The Automotive Services Industry – is it ready for EVs, AVs and Smart Mobility? Part 1/2

When people typically report on developments with Electric Vehicles (EVs), Autonomous Vehicles (AVs), or Smart Mobility (Carshare, Rideshare, eScooters, MaaS etc) it is almost always with respect to the technology itself, or the ways in which it is changing how people move. What is rarely discussed but is no less important is the impact these development will have to the Automotive Services Industry (and by extension a country’s economy), meaning the millions of people across the world currently employed in the areas of:

• Sales & leases of new and used motor vehicles
• Sales of after-market motor vehicle accessories and/or modifications
• Sales of spare parts for motor vehicles
• Servicing of motor vehicles
• Repairs & painting of vehicles

‘Millions of people’ I hear you question? Yes, for example the Motor Trades Association of Australia reports that there are “69,365 retail motor trades businesses which employ over 379,365 Australians and contributed $37.1 billion to the Australian economy in 2017/18; which equates to 2.2% of Australia’s GDP.” These are already big numbers, but Australia is a relatively small market with a little over 1m new vehicle sales per year. Scale up for the big markets like China, the US and Europe that each sell more than 15 times this amount, and we quickly arrive at employment figures in the millions.

If you are one of these people then I’ve got some bad news for you – tough times are ahead, with long term downward pressure coming on your profitability. It may not be next week, next month or even necessarily next year, but it is definitely coming. Why? Read on for the 3 key trends you need to understand.

Trend #1 - A shift away from the Internal Combustion Engine (ICE) to Electric Vehicles (EVs)

By now you’d have to living under a rock to not see that Electric Vehicles are gaining in popularity around the world. Practically every automotive manufacturer is now in the process of bringing EV offerings to market, giving customers much more choice than they’ve had before. An analysis by Reuters in January this year pegged the level of global investment in EVs by the 1st tier automakers in excess of $300B, a mind boggling amount. More importantly, 3 key factors are gradually changing the economics towards cost parity between ICE and EV, enabling EVs to push further out of the luxury/premium segments of the past into the more affordable mainstream models that sell at much higher volumes. What are these factors? Firstly, we have emissions regulations getting ever more stringent, adding ICE technology cost largely in the exhaust after-treatment system. Secondly, customer expectations for ongoing improvements in fuel economy are further adding to this cost, either by way of increased Powertrain technology cost, or by increasingly expensive weight reduction actions. And lastly, EV battery technology and production scale continues to improve, reducing their cost.

How will this trend negatively impact profitability?

1. The powertrain of an electric vehicle has far fewer parts than an ICE based vehicle; a report by Forbes in 2018 put the difference in the order of 2,000 for an ICE versus 20 for an EV. This is a huge difference, but consider than both ICE engines and their multi-speed transmissions have hundreds of sub-components each where in comparison an electric motor and single speed ‘gearbox’ of an EV have only a handful. Then there are all the supporting systems an ICE powertrain requires that don’t exist in an EV, such as the Air Intake System, the Exhaust System, the Fuel System, much of the Cooling System, and multiple sensors/wiring/control modules that stitch it all together to make it function. In general then, it can be claimed that EVs are more durable, because fewer parts means fewer potential failure modes, fewer sources of variability, and fewer opportunities for manufacturing defects. As a result this means less repairs are required, and so reduced revenues from associated repair fees and sales of spare parts.
2. Similarly, EVs also require less scheduled servicing. Typical serviceable components in an ICE such as air cleaners, oil and oil filters, fuel filters, spark plugs, FEAD belts, timing chains and so on simply don’t exist in an EV. The result again is reduced revenues from servicing fees and the associated replacement parts.
3. While an EV has fewer parts than an ICE, the parts an EV does have are generally of a higher technology complexity, such as the battery pack itself, the power inverter, the electric motor, the battery charger, and the Battery Management System (BMS). The consequence is that dealerships and service centers will need technicians with a different skillset than they have today. While the total number of technicians needed will likely decrease (see items 1 & 2 above), those that remain on the payroll will either need to be retrained or replaced with new hires capable of diagnosing and acting new type of faults encountered.

Trend #2 - A shift away from individual car ownership to ‘smart’ mobility alternatives

The 2nd key trend to understand is the increasing shift in consumer interest away from the traditional model of individual vehicle ownership, to one or more of the growing list of mobility alternatives such as:

• Ride-hailing
• Ride-sharing
• Car-sharing
• Vehicle-subscriptions (instead of purchase/lease)
• Micro-mobility (Traditional or electrified bikes, eScooters)
• ‘Mobility-as-a-Service’
• Improved public transport services (trains, buses, trams etc)

Let me pause for a moment to clarify one thing – I am not suggesting individual vehicle ownership will disappear. I’ve read others make such bold claims but frankly I don’t buy into this vision; for me there are far too many obstacles and practicalities preventing this, meaning I see vehicle ownership as remaining the dominant preference for many people for a long time to come. However, we can say with confidence that the percentage of people choosing to own a vehicle and/or use it as their primary mode of daily travel, will decrease to some extent, because that trend is already occurring.

