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Doom & Gloom? Self-Driving Cars and Dealership Valuations…

By Jeremy Alicandri on Mar 5, 2013

Dealers should consider the effects of self-driving technology in their 10 to 15 year plans.

Five years ago, the self-driving car seemed like something limited to an episode of the Jetsons. But then Google changed history, and built an autonomous car that proved safer and more reliable than its human controlled counterpart. Then in 2011, Google began convincing legislatures in Nevada, Florida, and California to allow Google’s autonomous cars to roam without a driver.

Depending on regulations, analysts predict the self-driving car will populate US roads within the next 12 to 20 years. While the self-driving car will bring society innumerable benefits, dealers may find that self-driving technology will disrupt the entire retail automotive sector.

But what about America’s passion to drive?
It seems the passion is fading among the next wave of buyers. According to Time Magazine*, in the next 10 years, 40% of new cars sold will be sold to Gen Y consumers. Gen Y consumers already prefer an iPhone over a car, and even view auto ownership as “uncool.” As one industry analyst explained, “Owning a car is thought to be very stupid by Generation Y and they are moving from car ownership to renting. The business model of the future is to rent. Today it’s not cool to own a car.”

Gen Y’s Take on Car Ownership? ‘Not Cool’: *http://business.time.com/2012/05/02/gen-ys-take-on-car-ownership-not-cool/

Moreover, despite what seems to be declining interest in automobiles by the next wave of buyers, it’s easy to predict that the societal benefits of self-driving cars will force autonomous adoption in most markets. While some drivers may enjoy the freedom and thrill of the open road, their personal needs will quickly be challenged by the need for the betterment of society. For better or for worse, it seems probable that in certain markets, only autonomous cars will be allowed on the roads.

Unit Sales per Dealership result in Historically High Profits
I recently attended a NADA 2013 workshop hosted by Erin Kerrigan, the Managing Director of the industry broker Presidio Group. Erin predicted that average unit sales per dealership in the US will reach 856 units/dealership in 2013 – an all-time high. As Erin and others have explained, sales per dealership is a “key driver” in dealership profitability. Thus, unit sales/ dealership played a prominent role in causing average 2012 dealership profit to reach an all-time high as well.  But what happens if the mass adoption of the self-driving car lowers unit sales/ dealership?

It’s believed that after the initial rush to purchase the self-driving car subsides, unit sales/ dealership will decrease for most dealers, as the consumer’s need for more than one automobile per household will decrease(opinion: from the current 2.28 to less than 0.5). Moreover, with the expected lowered cost of public transportation and tendency of Gen Y buyers to rent vs. buy, we may even see a greater shift to on-demand public transportation. Moreover, there is the risk that brand differentiation will subside, or become “commoditized,” as the focus of car buyers will shift to easily mimicked passenger amenities (e.g. plush seats) – and no longer brand distinguishing characteristics (e.g. handling, performance). It’s feared that the “driving experience” offered by each brand will be replaced with the “cabin experience,” therefore paving the way for the massive commoditization of cars. These factors, while hypothetical, may force dealers to compete for declining demand in what will likely be an over-dealered environment.

By 2018… The potential for “Doom & Gloom” is still a few years away…
Five years from now, in 2018, the greatest challenge for car dealers will not be self-driving cars. I predict, as well as many others, that dealers will be challenged by the necessity to revamp their variable(sales) processes to reflect the consumer’s demand for no-haggling and transparency. In addition, dealers will be pushing to be more profitable in their service departments, as warranty reimbursement will continue to dwindle. While the arrival of the self-driving car will be closer by 2018, the economic effects will still be unfelt and will remain years away.

However, during the early to middle years of the next decade, we may begin to identify small declines in dealerships values as the perceived effects of self-driving cars could begin to affect blue sky values and other aspects of the industry (e.g.  OEM credit risk ratings). Still, predicting this risk remains rather speculative, as no one can truly understand the future dynamics of this technology and how it will be implemented. At the minimum, dealers should be aware of this technology in their 10 to 15 year strategic plans, especially since “semiautonomous”* cars have already entered the marketplace.

