Current technicians will have to be trained on specialized skills of working with high-voltage systems safely. The dealerships might also grow to less impacted products such as tire sales and seasonal storage without the need to continue dealing with customers through “OTA status updates or at-home services. Simple maintenance like annual checks, replacement of brakes and tires is important. Maintenance technicians and good mechanics will always have a job as one of the heavy diesel mechanics remarked. Most importantly, there is the value addition, maybe the car can be serviced even as it is being detailed?
Service Innovation and Reinventing Dealerships for the Electric Era
Establish a low cost-based EV regular service model to counter the tendency of the buyer to be unwilling to buy a second-hand EV lacking service records. Such a proactive strategy would reduce battery health and car life anxiety, and increase the used EV market. Although there are certain brands such as Tesla that lean towards a centralized hub and a less demanding service timetable, some other brands such as BYD might still require numerous agents implying that a hybrid service model might develop. Dealerships might collaborate with manufacturers and subsidize EV-related infrastructure or equipment, which would reduce the cost of this change. The certification of the dealership as EV can prove their intentions and skills and appeal to more sophisticated customers.
Other than direct service, the dealerships might consider some new long term sources of revenue. The manufacturers may stock more spares to enable dealers to earn their margins through provision and attachment of parts to ensure the EVs continue to purr at least in the next several decades. The dealerships might also provide the option of converting ICE cars into electric or upgrading Older models with a battery which would create a new market of specialized mechanics. The reorganization of the service network by splitting the Sales and Service and having an E-AUTO Service center with only the service of the EVs as Franchises may be a radical and yet efficient reorganization of the service network, providing more specialization and utilization of assets.
Dealerships could grow their fleet business, particularly to rideshare and commercial car operators. Reselling used EVs to these groups will allow dealerships to clear up old stocks and become reliable providers of affordable maintenance and repairs. This business to business segment will provide stability in revenue and new clientele.
Rebook dealership strategy. Restructure the approach to OEM-dealership contracts, namely by promoting the situation when dealers would process online orders. This mixed system captures online buying habits without depriving the dealer of his/her delivery, onboarding and service. Adding used-car stock with off-brand EVs will make dealerships one-stop retail stores of trusted EVs of various brands and potentially boost traffic and popularity.
The final vision of the developing dealership is not about sales and service. Based on new approaches such as Nio, dealerships would be able to expand to community centers with such services as cafes, play areas, libraries, conference rooms, concierge and mobile tire and charging services. This re-invention will transform dealerships to be a valued destination in life beyond just a place of sale that will generate loyalty and new employment opportunities and income sources. This could imply a reduced number of mechanics and a new customer engagement strategy, but it represents a holistic approach towards the customers. Other larger dealerships are already showing agility by acquiring EV distributors such as TrueEv (Xpeng) or EvDirect (BYD) to merge with new entrants. This fluid world implies that despite their probable reduction in size, dealerships will still be present but in a restructured form as they specialize in special services and unmatched customer experiences.
The Electric Future of Dealerships
The electric cars revolution is not a death ringing bell to the auto dealership but a significant wake-up call to evolve. Innovation, customer-centricity, and strategic foresight are the way to prosperity in this new era. The dealerships can overcome this seismic shift by investing in specialized technical personnel, creating custom F&I items, transforming service operations to meet EVs, innovative market segments such as fleets, and rethinking their presence. It is no longer a question whether they have to change or not, how resolutely and creatively they will seize this chance to set a new, electric path.
