Auto Industry MARK7520

The Auto Industry: Déjà vu?

With global auto sales plummeting due to the Coronavirus, it’s no small wonder that the auto industry is looking to the government with their collective palms out, pleading for assistance, as America and the rest of the world continue to both shelter themselves, and their vehicles, at home. (Washington Post) Vehicle sales are down 26.6% nationally, and 22% worldwide in just the first quarter of the year, according to CNBC, and relief doesn’t appear to be anywhere close as the Coronavirus keeps workers unemployed and at home even into June. Not since 2008, when the greatest stock market and housing crash since the Great Depression of the 30’s has the industry been rocked by such aggressively declining sales. In 2010, the hole that had been dug was reaching its furthest depths- a mere 11.6m cars sold for the entire year. This year: an expected 12.5m units. (CNBC) In April of 2020, the automotive industry saw its worst single month of sales since 1990 with a pitiful 168,850 light vehicles (passenger cars, trucks, and vans) sold. (GoodCarBadCar, NYT, Edmunds)

The auto industry is unique in the methods that its market capital is raised and revenue is structured. Because they work on a dealership model- not unlike that of a fast-food franchise- the manufacturers are all required to sell their products to a middle man (dealers), given that they have lobbied strongly to outlaw direct-to-consumer-sales to line their own pockets- are now are being forced to come to the table to deal with the problems this has wrought. (GA Legislation, also exists in other states) It’s no coincidence, then, that Tesla- the only car manufacturer currently allowed to sell cars on a direct-to-consumer basis (Atlanta Business Chronicle), is the only manufacturer to have lost the least, in terms of a percentage of sales quarter-over-quarter during the coronavirus-afflicted months. (GoodCarBadCar) This posits the automotive industry at a crossroads as far as future-proofing their industry: do they now pull back from the dealership model?

Currently, automotive manufacturers’ only means of raising significant capital is by selling cars to dealers. With this capital, they then turn around and produce new vehicles for the next model year, and also fund research and development on new technologies to implement. In this way, the manufacturers are beholden to dealers to continue buying cars, and the dealer is also very dependent on the consumer to continue to buy them at a certain rate (and continued growth of this rate), or they are otherwise left with millions of dollars of inventory with no one to sell to. This puts the entire industry in a bind where consumers must continue to purchase cars at greater and greater rates as manufacturers demand more funds with which to produce new cars. The Coronavirus has the potential to change all of this. If the dealership model were to go the way of the dodo, what would the industry look like? Though this is all speculative, some immediate, and more latent changes are all but certain to happen. We can base these ideas on the business model of Tesla, who are, as stated above, the lone producer able to sell their product directly. Currently, Tesla operates 102 retail stores, down from over 300 just earlier last year, in March 2019. (Car and Driver, Tesla) For those who do not live in a state or locality with a Tesla store, the majority of their sales will take place online. Every manufacturer already enables consumers to go to their website and build a car to their specifications with trim packages, colors, wheels, accessories, and more, as well as see the price as currently built. Tesla’s site operates no differently from this, other than it lets you turn fantasy into reality and have your dream car shipped directly to your door without having ever talked to a salesman or finance manager.

Consumers have made their voices heard: they are tired of dealing with dealerships, pushy salespersons, and unnecessarily complex financial agreements with the purchase of their new, or new to them, car. With the rise of such used car dealers as CarMax, Carvana, and AutoNation who offer “no haggle” pricing (where the price for each vehicle is set by the market, not an agreed upon value arranged by the consumer and sales person), consumers are letting traditional dealerships know their displeasure by taking their dollars elsewhere. Though traditional dealerships currently remain the only place to purchase new vehicles, this has the potential to change. There are significant savings to be had with an online-only business, and reduced cost to the consumer as well, with the removal of dealer markup and resell fees. Manufacturers would now be responsible for housing cars on company-owned lots, but they would not have to exist on commercially zoned property, and be subject to large land taxation, as well as expensive upkeep of the property, signage, and advertising, in addition to the huge savings of salaries from sales and finance personnel. This would free up their budgets to research and design better products, in theory, as well as force them more effectively market to the consumer, since the car lots are no longer a fixture in the consumer’s collective field of vision in cities and towns. The incentive to sell cars at a rate determined by the market is also greater since manufacturers would be competing solely against each other, and not against themselves (multiple dealers for Ford in one city). This would also shift the landscape of cars- as consumers would be able to price discriminate more effectively, since they can purchase exactly what they want, and not have to compromise with pricy add-ons and packages that dealers put together. Distribution and shipping sectors would also see a boost, and an entirely new industry segment of newly purchased light vehicle delivery would almost certainly be born- with both private companies taking part, as well as the manufacturers (similarly to Amazon taking on their own deliveries for Prime customers).