Battery electric vehicles in the aftersales market

Aftersales related revenue is expected to decline by more than half

Original equipment manufacturers (OEM) currently make close to a quarter of their total profit through aftersales. However, the emergence of four industry mega trends related to connectivity, autonomous, shared mobility and electric (CASE) are set to change fundamentally the way they generate aftersales profit. We believe that aftermarket profit of a typical OEM could reduce by as much as 55 per cent by 2035.

It is critical for OEMs to start planning for the emergence of battery electric vehicles (BEVs) as this trend has the potential to have the biggest impact on aftersales in the short term. Global sales of BEVs reached more than one million units for the first time in 2017 increasing 54 per cent over 2016 and surpassed two million units in 2018. The growth of BEVs will have an impact on the entire market, but will hit the OEMs’ core aftermarket business first and hardest. Businesses that are over-dependent on aftersales revenue from cars aged between zero and three years old are particularly at risk. No matter what strategies are put in place, current levels of profitability from aftersales appear unsustainable. There are ways to mitigate against potential losses, but failing to act could prove an existential risk for some OEMs.

Source: Deloitte analysis

Manufacturer reaction

To prepare for and minimise the impact of this potential lost revenue, OEMs need to address three fundamental questions:

• How do they protect and grow profit in their core business which relates to new and nearly new vehicles (zero to three years old) maintained in a manufacturer approved dealership?
• How can they compete in an intensively competitive older vehicle market (four years and older)?
• Where in their aftermarket parts supply chain can they increase efficiency to reduce costs?

Electric puts short-, medium- and long-term business plans at risk

The environmental benefits of BEVs over their ICE (internal combustion engine) equivalents are clear and after significant investment in the technology by manufacturers, any growth in the sales of BEVs is generally welcomed. However, the growth of BEVs and the emergence of other industry mega trends will have a major negative impact on OEMs’ core aftersales business, impacting revenues and profitability as consumers adopt any new technology. In the UK, EV and hybrid sales achieved a milestone in October 2019: ten per cent market share of new car sales, highlighting that the impact may be felt sooner rather than later.

Short term impact

OEMs’ core aftersales business comes from new and nearly new vehicles. These vehicles are likely serviced in a dealership, have a manufacturer’s warranty and additional factory service products which drive retention and loyalty. In addition, these vehicles tend to be owned by the first owner who has developed a relationship with the dealer and therefore more likely to visit again. Overall customer retention in this segment is normally around 70 per cent for passenger car brands.

This core business faces an immediate risk from the growth of BEVs as the sector gains an increasing share of new car sales. BEVs have fewer moving parts and serviceable items, meaning that the revenue generated through parts sales or per unit servicing is less than for a petrol or diesel equivalent. There is also evidence to suggest that consumers will expect lighter service requirements as part of this new technology. For example, Tesla has recently announced that their vehicles no longer require annual maintenance.

It is not just the emergence of BEVs that will negatively impact OEMs’ core aftersales business. As the other CASE trends emerge, the total number of new vehicles sold is expected to decrease. Any drop off in new vehicle volume will directly impact the total sales potential in the aftermarket. Similarly, a shift in market dynamics from personal ownership to fleet could result in more pressure on price and slimmer margins.

Outside of their core business, OEMs derive revenue from aftersales on vehicles that are over three years old which often represents a change in ownership. However, this market is highly cost competitive and dominated by specialist service chains and wholly independent workshops rather than OEMs and franchised dealer networks. Owners of these cars are less likely to go to a franchise dealer because they may not have an existing relationship and are less likely to own official OEM products such as service plans and warranties. This customer group is traditionally more cost conscious and therefore more likely to shop around, or simply go to wherever is closest and most convenient. Some consumers may even avoid regular servicing completely.

Medium to long term impact

In the medium to long term, the profile of older vehicle segments will also be affected by the change in vehicle technology as electric and connected vehicles enter the used car market, replacing petrol and diesel vehicles that eventually drop out of the total vehicle parc. The available aftersales revenue on a three-, four- or five-year old and older EV will be considerably less than for an equivalent ICE (internal combustion engine) vehicle meaning that the potential revenue available will decline.

OEMs have much lower customer retention once a vehicle reaches a certain age which will allow them to target growth in this area through increasing market share at the expense of independent specialists. However, achieving growth in this way will not be easy. Current OEM business models are not always geared to either cost based competition or convenience and OEM customer retention in these older vehicle segments fairly reflects their ability to compete effectively within it.

As the CASE mega trends start to penetrate older vehicle segments, absolute market growth will be unlikely, which will mean growth can only be achieved through market share. This will result in increased competition. With revenue growth difficult to achieve, the large specialist chains that have previously relied on older cars may look to achieve growth through the new car market. Block exemption regulations introduced in 2010 should mean that a motorist can have their vehicle serviced in any chosen workshop without invalidating the warranty. While these regulations were introduced to increase competition and benefit the consumer, the specialist chains have not taken advantage of the opportunity they present. However, this is likely to change as the specialists will look at new cars as a growth opportunity as their primary market contracts.

