Looking in the rear view mirror

As we approach the end of the year, and my last blog until January, it seems appropriate to look back at what we have experienced and what we have learned.  My late friend and colleague, Martin Leach, warned against using the past to predict the future – he used to call it managing by looking in the rear view mirror – but if you are selective with your focus, you can hopefully pick out what is significant from what is transitory.  Here’s my shot at picking out three significant events that will influence the next few years of automotive distribution development in Europe.

Electrification

Despite the constrained market overall, and helped by Government incentives, the penetration of EVs has grown rapidly through the year.  According to ACEA data, the proportion of BEVs in total European registrations rose from under 6% in the first quarter to almost 10% in the third quarter.  With a year-end push to achieve emissions fleet averages, the overall share in the final quarter could be four times the 3% achieved in 2019.  At least in the UK – which is unfortunately the only market that I can observe directly in these restricted times, charging infrastructure is also improving rapidly.  At these levels, the overall impact on the aftermarket is still modest, but particularly for franchised dealers focused on younger cars, the lower aftersales service revenue per BEV is going to become evident, and the compensating actions to improve retention on ICEs and hybrids as they age need to start now.  Improving customer satisfaction or selling service plans when the car is already three or four years old is too late – closing the stable door after the horse has bolted.  Similarly in the independent sector, there are now enough BEVs in the parc in many markets to justify the investment in service training and equipment.  2022 is likely be the first year that the market share of BEVs exceeds 10% in Europe.

Changes to dealer contracts

Other than the pan-European contract terminations by Stellantis in May this year, not a great deal actually changed in terms of dealer contracts during the last twelve months.  However, the focus of conversations definitely changed throughout the year, as Stellantis revealed their plans to switch a number of brands and markets to agency contracts from 2023, and negotiations kicked off with Mercedes and VW Group dealers on a switch to agency for some or all products.  We ended the year (last Friday) with the announcement that Mercedes had reached an agreement with their European Dealer Association to progressively switch to agency, with the UK joining Germany for a 2023 ‘go live’ date.  However, the belief in agency is not universal, and whilst we recognise the benefits to omni-channel retailing, and the improved discipline it should bring to manufacturers, a modified franchise contract can get close.  The indications are that the changes to the Block Exemption Regulations (BER) will make this even easier.  We therefore see some strong advocates of the franchise system, including from the OEMs, for example Dale Wyatt – the UK MD of Suzuki – who has suggested that the agency model will ”put the dealer last.”  One lesson is clear however.  Triggered by the changes in customer behaviour and the opportunities through digitalisation rather than the usual BER effect, we are going to see some major changes in the contractual relationships between OEMs and dealers over the next 2-3 years.  Success or failure will depend on how changes are implemented rather than the basic model chosen, but I believe that we have moved into a period when there will be much more diversity than in the past.

Chip shortages driving higher profits

I think the knee-jerk reaction to hearing about production constraints caused by chip shortages was that it would blow over, and more attention was paid to the continuing impact of Covid restrictions around Europe.  However, the impact has continued throughout 2021, and some suggest that it could continue into 2023.  This felt like a reason to worry about what the impact would be on the business results of manufacturers and dealers, but that sense of worry has turned into a sense of wonder, as profits have been boosted for manufacturers and dealers by the elimination of discounts in a period of supply shortages rather than stock push.  Customers have adapted to the delays and generally accept that if they want a car they pay the asking price.  The knock-on effect on used car availability both from older trade-ins and the elimination of zero kilometre, pre-registered cars has similarly boosted used car profits across the board.  The questions now are whether the experiences of the last year will be turned into lessons, and will they be applied in 2022 or 2023 when manufacturers have the choice of producing to meet demand or producing to maximise capacity utilisation?  For the good of the industry, we can only hope that it is the former.

Final thoughts

We have the good fortune to work in a fascinating and complex industry that plays an important role in global economies and the lives of most citizens.  We have always faced challenges, but arguably they are greater now than they have ever been, and the balance of this decade will be the most transformational than we have ever seen.  We are only two years into this decade, with plenty of challenges remaining, so time for a break and a rest!  I wish you all the best for the festive season, and good fortune in what will be a fascinating 2022.