Embracing the opportunity in uncertainty - Motor vehicle retail in Australia
Balram Dabhade, Dorian Lapthorne | 9 August 2017
Australia has now successfully navigated the economic ups and downs of this world without slipping into a recession for a record 25 years. While this is a commendable achievement in itself, it also shadows some of the challenges that we face, making it difficult to clearly recognise these challenges and prepare for them.
Like the Australian economy, the Australian motor industry also has many accolades to its credit, the latest one, it sold a record number of vehicles in 2016. The Australian Motor Industry sold 1.17 million vehicles in 20161. While the volumes were spectacular this growth came at a price – the profitability.
Recently we’ve seen many uncertainties grip the Australian motor industry, from regulatory changes looming in F&I, emission challenges, to disruptors in form of ride sharing and electric driveline vehicles. While the uncertainties and the pace of change is overwhelming, it brings along unprecedented opportunities to those who have the courage to change and humility to stay relevant. The good news is, we have a chance to find and exploit opportunities in these uncertainties.
Never before was the need to be informed and the need to be prepared so dire. In 2016 we saw around 25% of the motor dealers in Australia turn loss making. Delay in recognising the changes that were set in the latter half of 2016 cost loss making dealers nearly AUD 50,000 every month in net losses2.
In the light of these challenges, it can be safely assumed, that the Australian motor industry faces some of the most challenging times and it can be quite daunting to be a motor vehicle dealer or distributor today.
This paper makes an effort to give the industry a glimpse into three key uncertainties that challenge the industry today:
1. Regulatory uncertainties
2. Economic uncertainties
3. Technological uncertainties
Recently Australian motor dealer finance has come under regulatory scrutiny. This has the industry worried as in recent years more than 80% - 90% of the average dealerships profit can be attributed to F&I income. Of all the uncertainties the industry faces, this is the challenge that is most likely to appear in the near future.
The regulatory bodies ASIC and ACCC are investigating the motor dealer finance business with respect to flex commissions and add on insurance commissions. Based on modelling conducted by Deloitte Motor Industry Services, the following figure shows the percentage of dealerships that may, in a worst case scenario, turn loss making after the proposed ASIC ban on the finance flex commissions. Note that this only considers the potential impacts of the finance income reduction. There is still uncertainty about the direction the regulatory bodies might take on insurance.
Although on the surface this looks alarming, these changes may also bring with them the opportunity to build better and lasting business models. These regulatory changes will make the Australian Automotive Industry transparent and will boost consumer confidence in the long run. A fallout of these changes, ironic as it may sound, may be an increase in the sale of finance through the dealerships. With better clarity on interest rates, increasing numbers of consumers may want to shop for finance at the dealerships adding to their convenience.
The dealerships should better prepare for taking advantage of this benefit when it materialises by:
1. Understanding the scope of the ASIC rulings
2. Working with the distributors and financiers to build better business models
3. Developing business processes that make the sale of a vehicle and sale of finance seamless
4. Training their workforce to be multi-disciplined and agile as navigating these changes will require better leadership
Australia has enjoyed a robust economic performance despite the commodity price and mining investment bust 3. While the resilience of the Australian economy is commendable, with the global uncertainty since the GFC, Australian businesses have been increasingly confronted by the “new mediocre” globally for a better part of the decade 4. A hard landing in China is cited as a major external risk, which may put the Australian economy under tremendous pressure.
The recent low interest rates have created a risk in terms of household debt. While the lower interest rates were useful in selling more cars, increasing amount of household debt casts a risk on future vehicle sales. The chart below shows the effect low interest rates have had on personal finance for new vehicles.
While this economic uncertainty may never realise, the fear of the uncertainty puts expenses on hold and households many times defer a buying decision. According to a recent Deloitte Access Economics study, if Australia were to slip into a recession, there would be half a million fewer jobs and the $A would shed 15 cents vs. the $US4. This may not be good news as not only will the Australian Motor Industry lose potential customer base, the prices of cars may increase as Australia today already imports most of its cars, and will import all cars in the near future.
