Updated: Mar 5, 2022
Number 19 is THE BIG ONE. I hope you read last week's, 1-8.
9. Strong Residual Values, with Notable Exceptions
With supply of new vehicles still constrained by chip shortages, second hand values will remain strong across the board. The disruptors affecting the market are increased appetite for electrified vehicles, whether that is PHEV or pure EV, or even mild hybrids, and the second stage of the Clean Car Act. When penalties start hitting fresh imprints of new and used, it will bring emissions and economy into focus for many, who may have ignored these factors. That means cleaner cars will become more in demand, driving up sale prices (for fresh imports and vehicles already landed). Conversely, now might be a good time to get rid of that V6 Highlander, or your 5-year-old Dodge Journey. Less efficient, more polluting vehicles are likely to see their residuals plummet over the next 12-36 months. You’ll be able to hear the whistling sound of their falling values, just like an old Volvo with a roof rack passing by.
10. Used Market Goes Nuts for Mild Hybrids
Japan might not have fully embraced the BEV revolution, but they have been producing mild hybrids in volume for some time, to the point that 40% of vehicles now have some electrification. Yet within that only 3% are pure BEV. The second wave of the Clean Car Act favours mild hybrids and used importers will seek to capitalise on the incentives, however small, that mild hybrids attract. Conversely, as an importer, now is a great time to clear out the polluting stock – and that also means there are short term deals to be had as a buyer right now.
11. Dealer Margins Squeezed on BEV
Legacy manufacturers will feel the pressure of investment in BEVs, battery technology, and new model introduction, and will squeeze margins tighter, especially on new BEV products. They won’t take this pain alone, and will put tighter margins on dealers. Expect to see a 2% margin reduction on sales of BEVs.
12. Technician Pay Rate Inflation
The market is strong for vehicle technicians and demand is outstripping supply. Pay rates for technicians will break the $50 per hour barrier. That rate might have been unthinkable two years ago, but the reality is that until supply of good candidates improves, wage inflation is inevitable. Dealers will have to think long and hard about how to develop and retain good staff as well as how to attract apprentices with good potential.
13. Agency Model Gains More Momentum
It is well known that Honda was an agency model pioneer in New Zealand and that Toyota has had Drive Happy in place for over three years. Mercedes-Benz is next (here, in Australia and in the UK and Europe) and more brands will follow suit. Maybe even Ora will become agency. But in order to meet tougher competition, brands will seek to create the foundations to enable online selling. Agency remains the key requirement to do this.
14. PDI Centres Become Fixed Ops Off Site
Real estate is no longer expensive; it is now very expensive. Dealer groups will seek to use secondary sites perhaps on the edge of town to drive out costs while aiming to increase efficiencies. For example, by using a Pick Up, Drop Off Service, customers don’t care where their car is serviced. By utilising two shifts (assuming a dealer can find the techs), dealer efficiency is boosted. In this scenario, the Fixed Operations business is working with better asset utilisation at cheaper premises. This in term may mean that what was previously ‘just’ a PDI centre now becomes the service hub, and dealers focus on adding customer value to each online interaction.
15. CarMax style operator comes to New Zealand
In the US, one dealer group sells 227,000 vehicles per quarter, and does 2 million appraisals over the same period. 9% of their sales are completed online. CarMax is the largest buyer of used stock in the country. While we won’t see this level of volume, there is real potential for a retailer to shake up the market. Whether this will be Turners or 2Cheap remains to be seen. Perhaps it will be an overseas business, but the opportunity is there for the disruptor.
16. Tesla Troubles
Tesla has almost re-invented the wheel. At just 15 years old, it has achieved what many thought were folly, time and time again. But right now it has to recall 475,000 cars. Unlike legacy manufacturers, Tesla has a very small model range, so any recall hits it disproportionally hard. This is a very high level of recalls, especially on a relatively new model line up. Two or three large recalls would be unlucky, but is also possible, and if the recalls were sizeable, the business would be in trouble.
17. Used Car Price Collapse Risk
Car purchase volumes have a high correlation to house prices, with many consumers freeing up equity to fund new vehicles. The tougher lending laws seem to have taken some steam off the market, but sales of new and used vehicles were at a record high. If house prices slip and interest rates edge up further, there could be a lot of consumers feeling the credit pinch. If this happens, then there are a lot of near-new cars that might become unaffordable. This is a prediction we hope is wrong.
18. Best Year on Record
With chip shortages still in play, inventory remains tight. With tight supply comes good margins for new and used vehicles. It is unlikely the chip shortage is near an end (last year over 9.5m units were lost), even though supply will ease. Make hay while the sun shines. 2023 will be much tougher.
19. The Next ICE Car You Buy Will Be Your Last.
'Woah!' I hear you say. Steady on there. Here’s why we believe this. New vehicle ownership cycles are 3-4 years (a little shorter for enthusiast’s cars). Which means if your next car is bought in the next couple of years, and you hold on to it for 3 years then the automotive landscape will be very different. In 5 years time for new car buyers, there will be BEVs with 200 kms range available in the mid to high $20K mark. Many will be from new brands you haven’t heard of, most of which will be Chinese. When BEVs have near price parity, lower servicing costs and fuel is about 20% of the cost of today's petrol, what will most people do? They’ll buy electric. Assuming we still buy cars in five years time, and don’t either lease them or rent them like a Lime scooter, of course….