Will car dealers close along with the EV revolution?

Car Dealer
Photo by Erik Mclean on Unsplash

One of the most frequently asked questions in the EV conversation is about car dealers. What will be their role in the EV space?

As more EV companies adopt direct-to-consumer sales as their preferred method to deliver their cars, people in the dealer market are starting to question what will their future be.

With a diminishing post-sales service needed on these new vehicles, dealers’ role is on the edge. What is the future of this business?

The main business for dealers is maintenance and not sales

It was long ago when manufacturers decided that the main role for dealers would be car maintenance and not sales. This would leave the most profitable and first business step for the makes and the long and customer-intensive post-sales experience to dealers.

Post-sales services are high labor intensive and localized. This is why manufacturers thought in the past that it would be better to externalize it so they could differ some of their costs to a third party. Auto markers would take care of the product, from design and manufacturing up to marketing and distribution. But they wouldn’t set up points of sales in every town and wouldn’t take care of future maintenance. This last part would be outsourced to the dealers.

This is a smart approach as it would split a lot of the risk as points of sales are an expensive investment.

Also, they could use the dealer network to fulfill their needs in terms of inventory. Their production lines would not stop and the dealers would take care of their inventory overflow when needed. Some automakers reward their dealers when sales targets are met and make them buy up to a number of units per year in order to make any profit at all. Dealers have to later clear this overflow in the market.

A new sales model

It would be Tesla the first car company to challenge this model. A model that is so strong that, in some USA states, is mandatory and no one can sell cars directly to consumers.

When Tesla started selling their vehicles, they didn’t build a dealer network, but, instead, they set up a web page where customers could directly order their preferred vehicles. Also having only one model to offer (or four nowadays) and keeping the different choices list short and easy helped on this model.

The main differences are:

  1. The price is fixed and it is not subject to a customer-dealership negotiation.
  2. The options and accessories list is short and simple to use. Mainly 2 or 3 versions (power and range), some aesthetic options (paint color and interior), wheels, and autopilot. Legacy automakers usually have hundreds of options to personalize their vehicles.
  3. Deliveries can be arranged in a Tesla store or at the customer’s address.

Think about the last time you bought a car. It probably took you days to analyze, ask for offers, decide and buy it. Now you can do that with a few mouse clicks in 5 minutes.

This method gives more control to the automaker that now has all the information and instead of having the car dealers as their customers, now they can deal directly with the end consumer, the user of their product.

It also gives benefits to a vertically integrated company like Tesla, as they can collect that profit directly and avoid outsourcing this part of the business.

Other new EV manufacturers are following Tesla’s lead on this and offer direct-to-consumer sales. Even some legacy automakers are starting to skip the dealers and setting up their web pages to accept direct orders, or at least preorders as it is not easy to skip the dealer network that is so fixed to you already after so many years.

The post-sales service and maintenance

But selling the car was the easy part. The main role for car dealers is post-sales service. This is the most difficult part and the one new automakers are still struggling with.

To offer this service you have to set up brick and mortar places next to your customers. That’s not something you can do online.

Tesla’s approach to this has been following this model:

  1. Best service is no service. From the ground up, Tesla cars are designed and built to minimize maintenance and their most critical parts don’t need any at all.
  2. Prioritize remote service. Due to their great software, Tesla cars can be checked up and to some extent fixed remotely. This means you don’t even need to have local people in a specific location.
  3. Setup a service center network on selected locations where sales are relevant.
  4. Setup a mobile service center to reach simpler maintenances.

Even when EVs have far less maintenance than ICE cars, they still have moving parts that are exposed to friction and heat and liquids that have to be replaced. While this maintenance has to be addressed anyway, I’m not sure that it will be able to support the wide range of dealers that exist today.

Also, regarding car wrecks and body shop works, new active safety features and, in the future, self-driving cars, will make this service almost non-existent.

For the future we can still think of two different scenarios:

  1. Legacy automakers can follow up EV startups and change their business to EVs only.
  2. Legacy automakers don’t have the necessary innovation to reconvert their business and are the new “Nokias”.

In either one of these situations, dealers are the weakest part of the business. With a direct-to-consumer sale strategy for the automakers and less maintenance for their products, they will have to rethink their businesses.

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