New car sales are going to change as a result of the COVID-19 coronavirus pandemic... But not how you might think.
In an industry that has seen very little real change, it will now see an acceleration of permanent change because of the Covid-19 virus.
The new car industry has seen great change in technology, production, in-car entertainment and, particularly over the past 40 years, in the volumes of vehicle production and consumer accessibility.
The generic dealership model, established in 1898 by William E Metzger, has seen no significant change since, unlike almost all other industries have seen vast change in technology, lifestyle and economics. The digital revolution has, so far, largely bypassed our industry.
Most business forces in the automobile industry are fairly straight forward: consumers need cars and a procurement channel. Dealers supply cars but need manufacturers to build them.
However, there is one complicated force which prevents radical change: cars are assets with unavoidable future obsolescence, unlike a house, characterised by procurement costs and typically the largest slice of a consumer’s annual income outside of mortgage, unlike mobile phones, manufacturers need dealers to finance operations. This is a confusing arrangement and different to other industries.
The way that consumers finance new vehicles has changed. Fifty years ago few people could afford new cars and most cars on the roads were used. Consumers now have a number of different financing options but the dealer model remains unchanged.
Covid-19 is having an unprecedented impact on all industries – Moody’s have significantly downgraded global vehicle sales expectations.
China’s new registrations plummeted by around 92% in February.
However, I believe that the industry will return more or less to normal in regard to those impacts – eventually.
New car volumes will creep up again as both market and consumer liquidity returns to normal because, as Mark Zandi, chief economist at Moody’s Analytics said: “This feels different to other market crisis in that it involves disruptions to daily life – this isn’t financial.”
I further believe that the industry was already on a course of change: that the seeds of change were sown years ago and that change is inevitable.
Frost & Sullivan estimated that aound 825,000 new vehicles were sold online in 2019 across the world, approximately 1.2% of total sales.
They figure includes sales that originate through online financing and where a deposit or part payment was made online.
They go on to estimate that this figure will climb to six million vehicles within five years.
Some manufacturers have built digital ‘build your car’ tools that enable consumers to choose options, place orders and collect from local dealers, a model that dealerships could grasp and develop.
But it is in the used car industry where there are a number of interesting platforms that embrace digital or business innovation. In the US autolist.com has developed standout mobile apps to make car buying simple and Carvana has given us the exciting and spectacular car vending machine without human interaction.
The advent of commercially tenable electric vehicles (EV) is the obvious driver towards a new commercial model and the clearest signal of change.
If, perhaps when, all new cars are electric then the car servicing industry will change – what, other than tyres, is there to service? Brake pads, because of energy recovery systems, can cover huge mileages.
Given that modern vehicles are far more complex in terms of sensors and the calibration of those sensors and information processing technology is paramount to safety, I do wonder if the service and maintenance industry will change to become one of accident repair and fine tuning.
Coronavirus has put the world into “supply shock” with major shortages of supply in many markets. This is different from the “demand shock” which has characterised previous crisis. Supply issues have affected the auto industry with an estimated 10% of all car parts originating in China.
Habits of consumers are always changing and crisis will always accelerate change. A world that currently values no human physical contact during procurement will unleash the unexpected consequence of online car purchase and home delivery test drives.
We have already seen evidence of this in China, the world’s largest car. Major manufacturers are redirecting resources in the region to online marketing and e-commerce.
Just as people won’t now give up video conferencing from home, they won’t give up buying new cars online.
The digital dealership, though in its infancy, has begun and I believe that consumers will quickly become very comfortable with it and refuse to go back to traditional models.
Just as online used car markets are becoming digitalised, I predict that consumers will rapidly begin to look for online transactions over showrooms for new vehicles. This was always inevitable but will move at far greater speed because of the coronavirus.
The digital revolution has finally found us.
Author: By Oliver Woodmansee, chief executive XP Group Holdings