The business model for car dealers has been the same for a hundred
years. Your analogy that we are selling CDs in a streaming age is a
great one. But, worse still, we are doing it from big box stores in
the priciest locations so the business model is particularly
vulnerable. There was enough margin to support the business model
last century but that margin has been eroded significantly. Prices
are transparent and the consumer also has access to tools that create
competition between dealers for their business making erosion
inevitable. So selling mass market cars as assets doesn't work
economically and nor will it work psychologically for people in their
thirties. They can't afford to buy homes and they have never bought
music so why would they rebel against that mindset and buy cars? It's
just a logical extension of the story you have been on to for longer
than most in the context of renting music.
Plus cars are changing faster than at any time in their history.
Hybrids (and to a lesser extent PHEVs) are inconsequential but EVs
have changed the paradigm and self driving cars (like nuclear fusion,
twenty years away in my view) will do so all over again. Without a
universal charging protocol buying an EV involves making an
infrastructure bet. Even if you bet right you're buying tech so
there's always something better coming round the corner quickly (like
inductive road charging) that's going to change things all over again.
For all these reasons, residuals on EVs are terrible. No one in the
trade wants to buy any EV or PHEV we get in stock. Overlay those
realities on the millennial mindset and you can see that there's
gathering momentum pushing people away from car ownership.
Manufacturers do know this and smart ones like Ford and Volvo are
reinventing themselves as suppliers of mobility services. Even
Porsche has been trialling a subscription model, which I know you have
reported on. GM sees this too I suppose and you were prescient in
seeing their recent move in the context of underlying trends, hence my
admiration for your reporting.
Where does all this leave the car dealer who are important parts of
the US and UK economies? Stronger in the US perhaps where they enjoy
special protection because NADA is so powerful. But all dealers are
weakened by the fact that customer data is at best a shared asset.
Manufacturers have captured significant customer data through their
own websites, through warranty registrations and through owning
dealerships themselves so they now understand and can predict
customers better than any individual dealer. Add in all the data
that's going to be captured by manufacturers with connected cars and
you have a data set that Amazon would envy. So the dealers need to
pivot to survive too but that's hard to do when your biggest asset is
real estate, which slows you down. The future may be that dealers
become fulfilment houses acting as agents for the manufacturers but
that pushes a lot of stock back on to the manufacturers' balance sheet
which they won't want. However it plays out, dealers are clearly a
vulnerable species.
As for the manufacturers, aided by their data capture, they will be in
a strong position if they make good choices now and perhaps GM is
doing that. But they all need to act quickly as there are hundreds of
well funded EV start ups in China without any legacy costs of funding
development of the internal combustion engine who will be very well
placed when the pace of transition to EVs reaches its tipping point.
So the smartest manufacturers, especially those who understand the
value of data, will survive and prosper and some of those may yet be
American. I would expect to see Ford, GM and FCA to be looking to the
tech sector for their next CEOs. They should.
Hope this provides some useful perspective for you. I do so enjoy
reading your letter, which has been very influential in my assessment
of our own business opportunities.
Best wishes
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