The automotive downstream industry (distribution and retailing of vehicles) will see more change in the next five years than in the last 50.
This won’t be caused by one single factor – the agency model or battery electric vehicles (BEVs), for example – but by numerous, interlinked factors taking place simultaneously over years. As all these changes start to converge, automotive downstream is set for a significant shift in gear.
Finances heat up over demand for electric
Consumer interest in electric vehicles (EV) is increasing, which is generating demand for BEVs. On top of this, intensifying emission regulations and significant fines imposed on the original equipment manufacturers (OEMs), especially in Europe and China, help drive the focus on increasing supply with a large number of BEVs launching in 2022 and beyond.
In the UK, the market share of BEVs reached c25% in December 2021(source SMMT),more than double that of diesel vehicles. But the retail price and production costs of BEVs remain high and this will constrain an even faster take-up of BEVs in the short term.
To reduce the impacts of emission fines and still maintain a BEV retail price that is affordable, the OEMs have had to invest heavily in BEV and low-emission vehicle technology. This has impacted earnings and led OEMs to strive to reduce costs elsewhere in order to meet financial targets.
OEMs rethink B2C business model
In the face of increasing operating and development costs, many OEMs are reassessing their B2C retail model. A growing number set out publicly their intention to use a direct sales model process for the B2C market. In particular, Stellantis, Mercedes-Benz and VW have said they’ll be implementing a direct B2C process, also known as the agency model.
It’s unclear if this will be the full agency model, in which all transactions are undertaken online with the dealer receiving a handover fee. Or if it will be a derivative model that includes some current franchise model characteristics, but the OEM still sells directly to the consumer, and the dealer takes some part in the sales process. Compare the current franchise sales process with the full agency model in our graphic below.
We believe that the agency derivative model will be the popular option with few OEMs implementing a full agency model. This is because all OEMs and their dealer networks are different and to fulfil the required growth strategy of each would require a different model – no single standard agency model fits all.
Potential to unlock upselling opportunities
In both agency and derivative models, the customer is far more central in the sales process, providing the OEM with significantly more insight into customer buying habits. Having direct connectivity to the customer also gives the OEM greater scope to provide extra omnichannel services from vehicle sales to service and repair. It remains unclear at present, however, who will control other potentially lucrative channels the OEMs themselves, or their dealer networks, or a combination of both.
Direct B2C connectivity also creates the potential to upsell thanks to a greater understanding of what a customer needs. The OEM would also partake in the part-exchange transaction when the customer returns to purchase their next new vehicle.
It’s widely understood that many OEMs want to play a larger part in the used car market as this would generate more profits through the sales of additional car finance and spare parts, which are profitable for both the OEMs and their national sales companies. This raises the question: could OEMs go down the direct sale route for used vehicles? We believe that this is possible if done correctly, but it will take time and careful planning.
Is the future subscription-based?
If these changes are not significant enough, we also believe that subscription will play a part in changes to the automotive downstream industry. Volvo has indicated that half of its vehicle production will be on subscription by 2025 (source AutoCar).
The definition of subscription can include both short term, highly flexible options (SUV for weekdays, sports car for the weekend etc.) and also the more traditional, monthly all-inclusive models.
Either way, the subscription market remains small at present and fits well with the agency model and customer omnichannel process. We believe that the growth of subscriptions will be slow, but provide the opportunity for OEMs, dealers and independent used car operators to provide another flexible service to their customers.
Next five years are crucial
There is no single catalyst responsible for this acceleration of change in the automotive downstream market. What we know, is that there are many contributory factors at play and that where there is change, there is both tremendous opportunity and risk. Readiness, for both, is critical.
Helen Dale, Industrials and Automotive restructuring partner at Grant Thornton, commented that ‘As these dynamics play out, companies in the downstream automotive industry will be driven hard to adapt to change. Those unable to adapt quickly enough risk a heavy price.’
De-risking business models and adapting to these new and evolving opportunities will be key for businesses both to survive and to thrive. We are already working with a number of major OEMs and dealer groups around the implications and opportunities laid out here. If you would like to discuss further any of the points in this article, please get in touch with Owen Edwards.
