UPDATE: Click here to see more info on potential impact on dealers.
July 2016 — While everybody’s attention is on the autonomous vehicle — which may or may not take over the roads in the next 10 years, society is five years away from being immersed in the connected car era. Sometimes, the two terms are interchanged. But we’re talking about vehicles that are connected to the Internet — not self-driving vehicles.
We’re already seeing the transition today to connected vehicles, but within five years anywhere from 200 million to 300 million vehicles produced will be connected to the Internet.
In my opinion, this is the most disconcerting development staring the automotive retail in the face — and no one is talking about it.
Stay with me — the era of the connected vehicle could decimate service revenue and profitability dealers see today. We all know how important that revenue is for today’s car dealer. And service departments drive the majority of a dealer’s profitability today.
According to data from the National Automobile Dealers Association, dealerships generated more than $43 billion in service labor work (not including parts) in 2015 — about an average of $5.8 million per store. Net profit from service work averaged about $350,000.
In five years, a large percentage of that service work done in the dealership today will be done using over-the-air software updates (OTA is the term used by investment and research firms).
Earlier this year, ABI Research estimated automakers could have saved $6 billion — one third of what they spent fixing recalls in 2015 — by using OTA updates. That number will only increase as more vehicles become connected to the Internet.
It’s easy to see how dealers will begin losing out on that revenue. Tesla has already shown how OTA updates can be used for service work. Someone at the automaker writes the appropriate code, and pushes a button sending the update to all of the affected vehicles. Who needs the dealer?
That’s warranty money dealers will no longer get; and a significant portion of that recall/warranty traffic to the service department disappears, which means less opportunity to upsell those customers with additional work.
Ironically, we may see an era again where the only service technicians in the dealership are folks doing mechanical work — the so-called “grease monkeys.”
Mechanical work will continue to be important — brakes, tires, oil changes etc. But even some of that work will begin to decline as electric vehicles begin to take off. Today’s car buyer has shown little appetite for EVs — despite headlines touting Tesla sales. But at some point, it appears EV sales will start to become a bigger percentage of the overall market as the range from one charge continues to improve. Chevrolet just announced that the Bolt — a vehicle launching this year will have a 238 mile range from one charge. At that range, I’d be willing to buy an EV.
I don’t want to be Chicken Little, but the industry — NADA, dealers and automakers need to start talking about how the connected vehicle will impact the retail network. That impact could happen seemingly overnight. Within 10 years, most vehicles on the road will be connected in some way.
The first question should be, What role do automakers envision their dealers having in OTA updates? I suspect automakers may not even be thinking about it.
Second, dealers should start evaluating their marketing efforts. Owning and communicating with their customers more intelligently will be even more important than it is today.
A third question should be how vendors can help dealers. At some level, vendors are already beginning to move in that direction. Last week, The Banks Report broke the story of CIP Capital’s acquisition of four technology marketing firms combining them into one entity they care calling Affinitiv. It’ a service marketing play but don’t be surprised if Affinitiv announces an acquisition of a company providing connected-ability to vehicles.
Companies like Cox Automotive and CDK Global have invested in companies providing connectivity to used vehicles. Expect more announcements these companies touting connected services.
But those solutions likely won’t address the issue of protecting that revenue dealers will lose once OTAs become common practice.
Let the conversation begin…