The Auto Industry Enters Era of Uncertainty

On the wall outside the executive conference room at Cars.com’s headquarters, is a mural. It’s a picture of a two-lane road in the forest that bends abruptly to the left. The turn — which is a bit misty — is so sharp, we can’t see what’s beyond the bend.

CEO and President Alex Vetter says he placed the picture there to remind his executive team it’s their job to see around the bend — even though it’s foggy and the data is imperfect and not clear. As leaders, they have to use their intuition and experience to make educated guesses what is likely to be around that turn.

That picture captures where the auto industry is today…

We don’t really know what’s around the bend. For the first time since the early days of when cars first started taking over the road, we don’t know what the future looks like. And yet, companies — automakers, dealers, investors and vendors — are making big bets staking their futures on on where they believe society and technology will be in the next few years.

For the last 100 or so years, five fundamental aspects of the industry have stayed relatively the same.

1. The product — except for stylistic and technological advances — has stayed the same. It’s still four wheels, a gas-driven engine with a human driver. In fact, the best selling vehicle was Ford’s Model T in 1917 — the year Ford also introduced the first pickup truck the Model TT. And a century later? the best selling vehicle is Ford’s F-150 pickup — a direct descendant of that early Model TT. But the product looks to be changing radically in the next few years. Vehicles will be connected to the Internet. The onslaught of electric-powered vehicles is soon to be upon us with the only question being, when is the tipping point? Despite projections of 30% to 40% consumer adoption by 2030, EVs only comprise at best 1% of sales today. But with approximately 120 electric vehicles slated to hit the market in 2021, the industry will have to make significant adjustments. Furthermore, the predicted potential income from autonomous vehicles has investors, tech giants and automakers spending billions to develop the first real self-driving system.
2. The manufacturers have remained unchanged. Yes, a few automakers may have seen their ownership change, but otherwise, it’s still the same players with the same names. But that may change as large tech players lured by the promise of autonomous vehicles enter the fray. Will Apple or Google build a vehicle? Or will they — or other tech giants — decide to buy an automaker?
3. The distributors — the dealers — have not changed. Some of them have been in business and in the same family for 50, 80, 100 years. Except for consolidation and increasing costs of getting into the business, the distribution model has not changed. Dealers buy the cars from manufacturers and sell them to customers. Will this change? Franchise laws are still a formidable roadblock for potential outsiders. And dealers are adapting to new technologies and business models, but the threats to the franchise system keep coming.
4. The buying experience is the same. Years ago, leasing and financing introduced new components to the ownership experience, while the Internet has put more information in customers’ hands making research and shopping easier. But other than a couple of online used vehicle startups (such as Carvana and Vroom) customers still buy vehicles at the dealership. But new ownership models are coming — flex or fractional ownership; subscription and short term leasing models are hitting the market now. Whether they resonate with customers is question yet to be answered.
5. Finally, the ownership experience hasn’t changed. But the big question? Will customers actually buy cars in the future? Numerous prognosticators say, no. They argue the autonomous vehicle era is around the corner and will take a drastic bite out of private ownership within the next 10 or so years. We think there is a bit too much of the Silicon Valley Kool Aid in those predictions. The American consumer is motivated by convenience. And it’s just too darn convenient having that vehicle in my garage storing the golf clubs, the child safety seat — insert anything here — while having the vehicle at my immediate beck and call.

Our perspective is that the dealer model will continue to exist in its current form for at least a couple of decades and that many of the projections about the end of private ownership are hype coming from so-called experts that understand little about automotive manufacturing and distribution. (Read TBR’s response to one such projection: Lutz Predicts the End of Automotive in 20 Years, Do the Math, It Ain’t Happening.

Or, TBR’s latest, Why the Dealer Franchise Model Will Not Go Extinct.

Nevertheless, massive change is coming. The investment alone — which is hundreds of billions of dollars — is driving it. The question is timing and impact. But 2018 is clearly the first year of what will be a period of uncertainty for the industry. And it may take anywhere from five to eight years — maybe a few years longer — before we really understand what the future of transportation will look like. Opinions vary widely.

For dealers debating whether to sell or where to place their bets financially, not much likely will change structurally in the industry for the next decade. The hundreds of billions of dollars tied to the auto industry as it exists today; the complicated process of manufacturing vehicles (Tesla is learning this the hard way); the 264 million vehicles on the road today with an average age of 11.6 years; the slow pace of legislation and regulatory activity — all of these factors almost guarantee the auto industry will not be radically upended within the next decade.

From a high level, we see the impact in some cases creating a greater advantage for dealers with capital and resources available to experiment and invest in new technologies. This is a trend we’ve been writing about the last few years, but the disparity between the “haves” and the “have nots” is becoming more pronounced. It should lead to a continued brisk, yet limited market for dealership buy-sells over the next five years.

The consolidation will continue the trend we’re seeing of groups with capital extending their reach as they grow into regional powerhouses providing full transportation and mobility services. But there are smaller dealer groups that are proving to be more nimble and are outperforming the big players.

The only thing we can say with certainty is that the next few years will be uncertain.
[highlight color=”#CCE6FF” font=”black”]**This article was originally posted on The Bank Report[/highlight]