Will electrification impact on aftersales overhead absorption?
Likelihood of reduced workshop sales puts focus on incremental business to boost revenue
According to Mary Barra, CEO and Chairman of General Motors, the automotive sector is on the brink of a major disruption and car manufacturers are about to see “more change in the next five years than in the last 50 years.” Clearly, one of the fundamental shifts is from internal combustion engines to electric powertrains.
Research from the Boston Consulting Group suggests that the tipping point for electric vehicles is in sight with a combination of hybrid and fully electric powertrains expected to cut the global market of pure internal combustion engines by about 50% by 2030 from a share of around 96% today. Its research also acknowledges that fossil fuels will continue to play a major but changing role, as most electrified vehicles produced between 2020 and 2025 are expected to be hybrids, as emissions legislation becomes more stringent, in advance of a move to full electrification.
Electrification has the potential to impact directly on aftersales revenue, as routine tasks such as oil, air filter or timing belt changes become increasingly obsolete and customer visits become less frequent due to extended service intervals
This change is arguably already disrupting the market, as volume car brands grapple with newer entrants such as Tesla. As a result, these manufacturers are investing heavily in the technology and infrastructure required to remain competitive and avoid a ‘Kodak moment’, whereby legacy technology risks becoming obsolete.
It is recognised that electrification will have a major impact on the supply chain, such as the switch from engines to electric motors, the need for advanced battery technology and the charging infrastructure. However, the impact of electrification on areas such as the automotive aftermarket and service maintenance and repair operations is as yet largely unknown.
This is particularly relevant to dealers, as their business model relies on positive overhead absorption, whereby revenue generated by the aftersales department is used to cover the operating costs of the whole business with overall margin coming from vehicle sales. The higher absorption a dealer achieves, the more they can strengthen the resilience of their business, by focusing on aftersales to minimise the impact of fluctuations in new and used car sales.
To put this into context, electric cars have significantly less mechanical parts than their internal combustion-engine counterparts and therefore require less replacement components throughout their lifecycle. In terms of reduced complexity, electric cars possess around 11,000 components, compared to 30,000 for a vehicle with an internal combustion engine.
Electrification has the potential to impact directly on aftersales revenue, as routine tasks such as oil, air filter or timing belt changes become increasingly obsolete and customer visits become less frequent due to extended service intervals. Electric cars also use motors for regenerative braking, resulting in less wear and for dealers, less profitable brake replacement work. Interestingly, brake fluid services may well increase, as when brakes are used less, the hygroscopic fluid absorbs more moisture from the atmosphere. At the same time, motor retailers are also having to invest in their aftersales skillsets and specialised workshop equipment, in order to be capable of maintaining electric drivetrains.
The shift from hydrocarbons to electrons poses a challenge to dealers relying on aftersales profitability to absorb their overheads, as the decline of existing servicing revenue accelerates. As a result, dealers are already seeking alternative sales opportunities, such as incremental business through added value finance and insurance-related products, accessories and Autoglym’s market-leading LifeShine Vehicle Protection System (VPS).
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