On a sunny December afternoon in 2006 a meeting took place in a Las Vegas Hotel room that would eventually contribute to the end of the retail automotive distribution system as know it.
The meeting had nothing to do with the auto industry.
But it was an important last step in giving birth to a finance model that will impact auto dealers in ways few of us could have imagined.
The Vegas meeting was between Cingular Wireless (Now AT&T) and Apple.
Steve Jobs presented the prototype of the iPhone to the Cingular wireless boss Stan Sigman who reportedly said it was the best device he’d ever seen.
There’s been much written about how the deal Apple struck in 2006 with AT&T changed our world. (No need to repeat that story here)
What Jobs did was effectively eliminate the biggest friction point for consumers who would be buying the new iPhone when it was released in June 2007 (The iPhone sold for $399 US)
There would be no need for consumers to buy the iPhone if they chose not to.
AT&T would buy them.
Apple has since sold over 2 billion iPhones. Their market cap hovers around 1 Trillion Dollars.
Electric Vehicles
As I write this article, (January 1, 2020), there are reports in the media daily about Tesla, Rivian, and a long list of companies building or planning to build EV’s.
Billions are being invested in EV tech, AI for self driving EV’s, battery factories, EV charging stations, and new auto assembly facilities.
In spite of all this investment and innovation, all the talk of climate change, carbon tax, the Paris Accord, taxpayer funded rebates for purchasing EV’s, not even Greta Thunberg is going to convince consumers to make the switch en masse to EV’s this decade.
“Not even Greta Thunberg is going to convince consumers to make the switch en masse to EV’s this decade”
The change won’t happen for environmental or social reasons.
The transition to EV’s will be driven by economics.
At some point after the cost of owning and operating an EV is less than internal combustion powered vehicles, EV’s sales will dominate.
If however there were no requirement for consumers to purchase an EV, the transition would happen much faster and be massively disruptive to several business models, including the retail automotive franchise system.
Here’s how this might look with a company like Amazon Prime Auto.
(What follows is conjecture, fake news, and for those of us in the business of retailing automobiles, perhaps a little provocative).
Transportation as a Service (TaaS)
The first generation of EV’s offered by Amazon will only be available via an Amazon Prime Auto subscription.
With Amazon Prime Auto Jeff Bezos is creating the first large “transportation as a service” company. (TaaS)
He’s struck deals with several companies to make this happen at scale and to ensure Amazon quickly captures a sizeable share of the retail personal transportation market.
Manufacturing
Tesla, well known for their ability to keep new products a secret until they drive onto the stage, has quietly developed an entry level 4door SUV called “Model 1” exclusively for Amazon Prime Auto. It’s intended to provide basic transportation in metro markets. It has a range of just 150 miles.
Distribution
Enterprise Holdings (Enterprise, National, Alamo) will be the distribution centers for Amazon Prime Auto and will be adding the Tesla Model 1 to their rental fleets. (Purchased through Amazon)
Maintenance
EV’s require little maintenance as they have less than 20 moving parts. When there is a problem that is not correctable via software downloads from the cloud, the Subscriber can simply return the EV to the nearest distribution center and pick up another. (Similar to a rental car). If the EV is not drivable, a service vehicle will deliver a replacement and take the defective EV away.
When a subscriber has an accident and the EV is damaged, a replacement is immediately provided. Severely damaged vehicles are returned to the factory for repairs or to be recycled.
Insurance
The Amazon Prime Auto subscription includes insurance. The charge varies depending on driving history and age. Amazon Prime Auto is self insured to keep cost to the subscribers as low as possible.
Payment
Amazon Prime Auto subscribers will pay via credit card.
All transactions will take place via an app. (Similar to Uber)
Amazon Prime Auto subscriptions will not require a credit check.
This will make TaaS an attractive option for the 20 plus percent of the retail automotive market now in subprime loans at high interest rates.
There is little risk for Amazon as the EV’s can be deactivated remotely for non payment and they always know precisely where the vehicles are located.
Cost of Subscription
The cost of Amazon Prime Auto subscriptions will vary depending on the unique requirements of each consumer. While some may need a vehicle everyday, others require one only a few days a month but in different locations.
Business travelers in particular will find TaaS has many advantages over traditional car rentals. No more standing in lines. No more “topping up” the fuel tank before dropping off. No more forms to sign or insurance to buy. Vehicles are activated from the subscribers smartphones. There are no keys to pick up or drop off. The app on the subscribers smartphone will direct them to the parking spot. The car will even heat or cool the interior just prior to arrival.
The cost for use will vary but, like other Amazon services, prices are expected to be very low.
Customer Lifetime Value
Jeff Bezos is playing the long game with Amazon Prime Auto.
The goal is not to sell subscriptions.
He wants to build a relationship with the subscribers and provide them with other services from Amazon and it’s affiliated companies.
Amazon knows the “Customer Lifetime Value” (CTV) of their subscribers. Providing a product or service at a small margin, (or even an upfront loss), can work when the backend sales and future revenue is factored in.
Amazon predicts within 5 years, 35% of households that currently own at least one passenger vehicle will opt for a TaaS subscription with Amazon Prime Auto, (or competitor).
The biggest limitation early on will be the supply of EV’s.
The Great Consolidation
Over the next decade several auto manufacturers will merge as they respond and adapt to the disruptive forces of Electric Vehicles, Self Driving Cars, and new business models like Transportation as a Service (TaaS)
The transition to EV’s will continue to accelerate as more investments like the one last month of 1.3 billion in EV startup Rivian led by T.Rowe Price, and included Amazon, and Ford.
There’s little doubt at this point where all this will lead.
The only question is how fast we get there.
And where does this leave car dealers when manufacturers like Tesla are selling EV’s directly to consumers?
Are Car Dealers an Endangered Species ?
The decline in the number of franchised auto dealers will closely match the increase in EV market share.
Although auto manufacturers will continue to provide product, (including EV’s), to their dealer networks, selling vehicles that need little maintenance will no longer require large parts and service department staff, or large facilities for that matter.
If the TaaS model is adopted by manufacturers, dealers revenue from providing finance, insurance, and warranties will also sharply decline.
As with manufacturers, auto dealers and dealer groups will merge in order to cut cost and remain competitive.
Will there be as many car dealers as there are today ?
Nope.
As many as 50% could be gone in the next decade.
I recognize what I’ve written in this article may annoy people in my industry.
As a car dealer, (in Alberta of all places), talking about how Electric Vehicles and services like TaaS will disrupt our business may seem like heresy.
Whether we talk about it or not, it is happening.
As difficult as these changes will be for us, there will be new opportunities for those who find ways to adapt.
One thing is for certain, dealers with loyal customers and strong independent brands will have a clear advantage.
I intend to grow my business not in spite of what’s happening but rather because of what’s happening.
Digging your well before you’re thirsty seems like the right move at this point.
I’m looking forward to the next decade.
It’s going to be one hell of a ride.
David Tingley (Sr)
Redwater, Alberta