Peak petrol – the beginning of the end?
Twenty five years ago, I recall being at a US dealer event where one of the other speakers was Jim Press who at the time was the President of Toyota Motor North America, and became the first non-Japanese member of the main Toyota board. Talking about the industry challenges ahead, he suggested that we imagine Mount Fuji, and invert it so that it was a bowl. He claimed that if that bowl was filled with crude oil that represented all the known supplies that had ever existed, and that mankind had already consumed half of it. We were now on track to consume the rest of it over the next thirty years at the prevailing rate of consumption. I’m not entirely sure about the accuracy of the statements, but the principle was right, and we have got through most of those thirty years now.
I was reminded of this by a comment made by Deloitte last week concerning the June new car sales data for the UK market. They suggested that based on current trends, there was the possibility that with the BEV and PHEV market share now standing at 9.5%, and a weak outlook for the rest of this year, going into 2021, we may never see the sales of non-plug-in petrol and diesel sales ever reach their pre-Covid levels in volume terms again – that we had passed the point of “peak petrol” without noticing.
We are all very aware of the trends that are forcing increased electrification of cars and LCVs, so it is not really news that the rate of growth of BEV and PHEV registrations will overtake any effect that market recovery has on the sales of non-plug-in models. Nor is it a uniquely UK phenomenon – In Germany, the share of BEV and PHEV models has gone from around 2% in early 2018 to close to 10% over the last few months, and that will only accelerate as the many new models including the VW ID range come to market, and the green-oriented Covid incentives kick in. In volume terms, that’s equivalent to around 280,000 fewer non plug-in products registered each year. In France, the penetration of plug-ins has lagged Germany until this year, but in the first (Covid-affected) half also reached a 9% market penetration, and the Government incentives are so strongly focused on plug-ins that this will surely mean that the step change is largely maintained, rather than settle back down to a share of under 3% as before.
The growth of plug-ins, and BEVs in particular, is rightly a significant consideration in planning the future of dealer networks, particularly on the aftersales side. A BEV needs no oil change, and all plug-ins tend to be easier on the brakes than a conventional car due to the regenerative braking feature. They present new complexities in crash repair, and require specific investment and training in both sales and aftersales. Although it takes time for technology trends to work through the market, franchised dealer networks are affected immediately as they tend to work on the youngest cars.
Margins on new BEVs and at least in some cases PHEVs are lower than for non-plug-in models meaning that the higher the mix of plug-ins, the more pressure there is on new car gross profits. There are also recent suggestions that the technical advances in BEVs is now making older models less attractive as used cars, so that an improvement in residual values over the last couple years as consumer demand grew, may now be reversed as consumers see a gap of 100 km or more in the range of new vs used. In aftersales, if a workshop was seeing a 20% BEV mix, this would drive a 15% reduction in aftersales profits, assuming that the cars are serviced at the same intervals as non-plug-ins. If the manufacturer responds to the new car margin issue and aftersales interval risk by selling the car on agency with a service plan, there is still a risk to the dealer unless the agency fee and workshop labour rates are set at levels that deliver parity with the traditional model.
Under any circumstance, the passing of “peak petrol” should serve as a wake-up call to the industry to move forward – despite the understandable short term demands of a post-Covid business environment – with developing a viable network structure for an electrified car market. How many dealers can be supported? What is the role of those dealers? What should the commercial arrangements be between manufacturers and dealers? Across all of this, how is this all affected by digitalisation of the buying journey and some aspects of aftersales delivery? Whether it is along the path of our Dealer of Tomorrow vision, or more radical “clean slate” approach, every manufacturer, distributor and dealer needs to find the resources to consider their plan, that suits their product plan, market strategy and commercial objectives.