The Expert Podcast

So how serious are the manufacturers about getting to electric vehicle retailing? Well it's so serious that Ford dealers have to pick which way they're going to go within a year. No matter where you live, you certainly drive by a large Ford automotive dealership probably every day. That Ford dealership is pending a very significant change very very soon within the next year. Make sure you put your comments below and questions about our videos so we know how to structure the future releases. So here's what's happening.
Ford dealers are faced with a business altering choice. They have to either decide to be in the business of selling internal combustion vehicles - cars that burn gas that have pistons and engines - or sell electric vehicles - cars that run on batteries and electric motors - or do commercial which is like larger trucks and commercial vehicles. You can't do all three and the Ford parent company is requiring that each dealer decide which way they want to go by 2023. That's a year away. So if you're a Ford dealer, you have to pick one of three things.
If you pick electric vehicles, well you can no longer sell gasoline vehicles. You're putting all your eggs in one basket. What if electric vehicles don't take off? What if people don't want to buy them? What if there's no charging stations? What if people realize the batteries don't last and they don't want to buy them? Now you're stuck. Well if you stick with gasoline vehicles, you're limited in the number of models that are available because Ford is no longer putting manufacturing engineering and development into gasoline vehicles. In fact, this has been going on for a few years and most manufacturers are cutting back on their new offerings of vehicles. You have what's there. The existing engines and transmissions and drive lines are going to be phased out. They'll probably keep some trucks, maybe a couple SUVs, but that's about it. But at least you have an existing business model where you know that people want to buy these gasoline cars.
Because electric vehicles only represent about one percent of the vehicles on the road, and if you have to switch over to a business model where only one percent of your customers buy that product, that's a pretty significant bet to make. So if you stick with gasoline vehicles, at least you have a guaranteed product for 99% of your market. But two or three or four or five years later, you may have no market. In fact, in some states it's going to be illegal to sell gasoline vehicles within the next five or six years. The state of Washington has a law in the books that says dealers cannot sell and people can't buy - you can't even register a gasoline vehicle after 2030. So you couldn't even go next door to Idaho, buy a gasoline vehicle and bring it back to Washington because they won't let you register it.
The Ford dealer also has a third choice - they do you just want to sell box trucks or larger commercial, mostly trucks to companies, business clients. You could do that too, but that's a limited market. Most vehicles are bought by consumers. So what do you do if you're a Ford dealer? Again, put in the comments what you think a Ford dealer should do and do you think this is the right thing for the manufacturer to do, making them pick and choose.
The other part of the process is electric vehicles are going to be produced on a lower basis. You won't have large amounts of inventory on your lot. Here's one of the rules on the EV side: dealers will be tasked with executing a list of new standards. What that means is these are the rules - if you're a dealer you have to abide by these rules. The standards will include selling EVs at a fixed price - well that's good, you don't have to negotiate, haggle over price - carrying zero inventory. So if you're a Ford dealer, you can't have a lot full of 100 cars for customers to choose from. You basically have to order it and who knows how long that's going to take. And you operate at scaled-down facilities - well I guess you would if you don't have inventory, you don't need a big facility.
And this is part of the problem with the decision - it's a whole different way of running your dealership without inventory, with no haggle pricing, with maybe no service department. Because right now most of the service that's done at a dealership is repairs and maintenance that are part of the internal combustion driveline process - internally lubricated parts, transmissions, engines, fuel injectors, oil changes. None of that's needed on a battery powered vehicle, electric vehicle. You don't need any of those things. So how do you run your service department?
In fact, many dealerships operate on a very high what's called service absorption. What that means is the service department profits or revenue pays for most of the expenses of the dealership and the sales department is just the gravy - that's the profit. So let's say if you have a 90 percent service absorption, what that means is your service department, the repair shop, pays for 90% of all the bills of the dealership. So all you got to do is get 10% of the bills from your sales and the rest is profit. What happens if you take away that 90 percent service department revenue? Now your entire business has to depend upon the sales department revenue profits and you're relying on a business model that's untested that currently represents only one percent of the market. Tough place for a dealer to be.
As a consumer, what do you think? What do you think dealers should do? And even if you say well I think they should go to electric because I like electric vehicles - well that's fine - but how is the dealership going to survive in that marketplace? Will there be enough new business in electric vehicles? Will there be enough new sales for electric vehicles? Are there going to be enough incentives from the government to get people to buy electric? A lot of the incentives and rebates for electric vehicles are going away. They're being downscaled based on the number of vehicles sold by the manufacturer or maybe taken away as rebates and going into a tax credit. So you may find less of those and the prices of EVs are not going down, they're only going up.
What does it mean if you want to keep an electric or a gasoline vehicle? Well there may be less facilities. If let's say half the dealers switch over to electric, that means you have less choices to get your gasoline vehicle fixed. You need a new transmission, you need an oil change - you can't go to an electric vehicle dealership because they won't have the facilities to repair gasoline vehicles. You have to find another service department. That may impact ownership satisfaction of gasoline vehicles. What if you have an electric vehicle and your closest dealer is only gasoline? That could be a problem too because electric vehicles may not need maintenance but it might need software updates, it might need new system maintenance of the electronics and that has to be done at the electric vehicle center.
This is a huge transformation of one of the largest automotive retailers in the country. I suspect that other retailers will follow soon. One of the things that will probably happen is there can be a lot of litigation. Some dealers will contest this in the courts. Probably be lawsuits to where Ford is gonna have to defend basically taking away a franchise. So if you're coming out with new vehicles, you're supposed to get all your dealers involved and allow them to sell all your product line. If you're splitting up your product lines, in effect you're weakening your franchise system and that may be something that's litigated. State laws have very strong franchise protection statutes for auto dealers.
This is something where consumers may not see it initially but the impact on auto consumers may happen months, years, even towards the end of the decade where you don't have the same choices. Imagine going to a dealership and there's no cars on the lot. Most of us are used to going to an automotive retailer, a car dealership, and seeing 100, 200, 300 cars all lined up - pick the color you want, the equipment, the options, drive it home today. If the electric vehicle business model is not going to have that kind of inventory, you may be able to order what you want but you can't have it instantly. What if your car is totaled? What if you need a car immediately for a trip? It's going to change the way that consumers buy vehicles.
How did you buy your last vehicle? Did you take it as an on the spot delivery home the same day? Did you order it? Was it exactly what you wanted? Was there enough choice on the dealer's inventory for what you wanted? Let us know about your previous car buying experience and how that might change and what your thoughts are on a new automotive retailing business model as what's suggested by this Ford announcement.