As Bloomberg reported in February this year, global vehicle sales are already a long way off where predictions from 10yrs ago said they would be; for sure we have placed like China that have boomed over the last decade but the other big mature markets like the US and Europe have flattened off. For my home country of Australia, the annual Census data is a good source of insight into current and emerging transport trends and lets us drill down to a more granular level. From the analysis produced by ChartingTransport.com we find the following:

1. Car ownership is growing more slowly than the population, therefore the growth rate of passenger cars per capita is slowing. In fact the trend is clear that it has been slowing for many years with some states showing only marginal growth in recent years, and the state of Victoria actually now in declining vehicle ownership per capita.

1. Looking at annual passenger car kilometers per capita, we see an even more pronounced trend. With a knee point occurring across Australia in 2004, there is a marked reversal in the trend, flipping from growth to contraction, and with year on year decreases continuing to occur in most states in the following years. It’s important to note here that this trend began a decade before the new forms of mobility even existed; instead, the Census data is showing us that “mass transit use has grown much faster than car use in Australia’s three largest cities. In Sydney and Melbourne it has exceeded population growth also.” My read on this is that as public transport infrastructure has improved and vehicle ownership costs and congestion has increased, more and more people are reaching the tipping point where ditching vehicle ownership becomes a real alternative. With the arrival of new mobility options now providing even more choice, flexibility and affordable options, this trend is almost certain to accelerate. The big unknown in all of this is therefore in quantifying where the bottom is. How far might the market for new vehicle sales contract in the coming 5, 10, 15 or 20 years? The answer no doubt will depend on many factors, but critical ones are likely to be the unique transportation challenges in each city and each suburb, differences in cultural approaches and norms to transportation, and the extent to which individual governments invest in improving public transport and proactively support the growth of new mobility alternatives.

Ok, so the trends are clear, but how will they negatively impact profitability for the motor services industry? Well this one is obvious. Reduced levels of vehicle ownership directly results in reduced revenues from new vehicle sales/leases and reduced revenues from subsequent vehicle servicing, repairs and spare parts sales. It is also likely to put pressure on the market size for vehicle accessories and customization, however one could reasonably expect them to be less sensitive to these trends, because consumers who are passionate enough about their vehicle to accessorize/customize it will be much less easily swayed to give up on vehicle ownership altogether.

Trend #3 – Increasing capability & deployment of Advanced Driver Assistance Systems, leading eventually to Autonomous Vehicles (AVs)

The Society for Automotive Engineers (SAE) has defined 6 categories that define the path to fully autonomous (or driverless) vehicles. As the graphic below shows, these categories are split into 2 groups, where Levels 0-2 are defined as driver support features (or ADAS – Advanced Driver Assistance Systems), and Levels 3-5 are defined as automated driving features.

When (or indeed whether) we’ll ever achieve Level 5 autonomous vehicles is still a hot topic of debate given the seemingly endless types of road and traffic conditions a true go-anywhere-anytime driverless vehicle would need to be capable of. On one side we have people like John Krafcik, CEO of Waymo (Google’s Autonomous Vehicle unit, arguably the most advanced such operation) stating in January this year that Level 5 autonomy may never really be achieved because "Autonomy always will have some constraints", and that even then we won’t see widespread deployment for "decades". On the other side we have Elon Musk, CEO of Tesla, stating almost the opposite just this week, claiming Tesla will be ready next year to deploy a fleet of fully autonomous “robo-taxis” and that he can do this without the need for expensive Lidar sensing technology that practically every competitor is assuming to be a necessity. Who will be on the right side of history? Only time will tell.

However what is not in dispute is the trend of increasingly deployment of the lower tier driver support technologies, with more and more mainstream mass produced vehicles gradually moving further to the right on this scale. Indeed a study by McKinsey in 2016 found that revenues for ADAS technologies were expected to grow annually by around 10%, “fueled largely by regulatory and consumer interest in safety applications that protect drivers and reduce accident” and for example that “...both the European Union and the United States are mandating that all vehicles be equipped with autonomous emergency-braking systems and forward-collision warning systems by 2020.”

So as the interest and pace of ADAS deployment accelerates, what will that mean to the Automotive Services Industry? Well although we might call these driver “assistance” or “support” features, the intent is clear – they exist for safety; to minimize the likelihood and/or severity of accidents and eventually (hopefully) eradicate them. Of course this is a good thing we should all work towards, both for ethical and economic reasons, but a consequence is that body repairers and painters will begin to see pressure on their revenues, while service centers and parts suppliers will also come under pressure from reduce revenues associated with sales of spare parts to replace damaged items.

End of Part 1. Part 2 coming soon: Finding The Opportunities