AutoNation CEO sees auto industry transfored, but not personal car use

by admin November 26, 2017 at 9:50 am

Mike Jackson is CEO of AutoNation, the country’s largest dealership group. This article was condensed from a conversation with Automotive News reporters. Photo credit: AUTONATION

This article will be included in the fourth part of “Redesigning the Industry,” an Automotive News series exploring the future of a business in the throes of change. Part IV will appear in our Nov. 27 issue and focus on auto retailing. 

Disruption and revolution are coming to the auto industry — it’s absolutely true — and it will affect suppliers, manufacturers and dealers.

But dealers will not vanish.

They will not vanish because there are 265 million vehicles on the road that American consumers love and use very economically for independent transportation, and these vehicles will not be made obsolete from one moment to the next. They will have a life span on the road of 25 years.

Thus, retailers that have a brand that stands for something and scale in all the major markets will be in a dominant position. Brand and scale are a tremendous advantage, given all the challenges coming at the industry and the pace of change.

Personal use vs. sharing

I estimate the vehicle marketplace today is made up of 70 percent personal use and 30 percent sharing. In the sharing segment, I’d put rental cars, taxis, Uber, Lyft, buses and subways. A huge sharing market already exists.

In five to 10 years, the big disruption is going to be in this sharing marketplace with the arrival of autonomous vehicles.

Without a driver, you’re going to have choices in sharing that you’ve never had before. Will anyone rent a car? Will people get into a taxi or just get into an autonomous vehicle and tell a machine where they want to go? Will they get on a bus when they can get into a shared vehicle? And are people still going to take the subway when they have the choice of a convenient, shared autonomous vehicle?

Sharing is not going to disrupt personal use. Rather, sharing first must go through its own revolution. Then over time, it may affect the split between personal use and sharing. But personal use will still be most of the market.

For a seismic shift to occur, you must offer a significantly different economic equation. If an individual drives more than 5,000 miles a year, it’s cheaper to buy a car than to go into the sharing environment. Most people are driving far more miles than that, so it still makes economic sense to have a personal vehicle.

And there are additional advantages that come along with a personal vehicle. You have total flexibility. You can go long distances in the same vehicle, whereas if you rely on Uber, you can’t take the family on vacation.

We’re not at a point where this shared concept for personal use works economically. There’s no example of it, and it’s a minuscule part of the market.

If consumers are willing to pay a premium on a monthly basis to have the ability to change vehicles, they always want the latest and greatest. The highest depreciation curve on a vehicle is during the first 12 months of use, and shared use has the greatest impact on the depreciation of the vehicle. It has a much steeper depreciation curve than personal use. You will then have a clientele that is demanding a vehicle that has the steepest depreciation curve, and if you price for that, the payment is so exorbitant that it doesn’t make sense. Or, you just subsidize the business and lose money.

So I don’t view the sharing model as the wedge that’s going to disrupt and dramatically change the marketplace. It’s going to be trouble for buses, subways, ride-hailing companies and rental car companies. Their world is going to be very different very quickly. But for personal use, it’s a different matter. It’s going to take more time for the economics to make sense — for people to give up owning a car.

Dealerships will still be relevant

Thus, brick and mortar dealerships will still have relevance. A vehicle is still an expensive purchase, with tremendous technical complexity. People are still going to want to come to a place to confirm that they’re making a good decision. But what happens in this physical location will be very different from today. Everything that’s tedious and boring will be accomplished digitally, and the customer will be in control of what happens.

Dealerships that have scale and a brand will have a significant advantage. For dealerships that do not, it is going to be stressful. AutoNation has the scale and the expertise to partner with Waymo by servicing its self-driving vehicles. So I was in the personal use part of the marketplace, and now I’m in the entire marketplace. No matter where the split moves, I’ll be fine either way. I don’t have to lie awake at night staring at the ceiling, saying, “Is it a 70-30 split, or is it a 50-50 split?” I’m going to be deeply involved either way.

Complexity adds value

I look at the complexity of self-driving vehicles of the future, and the only way these things make sense is if they’re on the road for 300,000 to 500,000 miles. You can’t put something this sophisticated on the road and replace it every 100,000 miles. I like complexity. I like sophistication. I like added value. Can a mom-and-pop dealership do with Waymo what we’re going to do? With all due respect, I don’t think so.

Rural dealerships have better odds for success in a mobility environment than urban.

For some reason, the industry has never really understood the value of the rural dealer network to their brands, their products and their reputation. But they’re adaptable and resilient.

Luxury dealerships also have strong odds. Innovation and differentiation will remain meaningful in the marketplace. I’ll make a bold prediction: In 2040, there will still be a Mercedes-Benz, a BMW, a Porsche, an Audi and a Lexus. I’m not in Bob Lutz’s camp. I don’t think that luxury vehicles will disappear and that computerized modules will move us around.

Showrooms shrink

There’s a certain contradiction in the manufacturers saying to us, “Prepare for the future. There’s a revolution coming, and by the way, build me this huge showroom.” Twenty years from now, showrooms will not be what they are today. There will be no need for a huge showroom to walk around and look at all the various products.

Service departments will not disappear, but there will be a migration to those with the technical expertise, which are the new-vehicle franchise dealers. They’ll have a partnership with the manufacturers that gives them access to the tools, the training and the parts.

They’ll make the investment in infrastructure. The number of entities that can work on these vehicles will decline over time.

The complexity that’s coming with these vehicles is a strategic driver in our favor and in the new-vehicle franchises’ favor.

People say to me, “Why would you invest in a collision business? There’s not going to be anymore accidents.”

Yes, there will be fewer accidents, but when something happens, those who can fix it will be fewer. And, it’s much more expensive because the materials are more exotic, and the degree of electronics that’s in the vehicles will be exponentially greater.

In the future, dealerships will need scale, and they will need a brand that consumers trust, that insurance companies trust, that manufacturers trust and that suppliers and vendors can trust.

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