This sounds gloom and doom, but we don’t know if this uncertainty will ever materialise. We have seen the motor industry ride the storm of 2008 and come out a winner. Some lessons we can take from that phase are, the motor industry is resilient and adapts quickly in the face of adversity.
Possible strategies to navigate if this uncertainty materialises:
1. Increased productivity by workforce optimisation
2. Operating cost optimisation through process change and technology
3. Better inventory management
4. Better gross realisation on new vehicles
5. Targeted marketing spend by leveraging dealership databases
These strategies may help the Australian motor industry through this period, and the optimised business models can then deliver even better results once the economy bounces back. So while the pain may be short term the benefits may remain for a longer duration.
The car as we know today has evolved and morphed, from the early Model T to today’s wonders of art and technology. Today an average car’s on-board computer is more powerful than any of NASA’s early spacecraft5, and while the spacecraft traversed the depths of the ultimate frontier, a car is used to commute less fancy distances between home and work or the supermarket. While the technology in the car itself is changing rapidly, so is the way a car is bought.
Australia is one of the most innovative countries in the world and embraces technology fast. The average Australian is comfortable using digital devices and research has shown that approximately 72% shoppers do an online research before making a purchase6. The idea of an electric driveline with a connected car that you do not have to own or drive is seen as “The” paradigm shift in the automotive industry.
We do not know how far we are from that future, but there are imminent technological changes that are impacting the Australian automotive landscape.
1. Digital Retailing
2. Online marketing and advertising
3. Social media impact
4. Proposed automated road vehicles trials by National Transport Commission in its policy paper in Nov 20167.
The technological changes may mean that the car and the way it’s sold, might be different in the future. But amongst all the uncertainty, one thing is certain, humans will need mobility. This actually may be a good thing for the Australian automotive industry where the roles of dealerships may change based on locations. For example an urban city CBD may have a kiosk layout where you can have a car showroom merge with retail space or a café, and the intensive sectors like service and test drive etc., maybe located outside the congestion of the CBD. We have already seen kiosk style car showrooms emerge in Australia in Melbourne CBD and Sydney CBD (Tesla, Subaru, Hyundai etc) Even with all cars turning electric, the need for service may change in nature but it will remain. So the industry has to brace itself where the technicians are equipped with knowledge and tools to service a car of the future.
While nobody can accurately predict the future we believe that the Australian motor industry should take a leading role in designing the future it wants to be in. The Australian motor industry can get transferrable ideas from industries that have undergone disruption like consumer retail, hospitality, banking to name a few.
Few strategies that the Australian motor industry can use to better prepare for this change are:
1. Develop an online presence and an online strategy
2. Start engaging your target audience on social media
3. Start updating yourselves with the technological changes and their impacts
4. Actively engage with your distributors about their future plans and adapt your business
In conclusion, while the challenges of the uncertainties are huge they are not insurmountable. Seemingly disruptive changes may lead the Australian motor industry into a better future where the industry has robust business models, increased transparency, and is more connected. We believe that organisations large and small have the potential to exploit these uncertainties to their advantage and with better planning they can face the future with greater confidence. It may help your organisation immensely if you took the time and energy to identify what uncertainties
might affect you the most and how you can better navigate them.
If you wish to better understand these uncertainties with respect to your business and understand how you can gain more from our benchmarking, future modelling and analytical capabilities we would be pleased to discuss the results of our analysis with you.
Balram Dabhade and Dorian Lapthorne
1 Vfacts 2016
2 Deloitte eProfitFocus Motor Industry Overview Australia 2017
3 2016 article IV consultation—IMF Country report no. 14/42
4 What’s over the horizon? Recognising opportunity in uncertainty – Deloitte Access Economics
5 Driving to the Future – The Economic Intelligence Unit 2016
6 Deloitte brand and spatial research presented at Deloitte Motor Industry Overview 2017
7 Regulatory reforms for automated road vehicles NTC Australia Nov 2016