In my opinion, dealers will continue to make acquisitions and invest in brand required facilities improvements for at least the next few years. According to Presidio, by measuring the Return On Invested Capital(ROIC) for most dealership acquisitions, we’ll find that the payback for purchasing a dealership is 4.5 to 6.1 years of pre-tax earnings. Thus, based on this data, investments in a dealership now or by 2016, should generate a positive return before self-driving cars even begin to enter the marketplace. Thus, despite the future uncertainty, it’s my opinion that car dealerships will remain a solid investment opportunity for the next few years.

Default and Necessary Disclaimers:

  • Opinions AND VIEWS SET FORTH HEREIN  are my own AND DO NOT REPRESENTS FACTS.   SUCH OPINIONS AND VIEWS COULD BE WRONG.
  • This blog does not provide financial advice, and should not be interpreted as such.

Comments

Love the vision Jeremy.

My thought has been along the lines of who these self-driving vehicles will be ultimately marketed to - I'm guessing they won't be positioned for people like you and me, but rather the blind and the handicapped. If this will actually happens, it should create more overall vehicle sales - another question to ask is where and how these vehicle will be sold?

Will there be a whole new layer of the retail market created with the addition of self-driving car dealerships?

Could these also make the job of the taxi driver disappear?

Mar 5, 2013

Eric,

Many will argue that the self-driving car creates too many benefits for society, thus the desire for certain individuals to drive could be considered selfish when compared to the benefits for society. Eventually, when accidents decrease, insurance costs decrease, traffic congestion decreases(imagine no rubbernecking), etc... then it will be difficult to justify any type of human controlled driving. And since Gen Y already appears to be "rent" generation, there may not be much opposition to losing this freedom.

I think many are hoping that a new layer of retail will be created, but others feel the industry will change as a whole. Yes, taxi drivers, and perhaps even the delivery man, could be replaced within the next 20 years. However, I'm quite certain there will be barriers to accomplishing this. And again, five years ago, I don't think I could have ever imagined seeing this type of change in my lifetime.

Jeremy

Mar 5, 2013

From my research there are GM, Volvo, Nissan and BMW/Continental indicating that they will have fully autonomous vehicles by 2020 and Google saying their technology will be in the public hands by 2017/2018. Then Google are talking about retro-fitting existing cars (District of Columbia draft laws indicate 2009 vehicles and later).
As soon as these vehicles are capable of operating unmanned then they can do work - which means that they can make money for their owner. At this point the new paradigm begins and private ownership plummets as autonomous fleets become a much cheaper and more efficient form of transportation for the average person.
Add all this together and you will see that the bottom could fall out of the second hand car market in a couple of years as people realize the new paradigm and only want post 2009 vehicles. Plus automakers will realize that the biggest market by far will be fleets rather than private owners. This scenario would be doom and gloom for dealerships in my opinion.

Mar 6, 2013

Hi Paul,

Thank you for sharing your insights, I understand you have experience in this field so I'm grateful you chimed in. I was not aware of the 2009 restriction, you brought up a very interesting point. I'm curious to see if this gains more traction.

Jeremy

Mar 6, 2013

While evolution is inevitable in every business....rarely does revolution happen. Especially in a multi-layer complex industry like Automotive Retail. The assumption that the average vehicles per household will drop to 0.5 (thus decreasing the value of franchised dealers) is unlikely due to the fact that the US is a lawsuit happy Country....after the first person dies from a Driverless Car accident (which will happen....even the best computer and programmers in the world cannot program for every single possible series of events....if that could be done that computer should replace our Federal Government not Drivers) no OEM or Tech company will take the liability of letting their products go Driverless (aka the driver then has liability...not the Company). Thus average vehicles per household will not be able to drop to such low levels (Mom needs a car to take the Kids around and Dad needs a car to go to work still).

Mar 12, 2013

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