Welcome to this episode of The Friday 5 with Steve Greenfield, Founder and CEO of Automotive Ventures, an automotive technology consultancy that helps entrepreneurs raise capital and maximize the value of their business.

Well, it’s the first week of the month, and that means we’ve released another Intel report from Automotive Ventures.

In this month’s Intel report, I give our readers an overview of the auto agency model.We’re coming off the two most profitable years in auto retail history, and if we’ve learned one lesson, it’s that artificially limiting supply can dramatically increase profitability.

Automakers have taken note and have a keen interest in both limiting supply and providing consumer price transparency while eliminating discounts in the future.

OEMs have generally decided that they would like to have more control over the consumer experience, especially as online buying and shopping behaviors evolve.

Automakers are trying to redefine themselves as technology players as vehicle operating system, over-the-air (OTA) software updates, subscription services and enhanced standalone ADAS systems increasingly differentiate how consumers decide which brands or models to use. to buy.

Automakers envision a future where the “software-defined vehicle” allows a new wave of subscription products to be sold to the driver after purchase (think things like power boosts, rear seat activation heaters or unlocking autonomy on a battery) . Over-the-air (or OTA) updates to car software will reduce service visits and potentially enable much stronger customer loyalty and lifetime value.

OEMs are also concerned about the hundreds of new automakers that have emerged in markets like China in recent years, many of which will have global brands and could lead the fight in markets where older OEMs have enjoyed defensible market share.

Traditional automakers have pledged to spend billions of dollars to retool internal combustion engine production lines to electric ones in the anticipation that consumer demand for electric vehicles will continue to grow strongly.

Automakers are taking advantage of this, as they transition to electric vehicles, to redefine the consumer experience and the distribution channel.

In many cases, traditional automakers are turning to new online-only OEMs (such as Tesla, Rivian, and Lucid) and exploring how best to emulate elements of their business models.

Automakers believe that the strategic direction of their automotive retail model will likely determine the future success of the entire business. And they feel the urge to try new short-term sales models.

The “agency model”, although not consistently defined, is an evolution from a more typical franchised dealer model to “agents” who sell products on behalf of the OEM. This model is attractive to automakers because they see the potential to reduce operating costs (mainly marketing and inventory expenses), eliminate rebates (theoretically consumers pay the same price at each dealership) and standardize the customer experience.

Retail partners often remain involved, but in a new role as “agents” who receive a commission or processing fee for providing certain services. OEMs interact directly with customers and take responsibility for the sales transaction. The reseller remains the face of the customer but is no longer the contractual partner and acts as an agent.

Many large consulting firms are pushing the agency model to benefit OEMs, predicting that the transition could help them realize up to 8% of retail pricing inefficiencies, through:

  • Elimination of rebates (all dealerships will charge new cars the same, at MSRP)
  • Reduced incentives and rebates for dealers and consumers
  • Centralize and eliminate “back office” costs
  • And, Workforce Elimination

The agent model gives OEMs the ability to control the sales channel, gain direct access to customers, control pricing, and increase sales efficiency.

For dealers, the direct sales model can have advantages. If all new vehicles sell for MSRP in the future, dealers won’t have to worry about margin-eroding discounts. If they don’t have to hold inventory in stock, their carrying costs will be reduced. It may even mean less investment in real estate.

With larger dealer groups, receptivity to the agency model increases, while concern decreases. This is because larger groups are more likely to be the preferred distribution channel (compared to smaller players), will have more of a say in strategic decisions, and will have greater influence and “voice”. to the table” to partner with OEMs. .

We are seeing automakers move more quickly to an agency model in international markets.

Earlier this summer, we saw Stellantis terminate sales and service contracts with European dealerships for its 14 brands, effective June 2023. And Mercedes-Benz announced plans to cut 15-20% of its dealerships in Germany and approximately 10% of its dealerships worldwide, as part of a major overhaul of its distribution network.

Toyota has piloted a transition to the agency model in New Zealand, as has BMW in South Africa. And Volkswagen is planning a direct-sales/agency model for their new all-EV ID. models in Germany.

But we have also seen evidence of friction in this transition. There are currently lawsuits being brought by Mercedes and Honda dealerships in Australia against their respective OEMs, as the two automakers have pushed through a shift from the franchise model to the agency model.

Back here in the US, dealers are concerned that OEMs are “splitting off” EV divisions from the legacy business and trying to enforce a different arrangement/agreement with their dealers/agents. That’s why VW’s announcement of the Scout brand raised eyebrows, as did Ford’s announcement just before NADA this year about separating their EV and ICE divisions. More recently, Ford announced that it would support three dealer tiers: ICE only and two different EV tiers.

So where does all of this leave the franchised dealership?

These trends can fundamentally reshape the automotive value chain, dramatically impacting dealership economics. Potentially disruptive trends in the industry will continue to accelerate and force dealers to react in how they position their businesses going forward.

What we do know is this: dealerships will continue to play a crucial role in meeting growing customer expectations for a seamless multi-channel buying experience and ownership…and OEMs will need dealer networks healthy to deliver these customer experiences.

Dealers need to stay alert: stay on top of the news cycle, attend their dealer meetings, and look for nuances in their OEM communications. Staying lean and nimble is going to be important, as is keeping a mindset to embrace change and being ready and open to adapt.

What’s not clear to me at this point is that all of this hinges on the automakers’ ability to control their historical urge to produce more vehicles in a race to gain market share and make their factories at full capacity to recoup huge fixed costs.

Since OEMs carry inventory risk on their balance sheet (unlike the historic model of “wholesale” new cars to dealerships as soon as the vehicle rolls off the production line), what kind of tolerance do they have (or Wall Street analysts hedging their stocks) have inventory backing up the inevitable EV model that is a ‘dud’ and not well received in the market? Only time will tell.

If you want to learn more, head over to AutomotiveVentures.com and subscribe to the Intel Monthly Report.

Companies to watch

Each week, we highlight interesting automotive technology companies to watch. If you read my Intel Monthly Industry Report, I feature a few companies each month, and we take the opportunity here on Friday the fifth to share some of these companies each week with you.

SKAI

SKAI uses artificial intelligence and silhouette recognition to turn CCTV into action items. Measure, manage and monetize blind spots.

SKAI is like having your home security Nest app at the dealership, only with real AI bringing the cameras to life!

The reason I like SKAI is that so far dealer cameras have not been activated to unlock additional value. SKAI’s promise is that dealerships will be able to configure their own trigger events, whether it’s a customer not being picked up or even a customer slipping and falling in the dealership. I’m sure dealerships will innovate new use cases that can be triggered by applying AI and image recognition to a dealership’s existing cameras.

You can consult SKAI on www.SKAIvision.com.

BetterFrost Technologies

Betterfrost uses advanced science to master defrosting. BetterFrost uses smart, high-powered energy pulses to remove ice in a fraction of the time and energy required with conventional methods.

The reason why I love BetterFrost is their promise to restore hours of lost productivity as car owners huddle outside to scratch their windshields; reduce the thousands of accidents reported each year by motorists who do not properly clean their windshields for good vision, and potentially add miles of electric vehicle range that are lost when batteries are drained to clear windshields broken.

You can check out BetterFrost at www.BetterFrost.com.

——

So that’s your weekly Friday the 5th, a quick recap of the big deals in automotive technology over the past week.

If you are a young automotive tech entrepreneur looking to raise money, or an entrepreneur trying to decide if and when to raise money or sell your business, I would love to talk with you.

Thanks for tuning in to CBT News for this week’s Friday Five, and see you next week!


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