Less Haggling, More Upselling: How EVs Will Change How You Buy a Car
Summary
- Car manufacturers’ new selling strategies, including nonnegotiable pricing and over-the-air updates, promise a better experience for the consumer, but at a cost
Electric vehicles could make buying a car less stressful. They could also prolong the sales hustle well after you leave the dealership.
General Motors is in the process of rolling out a new digital sales platform so that customers can buy its products fully online, fully in dealerships or in a combination of both. Ford will introduce nonnegotiable pricing for its F-150 Lightning and Mustang Mach-E EVs starting next year.
In Europe, many dealers have already become sales agents working on commission rather than operating as independent businesses. This ultimate step in the reinvention of car retailing is hard to achieve in the U.S. due to so-called franchise laws that protect the independence of dealerships in many states, though Tesla has used online sales to get around them.
Most of the new approaches borrow from Tesla in one way or another. The EV pioneer sells directly to consumers at prices that, while changing frequently, don’t leave room for individual bargaining. The high margins it achieved before this year’s price cuts probably wouldn’t have been possible without cutting out the middleman.
Many consumers prefer the transparency of nonnegotiable pricing even if it means they get a worse deal: Haggling with car dealers is a process few enjoy. But consumers still enjoy the convenience of dealers. Direct-to-consumer EV sellers Tesla, Lucid and Rivian ranked among the worst in a 2022 customer satisfaction survey of luxury brands conducted by research firm Pied Piper Management Company.
Traditional manufacturers are betting that smarter distribution can bring them some of the cost benefits of the startup approach without the service gripes. GM, for example, says its new digital sales platform, combined with a shift in inventories from dealerships to centralized manufacturer hubs, will shave $2,000 a vehicle off its selling costs. The theory is that having only the right vehicles in the right places at the right times should limit the incentives historically necessary to shift models from overfilled dealer lots. Manufacturers and dealers alike enjoyed better margins when inventories were low as a result of the semiconductor shortage, and they want to keep them.
The high expense of manufacturing EVs is forcing automakers to cut costs and juice revenues wherever possible. Besides trimming incentive spending, car companies want to sell more services—including well after a car is sold.
The attention-grabbing opportunity is the potential to sell software, notably for self-driving technology, via over-the-air updates. Tesla charges $15,000 for its “full self-driving" package, which allows drivers to take their hands off the wheel but not their eyes off the road, including to existing customers. Others would love to get that kind of money for comparable products they are launching.
But more mundane services could prove just as important to automakers—possibly more so if driver automation becomes as ubiquitous as air bags and other once-novel safety features. As vehicle internet connections improve, manufacturers will be able to maintain a closer relationship with drivers. In addition to selling them software, they will be able to direct them to their dealers—and away from independent repair shops—for servicing and parts sales.
This is a big opportunity for both sides. Car companies don’t disclose how much money they make from parts, but a rule of thumb in North America is that it is close to 10% of profit, said John Murphy, an analyst at Bank of America. That is despite just 25% of Ford owners, for example, sticking with the company’s service package after their warranties expire. The company said at an investor day last month that it wants to get that number to 40% within three years.
This strategy is important because it promises to be a win-win for manufacturers and dealers, which have historically had a relationship verging on the adversarial. Notably, any additional business car companies can send their dealers’ way will help smooth over negotiations over sales of over-the-air updates, for which the industry hasn’t settled on a revenue-sharing model.
Manufacturer-dealer relations are “in a developing, experimental phase," according to Adam Jonas, an analyst at Morgan Stanley. “Feeling out where there’s sensitivity, and where there’s room to review contracts. It’s going to be iterative."
The shift to EVs is broadly positive for large, well-capitalized dealer groups that have the wherewithal to invest in the upgrades their facilities need to service the next generation of vehicles. These include adding new power lines and transformers, buying heavier-duty forklifts to cope with the weight of batteries and hiring and training technicians. All this infrastructure can cost $1 million or more per store.
The shakeout has already begun: Cadillac dealer numbers are down to about 565, from 880 before GM said it was taking the brand all-electric and asked its dealers if they wanted to join it for the ride.
Similarly, large dealers may end up taking repair business from independent mechanics that don’t have the means to invest in EV facilities and won’t get a shout-out in manufacturers’ over-the-air alerts.
For both carmakers and their dealers, EVs involve additional costs that they can recoup either by taking market share or by charging their customers more. The likely result will be a more consolidated, collaborative and service-oriented industry that offers a better customer experience, but at a cost. Bargain hunters in the postpandemic vehicle market could continue to be disappointed—and not just those looking for EVs.
