In this article I argue that the consumer facing, retail side, of the automobile industry, a landscape that has seen very little real change in many generations, will now see an acceleration of permanent change because of the Covid-19 virus. Many of us have talked about change within the industry but had little idea how or when it might happen. Where change has been forced, it has invariably failed or, at best, failed to succeed. Those days are now over.
The new car industry has seen great change in vehicle technology, production methods, in-car entertainment and, particularly over the past 40 years, in the volumes of vehicle production and consumer accessibility. But the generic dealership model, first established in 1898 by William E. Metzger1, has seen no significant change – strange since almost all other modern industries have been forged through vast change in technology, lifestyle and economics. The digital revolution has, so far, largely bypassed our industry.
According to Lewin’s force field model2, forces for change and driving forces must be greater than forces resisting change and restraining forces for change to happen. This has been proven abundantly in consumer markets time and time again: Blockbuster were overwhelmed by forces of change through streaming; Kodak didn’t embrace digital forces they themselves initiated. The fact that it is easier to think of radical industry changes across the world in the past 30 years might suggest that the forces for change in the car industry will have to, at some point, become so great that they are unstoppable.
Most business forces in the automobile industry are fairly straight forward: consumers need cars and a channel to procure them through. Dealers supply cars to consumers but need manufacturers to design, build and re-invent them. However, there is one complicated force which perhaps tell us why the industry hasn’t changed as much as others: because cars are assets with unavoidable future obsolescence, unlike a house, characterised by procurement costs typically the largest slice of a consumer’s annual income outside of mortgage, unlike mobile phones, manufacturers need dealers to finance operations – or do they? This is a confusing force and unlike most other industries.
What has changed is the way that consumers finance new vehicles. Fifty years ago, very few people could park a new car on their drive and most cars on the roads were used. Consumers now have a number of different avenues that they can use to access used or new cars: loans, PCPs etc. But the dealer model remains unchanged.
Covid-19 is an unprecedented crisis that has already begun to have previously unthinkable generic short-term impacts on almost all parts of life. Economists, financiers and commentators are currently debating what those effects will be, how long they will last and who or what will break because of them. The virus has disrupted everyday activity, worldwide finances and cost control. There is limited visibility over legal positions, insurance and whether it is considered force majeure is currently a raging debate.
Many organisations see protecting staff as a priority and protecting revenue an imperative. Extreme tactical management is under way in almost every industry and long-term strategies will be thrown into the air and wholly rewritten in coming months. This is not an everyday series of occurrences.
Those generic short-term impacts may also be long term – the travel industry appears to be collapsing inwards and no wonder when you consider, for example, in the Australian region of Cairns where forward bookings of the value of $200M AU have been lost3. The question of whether the travel industry can recover reasonably soon, is a pertinent one.
These effects are global, and the world economy doesn’t yet understand how it will emerge from the virus. The China Council for Promotion of International Trade (CCPIT) has already issued certificates to Chinese firms who face potential contract breaches to the tune of $15B4. Stock markets have had their worst weeks since 2008 and one of the longest periods of continuous commercial expansion has ended. 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”5.
The automobile industry is affected by this crisis just like any other industry. Moody’s have downgraded global vehicle sales expectations by 2.5%6 (on top of an existing 4.6% drop from 2019), China’s new registrations plummeted by around 92% in early February and many European countries have started seeing a downturn in year-on-year sales.
However, I believe that the industry will return more or less to normal in regard to those direct and obvious impacts – at some point in time, car sales will resume, and consumers will want to test and select vehicles. New car volumes will creep up again as both market and consumer liquidity returns to normal.
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 in the industry is inevitable.
The advent of commercially tenable electric vehicles 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 – certainly far greater than vehicle first ownership – before replacement is required.
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 wonder if the service and maintenance industry will change to become one of accident repair and fine tuning.
We have seen substantial recent shifts 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 incredibly simple and Carvana has given us the exciting and spectacular car vending machine with no human interaction. I don’t believe that the used car dealer will disappear any time soon but none of these innovations have a traditional dealer in sight.
The London Electric Vehicle Company, owned by Chinese automobile manufacturer Geely and maker of black cabs, allow buyers to order and select their option packs online. Other major brands have or are commissioning similar mechanisms. Some manufacturers have built a digital ‘build your car’ tool that enables consumers to choose all options, place an order and collect from a local dealer, a model that dealerships could perhaps grasp and develop. However, we should consider that where consumers buy products from Amazon, they fully accept that they cannot collect it – modern consumers want choice and, very importantly, convenience.
