While 2015 saw record auto sales of 17.5M in the U.S. (1), Plug-In Electric Vehicle (PEV) sales actually declined to ~115,000 from ~120,000 in 2014(2). PEVs represented a mere 0.65% of 2015 auto sales. By contrast, the Netherlands saw PEV sales as a proportion of total auto sales rise to 8.50% in 2015(3). Why is the U.S so far behind? The answer may lie in how Americans purchase their cars.
Americans purchase their vehicles in one place: the local auto dealer. As the auto industry developed in the 1930s many states enacted laws preventing the direct sale of automobiles to consumers and the auto dealer business was born. For years manufacturers have been prohibited from selling directly to consumers and forced to give dealers exclusive rights to sell their brands in certain geographies. We, the consumers, have had to buy cars from irritating salesmen ever since. On the surface, the exclusive rights to sell cars in a given geography might sound like a good racket. In practice, however, dealers make very little money selling new vehicles. Consider America’s largest chain of auto dealers, AutoNation. In 2015, AutoNation sold 339K new vehicles for $12B. However, the company only made a 5.7% gross margin on these sales, or $682M in gross profit. Moreover, an irritating car salesmen kept a commission on these sales, a meaningful expense buried in the SG&A line, meaning the operating profit associated with new car sales is much less than the $682M in gross profit the company records. So where does the dealer actually make money? Not on the sale of the car, but rather on the servicing of the vehicle. In the years after you buy a car, you bring it back to the dealer for service because the warranty only covers service done at a franchised dealer. The dealer services your car at no cost to you (but inevitably convinces you that you also need service not valid under the warranty), and the manufacturer reimburses the dealer for warranty work. In 2015, AutoNation recorded ~$3bn in service revenue, and ~$1.4bn in service gross profit. Service contributes 2x the gross profit of new car sales, and if we had sufficient disclosure to allocate SG&A by segment, we’d see that, due to commissions on car sales, service is an even greater proportion of operating profit than gross profit as AutoNation treats technician compensation as part of service COGS and sales commissions as part of SG&A. So what do dealers care most about? Service.
But what does the profitability of dealers have to do with PEV sales? Everything. Dealers make all their money servicing traditional vehicles. PEVs require less service than traditional vehicles and dealers don’t have the expertise in servicing them. Hence, the lifetime value of a PEV is lower to the dealer than that of a traditional. Dealers push traditional and American consumers buy fewer PEVs than do Dutch consumers. Forest McConnell, dealership owner and former Chairman of the National Automobile Dealer Association likened selling electric cars to forcing customers to eat broccoli [electric cars] when they really just wanted low-calorie doughnuts [fuel-efficient traditional vehicles](4). However, when we consider McConnell’s incentives his aversion to electric cars likely has less to do with consumer preference and more to do with the fact that he makes more money selling “doughnuts” than “broccoli.” Because dealers are the primary channel through which Americans purchase vehicles if dealers, like McConnel don’t want to sell electric cars, it’s tough for Americans to buy them.
Moreover, dealers have been actively lobbying to keep their exclusive rights to sell cars in their territories. Unlike dealers, Tesla is motivated to push electric cars, but franchise laws limit Tesla’s ability to sell outside of the dealer channel. While Tesla has had some success in getting states to ease franchise laws and allow Tesla to open its own stores, dealers are pushing back. This past March the Virginia Automobile Dealers Association sued Tesla claiming that the company was in violation of the state’s franchise law(5). Moreover, state legislatures do not always side with Tesla. Earlier this year, Michigan rejected Tesla’s bid to become a licensed dealer(6). Is anyone surprised the Michigan legislature sided with the dealers?
Ultimately, for the PEVs to achieve meaningful market share in the U.S., policymakers need to address the fact that incentives in the auto sales channel are simply not aligned with policymakers’ desires for greater sales of PEVs. To promote PEVs, policymakers must more aggressively override franchise laws opening up the auto sales channel, or pursue some sort of subsidy program to reorient dealers’ incentives.
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- Phillips, David. “U.S. Auto Sales Break Record in 2015.” Automotive News. Automotive News, 5 Jan. 2016. Web. 03 Nov. 2016.
- Voelcker, John. “Plug-In Electric Car Sales For 2015 Fall Slightly From 2014.” Green Car Reports. Green Car Reports, 20 Jan. 2016. Web. 03 Nov. 2016.
- Ayre, James. “Electric Car Sales = 22% Of Car Sales In Netherlands In December 2015.” CleanTechnica. CleanTechnica, 07 Mar. 2016. Web. 03 Nov. 2016.
- Woodall, Bernie. “Virginia Auto Dealer Group Sues Tesla to Stop Second Store in State.” Reuters. Thomson Reuters, 09 Mar. 2016. Web. 03 Nov.
- Geuss, Megan. “Tesla Wants to Sell Cars Directly in Michigan, so It’s Suing State Officials.” Ars Technica. Ars Technica, 22 Sept. 2016. Web. 03 Nov.