Preparing for a new era: the auto retail biz in a time of e-mobility

With rising global temperatures and air pollution mercilessly choking major cities worldwide, the automotive industry is one among the many sectors witnessing its most challenging phase and sitting on the verge of disruption for a sustainable tomorrow.

New technologies and a dire need to switch away from fossil fuels have made electric mobility get all the buzz in recent times, making it emerge as the practical way forward towards a cleaner future. Year 2017 already boasts global sales of around 1.5 million electrified vehicles, projected to surpass the 30-million mark by 2030, with countries fleet-footedly announcing electrification mandates.

As opposed to over a 1,000 moving parts and an entire vendor economy running parallel to support the current demands of vehicle OEMs, a strikethrough on almost 70 percent of the engine and transmission-related components from a vehicle is set to hit the entire auto sector untenably, which contributes a significant chunk to the country's GDP. If such a technological shift is set to drive the future of mobility, a financial and socio-economic challenge looms over the industry, which employs over 30 million people in direct and indirect jobs in India. This will necessitate a realignment of some of the core businesses, some even longing back over a century, so as to make them stay relevant in a completely new era.

While the auto industry has already started feeling the heat due to these disruptions, the tension is currently concentrated at the OE and supplier levels. However, it's only a matter of time before the retail industry also sees some major evolution.

A veteran in the business, John K Paul, managing director, Popular Vehicles & Services and president of FADA (Federation of Automobile Dealers Associations), tells how the future could be like. “While electric cars will start rolling out in the next five years, they would not really impact the existing automotive ecosystem in the initial phase. However, the next five years after 2022 are going to witness a dramatic change, bringing about a boom in EV sales and replacing conventional IC engine cars.”

“The slow growth in the initial half of the decade would be attributed to impediments like low adoption rate due to small range of EVs and their higher price point. A battery range in the ballpark of 400km is a minimum, practical requirement to make these vehicles gain contention in the eyes of serious buyers. Also, major manufacturers will start venturing into the space and start mass producing electric cars and their components in these five years, leading to competition-driven cost efficiency. Infrastructure is another area, which needs to be developed for both intra-city and highway usage of EVs. Hence, in India, I envisage electric cars will truly only happen after 2022 and only then will the dynamics of the industry seriously change,” says Paul.

DEALERSHIPS AND MODERN TIMES

With vehicles becoming more software oriented, EVs typically so, and set to be equipped with over-the-air (OTA) update capabilities, reciprocating mechanical components, which need regular servicing, are going to be dramatically reduced. This will pose a threat to the aftersales business for most dealerships as vehicle servicing brings repeat footfalls, ensures long-term customer relationships, and creates a good opportunity of keeping the customer within the brand family by offering exceptional levels of customer service, not to mention profitability.

The average workforce of 100-odd associates working at a service centre of any mainstream player in a key metro city also face a dwindling future, when the reduced volumes of incoming vehicles would call for strict downsizing to make for a viable business. The country’s top two OEs, Maruti Suzuki and Hyundai Motor India, together handle over 66,000 cars coming daily into their service network of over 4,500 outlets spread across the length and breadth of the country.

Popular Vehicles and Services, itself, is one of the major dealers of Maruti Suzuki, having been in association with the brand since 1984 and being the first dealer for the company in the state of Kerala. Its turnover of over Rs 2,500 crore in FY2016-17 is significant enough to give an idea about the size of the retail and aftersales markets, where it closed the fiscal selling close to 40,000 cars and servicing 500,000 cars. Of this, 2,000 units came out of the recently introduced Nexa sales outlets for Maruti’s premium offerings. Employing over 5,800 people in its entire business chain, Popular contributes significantly to the total strength of 17,500 associates across Maruti's top three dealers in the country.

“The role of both the ancillary manufacturers and dealers is going to substantially diminish in the coming future and the car business will see the need for a transformation in the retail concept with the new generation being more tech-savvy and fast adopting digital tools. The younger generation is going to be a lot more active online than earlier generations. Hence, contemporary concepts like ‘experience stores’ hold a lot of value and huge potential to be successful in the upcoming scenario, where people would just want to have a touch and feel of the product, later, making their purchases online.”