Consulting firm Frost & Sullivan7 has estimated that somewhere in the region of 825,000 new vehicles were sold online in 2019 across the world, approximately 1.2% of total sales. They qualify this figure by including sales that originate through online financing or where a deposit or part payment was made online. They go on to estimate that this figure will climb to 6 million vehicles, or nearly 10%, within five years.
Coronavirus has put the world into “supply shock” where there are major shortages of supply in a broad spectrum of markets. This is very different from the “demand shock”, a lack of demand, which have characterised previous financial crisis. Supply issues will affect the auto industry with an estimated 10% of all car parts originating in China but I believe fully that this will quickly correct as soon as normality begins to return to the global economy.
However, the virus will undoubtedly forever change the world in numerous ways.
For an example, let’s look at video conferencing giant Zoom. The corporate world has dabbled with home working and many office workers now spend a day or two each week working from home. Economically this makes sense – expensive desk space is reduced and shared – but home working has never taken off the way that many believed it would, until now. Figure 1 shows Zoom’s enormous stock price gains over the past six months, driven by a massive demand and vast increases in sales caused directly by the virus.
The question is, now that workers and corporates have been forced to take this step, why would they change back again? People are incredibly good at adapting and there has been a shift with which there is now comfort. The theory of unexpected consequence and Adam Smith’s “invisible hand” have created this scenario and it is very difficult to envisage a world where Zoom usage returns to pre-virus levels.
Habits of consumers are always changing, at different speeds and in different ways, and crisis will always accelerate change. A changing world that now greatly values no human physical contact in procurement will unleash the unexpected consequence of online car purchase and home delivery test drives. This has already begun to happen in China.
New cars sales through online platforms will naturally grow as consumers and manufacturers learn that it actually works, and the Covid-19 crisis will rapidly accelerate this because it has been an inert but inevitable change waiting for a reason to begin. In fact, I wouldn’t be surprised if we reach the 6,000,000 mark within twelve months and not five years – certainly in terms of ordering and deposit payment.
And we have already seen some evidence of this in China as there begins what appears to be a recovery from the virus. China is the world’s largest car market and it has already started the change to online car buying9. Major manufacturers are redirecting resources in the region to online marketing and e-commerce. Just as people won’t 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 have begun to gain traction in the UK, I predict that consumers will rapidly begin to look for online transactions and doorstep test and delivery services over showroom or dealership for new vehicles. This was always inevitable but will move at far greater speed because of the Coronavirus. There will be a significant shift in both the car industry model and consumer habits far earlier than anyone had ever originally anticipated, and the UK car industry needs to get ready – the digital revolution has finally found us.
Oliver is the CEO of XPGroup, a specialist car industry supplier that sells technology and service to many of the car manufacturers.
Other contributors to this article:
Steve Coppin, CTO, XPGroup. Rebecca Martinez, CFO, XPGroup. Karen Brittle, CCO, XPGroup
1 Wikipedia, 2020, William E. Metzger, https://en.wikipedia.org/wiki/William_E._Metzger
2 Swanson, D.J., , Creed, A.S., 1967, Sharpening the focus of force field analysis, Center for the Study of Liberal Education, https://eric.ed.gov/?id=ED011996
3 Young, T., Brown, J., Bunce, P., Reade, G., 2020, Navigating Your Business Through the Coronavirus Outbreak: An Australia Perspective, Norton Rose Fulbright Thought Leadership, March 2020, http://nortonrosefulbright.com
4 Maier N., 2020, As Coronavirus Cases Rise Globally So Too Do Risks for International Businesses and Transactions, Syracuse Journal of International Law and Commerce, March 9 2020, https://jilc.syr.edu/blog/
5 Corkery, M., 2020, Coronavirus Fears reverberate Across Global Economy, The New York Times, February 28 2020
6 Taitz, Y., Engelskrichen, C., Geilenbrugge, A., Azofra, A., Whittington, J., 2020, Automotive Industry Covered byCOVID-19?, AutoVista Group, 10 March 2020, https://autovistagroup.com/news-and-insights/automotive-industry-cowered-covid-19
7 Singh, S., Abraham, I., 2020, 10 Brands Are Now Selling Cars Online, Frost and Sullivan, 5 Feb 2020, https://ww2.frost.com/frost-perspectives/10-brands-are-now-selling-cars-online/
8 Google Markets 6 month NASDAQ Summary, Link, 27 March 2020
9 Harper, J., 2020, China Turns to Online Car Sales as Coronavirus Spreads, BBC News, 27 February 2020, https://www.bbc.co.uk/news/business-51627213