The economics behind EVs and why they matter

Some dealers are reluctant to adopt an EV strategy. The tipping point is coming.

Automobile dealerships will look very different in the future. While it is still debatable how much market share electric vehicles will have, they will play a large part of retails sales.

The EV market share is expected to grow to 20 per cent by 2030 vs. 3 per cent today. This will be a monumental change in customer buying patterns and presents a tremendous opportunity for those entrepreneurial dealers among us.

Governments are onboard too. In August 2021, President Joe Biden signed an executive order setting the goal of having electric vehicles make up half of all units sold in the U.S. by 2030.

In December 2021, Prime Minister Justin Trudeau stated that he planned to align incentives to those in the United States. This will give manufactures a vested interest to increase the supply of EVs in North America.

Moreover, traditional customer barriers to entry (EV prices, km range, availability of charging stations) will be eliminated soon as governments invest billions in new infrastructure and technology within this emerging space.

I fully expect prices of EVs to decrease in the coming years. They will ultimately find price parity with ICE vehicles. This, in my opinion, will be the tipping point for the change.

When we reach this point, I believe dealers will need to prioritize their EV selling strategy over their traditional model. They will need to pivot both variable and fixed operations to capitalize on this fundamental change.

Will this make financial sense? Will dealers be able to profit from this shift, or will they just be wasting resources? Let’s look a little deeper at the economics:

Margins will be high

As we stand today, the average MSRP of an electric vehicle is $56,000. That’s approximately $10,000 higher than the average traditional vehicle at $46,000 (according to Kelley Blue Book). This 20 per cent premium positions these EVs much more like luxury vehicles than mainline cars.

Gross margins are higher for these vehicles too, ranging, on average, from 8 per cent to 10 per cent. If you are currently a dealer of a mainline or domestic brand grinding through every deal to make $500 a copy, these numbers should excite you. If you are a true entrepreneur, you should be salivating right now!

EVs will continue to have higher margins than traditional ICE vehicles. And  as demand grows for these products, a real business case starts to present itself— a high margin, high volume strategy.

Opportunities knock! EVs will continue to have higher margins than traditional ICE vehicles. And as demand grows for these products, a real business case starts to present itself—a high margin, high volume strategy. It’s a winning strategy in any industry.

Volumes will start  slow – but will grow

I agree with most experts on this subject. It will be a slow transition to carbon free driving.

As of November 2021, over 1.9M new cars were sold in Canada. The vast majority of these were traditional ICE vehicles. The leading EVs sold in Canada include the Tesla Model 3 (approx. 9,600 units), the Chevy Bolt (approx. 4,600) and the Hyundai Ionic (approx. 4,200) to name a few. I find this very interesting.

This tells us that there is a direct correlation between the price of EVs and the amount you can sell. That is, less expensive EVs, like the ones stated above, seem to be the ones most in demand.

OEMs are starting to understand this formula. They are investing heavily in producing EVs at the lower end of the pricing spectrum. And there is competition too. Chinese manufacturers are playing a huge role in making and selling electric vehicles at the $40,000 price point. This is exactly what will drive volume increases in the next few years. These cars are cheap, reliable and very well designed.

The shift to electric vehicles is on our horizon. I expect the “20 per cent market share” benchmark to be easily met within the next few years. That’s 400,000 EVs per year on Canadian roads less than eight years from now. The volume will be there, just give it some time. The real question is, will you capitalize on this opportunity? Or will you watch others win this race?

Low demand for service

Fixed operations will face the biggest challenge during this paradigm shift. It will take time for sales volumes to reach a sustainable and consistent level.

This means service “car parks” will be very slim until at least 2030. The average dealership will lose approximately 20 per cent of its current service customers base due to natural attrition in any given year.

Without an influx of new service customers to replace them, dealers will be left with empty service bays until full capacity is achieved again. This collapse in demand is the biggest problem facing dealers.

Moreover, with more sophisticated technology, it is expected that service intervals will stretch significantly longer than their ICE counterparts. The fact is, EVs have less parts in them, no engines to repair and no oil to change.

The time between service visits could be as long as 25,000 kms. It’s true, there is a real risk here for dealers. New EV sales centers could effectively eliminate what was historically dealers’ most profitable department. That’s a scary thought!

The EV shift is coming. You should view this as an opportunity. The economics behind this ecosystem makes sense if you play your cards right. Profits are solid, volumes will be there and the challenges you will face can be overcome. The key is to educate yourself and plan for it. The true risk is missing out on this opportunity.

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