What about EV new entrants?

The EV market is attracting a number of start-ups and new entrants (including established brands with no automotive industry experience). However, from the outset, their future revenue potential from aftersales will not be at the same level that established OEMs have been able to achieve.

Adopting a new business model, not dependent on aftersales revenue, could provide start-ups and new entrants more freedom to make customer centric choices on how to serve the aftermarket. For example, they could be more innovative by using warranty centres and teaming up with specialist chains to support the maintenance required. Similarly, there is an opportunity for start-ups and new entrants to operate a mobile service network, similar to mobile repair services that are associated with white goods.

What should OEMs do?

In future, OEMs will have to transform their business model to gain market share, defend against competition and either grow revenue or at least minimise the impact of lost revenue. At a minimum, OEMs need to adopt a two-stage approach: stage one involves diagnosing potential risks, and stage two is taking appropriate actions. A wait and see approach is not a viable option and could ultimately result in the business failing.

Stage 1: Assess the time and size of the impact (diagnose)

OEMs will need to assess the potential scale and overall impact on their business. This will enable OEMs to create business cases to support the transformational change that is required to mitigate some, but not all of the impact.

When assessing their exposure to the risks an OEM should consider the following questions:

• What is the shape of your vehicle parc and how does this translate into revenue/profit?
• What does the electric vehicle pipeline look like and how does this feed into your vehicle parc?
• What technologies might support growth in the future?
• What technologies could reduce the costs in your supply chain?
• What is the untapped potential outside of your core aftersales business?
• Does your current business model support growth in areas outside of your core business (i.e. older vehicles)?

Stage 2: Identify areas to increase efficiency, optimise existing business and deliver revenue growth (take action)

Having assessed their situation and identified specific risk areas, there are a number of strategic and tactical options OEMs can take. These options can be split into cost reduction, revenue optimisation and revenue growth.

Cost reduction

In the short term OEMs should assess the potential of making their aftermarket supply chain more efficient by utilising new technology to reduce costs. For example, how are they using analytics and connectivity to optimise their supply chain? Can they move to a new supply chain and distribution network to minimise inventory holding and VOR (vehicle off-road) logistics?

Cutting costs in these ways will help reduce the impact of lost revenue and could enable OEMs to compete more effectively on price. However, while reducing the short-term impact, operational efficiency is not a sustainable competitive advantage and will need to be supplemented by revenue generation strategies to secure the long-term future. Some efficiencies will occur naturally as common vehicle platforms are introduced and used across models, resulting in economies of scale that are likely to bring the cost per unit of parts down.

Revenue optimisation

In the short term, OEMs need to employ the latest technology and industry best practice to ensure their core market activities are running at an optimal level. For the majority, this will mean improving the customer experience through the use of digital and connected vehicle technology which should offer a more convenient, flexible and frictionless experience.

Revenue growth

In both the short and medium term, OEMs should consider their ability to penetrate the older vehicle market. In addition to having the right programmes in place, OEMs need to ensure that their current business model enables them to retain consumers with older vehicles. Connected vehicles are likely to support retention in this market, creating a more connected customer experience through the use of predictive maintenance and over the air (OTA) diagnostic solutions. New revenue opportunities will also be created. For example, manufacturers can sell OTA software updates that enable new vehicle functionality, while third party services can also be sold to customers.

In many cases this will mean a new strategic approach that is more efficient, more cost competitive and more collaborative than working exclusively with franchised dealers. In the long term OEMs should consider mobility as a service and the car as a platform as areas of potential growth. This may, or may not, form part of their aftersales business, but will be critical in offsetting some of the decline in their traditional channels.

Can OEMs keep up with the pace of change?

The growth of BEVs and the emergence of CASE mega trends in the automotive industry will have a transformational effect on the aftersales market.

Substantial strategic changes requiring major up-front commitment (financial or otherwise) will be required to survive. This means adapting to the changing consumer, driving efficiencies and exploring new business models that shift the focus from products to services. The larger the OEM, the more time will be required to change strategic direction and there is every chance that the market could change at a pace that exceeds an OEM’s ability to react to it.

Regardless of the approach OEMs decide to take, there are four key points that hold true across the industry:

• Aftersales related revenue is likely to decline over the next 15 years in any given scenario
• Increasing the digital experience will be a significant part of success and retention in an OEM’s core business
• Older vehicle segments are a key strategic opportunity but will require a substantial effort as competition continues to increase
• Parts supply chain efficiency will underpin the profitability of the whole operation so it is critical to adopt new technologies.

Ultimately OEMs and their partners will need to accept that the future of the automotive industry will be fundamentally different and businesses need to adapt or face the consequences.