In 2022, automotive industry professionals breathed a collective sigh of relief as the global recovery from the COVID-19 pandemic began to go smoothly and business continued to be exceptionally strong. Increased numbers of car shoppers have returned to showrooms and the tight inventory issues are starting to ease.
There is still plenty to be worried about
While that positive mood is buoying the industry as 2023 begins, there are still plenty of topics that provoke widespread worry, or at least a sense that the situation could or should be better. These include:
Supply chain and microchip manufacturing problems that still haven’t been resolved, leading to relatively low numbers of vehicles in dealership lots
From a worldwide loss of production units due to the microchip shortage totaling 10.5 million in 2021, this number has been reduced to 4.5 million in 2022 and less than 3 million in 2023, according to AutoForecast Solutions. In other words, there has been significantly less of a deficit as the pandemic recovery has moved forward.
This continues to be an issue, but we can expect that slow improvements, boosted by additional US semiconductor production capacity coming online, will continue over time. At this point in time, full relief appears to be a year or more away.
Making the decision about how much and how quickly to invest in electric vehicles (EVs)
Just about everyone agrees that EVs are the future – it’s timing the precise arrival of that future that presents a problem for many dealers. While there are plenty of EVs in the pipeline for delivery to showrooms over the next few years, the big question mark is how quickly your store can recoup the major investments that the manufacturers are demanding for entry to this vehicle segment. This includes:
- EV Tools
- EV Training
- Installation of Level 2 and Level 3 EV chargers
More to the point, how well will your customers receive the current crop of EVs? While affluent homeowners have shown that they will buy EVs as an extra vehicle for local driving and short trips, when will EVs appeal to apartment and condo dwellers who have no home charging options? How many years will it take to build out a national charging infrastructure? And when will affordable EVs priced at $30,000 or less be available?
Until EVs reach price parity with internal combustion engine (ICE) vehicles, the EV market will be largely made up of luxury buyers who can pay the current high prices, as well as the significant additional costs of home charger installation. Serious sales volume in the EV segment will not occur until prices come way down. While sales are steadily increasing, the fact that EVs are just reaching a 5% US market share is proof that we are in the very early days.
Watch: Paul Mumma of Kaiser Associates talks battery strategy reset for EVs
Then there are the geographic variables around EV adoption, which greatly favor the West Coast and parts of the East, while most of the heartland lags behind. All of these issues will factor into your decision about when and how hard to jump into selling EVs.
On top of all these issues, dealers will have to face the economic reality that EVs have greatly reduced service needs, compared to ICE vehicles. Over time, as the proportion of EVs increases and eventually surpasses that of ICE vehicles, dealers will need to find other sources of service income to replace the oil changes, exhaust repairs, radiator flushes, and all the other maintenance and repair procedures that will never need to be done to EVs. Tire sales could help to make up the shortfall, since EVs tend to go through tires much faster. This is due to the extra weight from their heavy batteries, as well as their high levels of torque from a standing start. Other forms of more individualized service may also present opportunities as the EV revolution shakes out.
Related reading: The Electric Vehicles Hype Fallacy
Figuring out whether to resist or join the trend of widespread dealer group consolidation
These have been heavy days indeed for automotive M&A activity. Ever since we bounced back from the depths of the COVID-19 lockdown, the M&A market has never looked back. Record numbers of dealerships have changed hands. It’s not just the mega-dealers and public groups that have grown: small and medium-sized dealers have been adding to their store counts, enlarging their footprints and preparing for a more competitive future. The trends that have led us to this point are well-known:
- Consolidation generates increased economies of scale
- Profits, driven by reduced inventories and high demand, have never been better
- Smaller and single-point dealers are retiring and looking for an exit strategy
- There are many more buyers than there are sellers
As we enter 2023, you may be wondering whether to sell out to a larger dealer group or continue to go it alone. While there is no reason that a well-run single dealership can’t satisfy its customers and keep them coming back, there is the issue of the ultimate profitability that this type of organization can achieve. That is why single dealerships and smaller groups must pursue the highest levels of efficiency, while emphasizing the many benefits of dealing with a locally-based, family-owned auto business.
Those competing dealers in your local area that are a part of bigger groups have several structural advantages. They can purchase larger quantities of everything, from parts for the vehicles they service to paper towels for their restrooms. They also have highly efficient management structures and CRM systems. This translates to their ability to sell vehicles and services for less and still make more money than single stores can. In this way, their size is a competitive edge. The small dealers that can’t beat the big ones may at times be better off joining them!
Whichever way you choose to go, it will take a laser-like focus on both your customer satisfaction levels and your bottom line to stay on the right track for a successful future.
DCG is a wide-spectrum group of automotive industry firms
DCG is a full-service mergers and acquisitions company in every sense of the term. At DCG, we can call on a wide variety of disciplines, all housed under one roof, to help clients navigate uncertainty, make contingency plans, and ensure a bright future for their businesses.
Whether you are interested in selling your auto dealership to the right acquirer, or you want to purchase an asset that will complement your existing business – whether you own a dealership, a professional services company, a component manufacturing firm, or any other company in the automotive space, we are here to help you make it happen.
Contact DCG to speak directly with an automotive M&A specialist and learn how our expertise can help you get the most out of your next dealership transaction.