“Autonomous driving technology, apart from electrification, is another area of disruption, which will be a bigger threat in the coming five years. This is due to the enhanced safety it brings with the myriad of sensors working on-board to safely manoeuvre these vehicles through regular traffic and on highways. With these systems also capable of rectifying the already lower error rate with machine learning, their adoption will be radically quick in a stride towards better road safety around the world.”

“So, by the time EVs come into full force in India, they would be seen equipped with almost fully autonomous technology, also significantly taking away from a dealer’s business opportunity to carry out accidental repairs on cars damaged in minor or major mishaps, thus, posing a severe impact to the revenue channels of these establishments,” adds Paul. That is also another reason why dealers will have to devise smart strategies to sustain and grow business in the future.

Even in an era of electric and autonomous (of various degrees) car showrooms would still remain, perhaps some in a different avatar. Tesla, for instance, today works through a model where it has display centres in malls or commercial complexes, and after experiencing and test-driving the product, interested customers could simply book their car online. Deliveries, however, are made through delivery outlets, which are comparatively smaller in their scale and size than a regular car showroom.

“However, as the competition increases and there is a foray of multiple manufacturers into the EV space, customer choices are going to broaden, leading to an environment where online alone will not help.”

“In such a scenario, manufacturers will still look to set up dealerships to reach out to customers faster and be more accessible to their target audience. The threat to the dealer fraternity would multiply only if the OEs don't outsource these experience and delivery centres to us,” says Paul.

FRUGAL NEAR-TERM INVESTMENTS

With e-commerce giants including the likes of Amazon and Alibaba also eyeing automotive retail, while already having a first-hand experience of doing a significant amount of business in selling automotive parts and accessories online, the environment is only going to become fiercer and more challenging for conventional dealers. Aftermarket sales through online means stood at US$ 14 million (Rs 90 crore) in 2014, and the space is only pegged to surge with a 7 percent CAGR to reach US$ 150 million (Rs 960 crore) by 2020. The internet giants then are set to optimise technology and disrupt the traditional car retail business in the times to come, with concepts such as Alibaba's fully automated car vending machines already in the works and set to become a reality in Shanghai and Nanjing, as soon as early 2018. Paul, who believes forewarned is forearmed, says: “I would say dealers should become far more frugal because the disruptions lurking in the near horizon can shatter the investments completely. While it may not be from the manufacturer's side at all, but it may be something else starkly connected to a dealership business. These changes can impact the investments, their returns and the money available for making further investments into the business.”

“It is highly difficult today to have an outlook on what the future holds for the industry. There have already been a slew of fundamental changes including demonetisation, implementation of GST and the BS III to BS IV transition, which together have affected the business at a vehicle retail dealership in the recent past.”

DECLINING VEHICLE OWNERSHIP WITH SHARED MOBILITY

With the convenience of ride hailing and ride sharing becoming aggressively popular with the advent of cab aggregators like Uber and Ola, vehicle ownership could be imagined to follow a downward trend in the times to come with self-drive rentals also emerging at a rapid pace. While a personal car would be limited to be a mode of self or family recreation, the ride sharing concept is going to take over the task of routine commute in big congested cities, thus posing a challenge to new vehicle sales.

“If we look at the rural space, or places where the public density is low, then, private transportation still emerges out to be the best mobility solution for these areas. Owning a car is a matter of personal comfort and shared mobility will only mean that a vehicle gets used in a much more efficient way.” With a startling transformation set to sweep the industry, the onus lies with carmakers too to make their dealers more frugal and start finding ways of making the same dealership function more economically. “We are still in an era of large-sized and fancy outlets. We must pause, take note and start becoming more realistic and cut down on such infrastructural expenses and focus on expanding presence in new markets in an increasingly dynamic times for the automotive retail industry,” Paul concludes, sparking critical thoughts to ponder upon.

(This article was first published in December 15, 2017 Anniversary issue of Autocar Professional)