The world is transitioning towards electric vehicles (EVs) and as a result, the demand for traditional internal combustion engine (ICE) vehicles is decreasing. While ICE dealers have survived for several decades, many EV dealers have closed down in the past couple of years. This article explores the reasons behind this phenomenon.
Most traditional ICE vehicle manufacturers receive multiple applications for dealerships because they are considered very lucrative.
The dealers’ intent is taken into consideration while doing due diligence by manufacturers. Traditionally, for ICE vehicles, the dealer margin is between 3 to 4% of sales. With ICE vehicles, one major investment is the infrastructure, which includes a large showroom and service area with investment in diagnostic and repair equipment. In addition to vehicle inventory, dealers need to maintain spares, slow and fast-moving.
It may be difficult to comprehend how there is a rush to obtain dealerships of reputed companies with just a 3 to 4% margin and how the dealerships manage to remain profitable. An important factor is that the volumes are far higher with ICE vehicles. An average ICE two-wheeler dealer may sell around 10,000 units per year, translating to revenues of Rs.100 crores. Even though gross margins may be only 3 to 4%, the net margins would be about 2%, which is considered healthy given the high revenues.
If we compare this to most EV dealers who have had to close down in the past, a few distinct differences come to light. Vehicles were being supplied by so-called “manufacturers” with absolutely no knowledge of how to run an automobile company.
In fact, manufacturers would compete with each other to appoint dealers in an overcrowded market, with the result that most dealers were dealing with multiple manufacturers at any given time. Whether it was the dealer or the manufacturer, the main criteria were to offer the cheapest available product and retail it at the highest possible price! Long-term business planning wasn’t the goal; short-term profitability was the focus. The dealer margins for EVs are/were about 8 to 12%, three to four times that of their ICE counterparts! Spare parts support from manufacturers and dealers remains a low priority.
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None of them understood the dangers of using cheap cells in lithium-ion batteries. With stark differences in approach between established ICE dealerships and the newer EV manufacturers and fly-by-night EV dealers, it is no surprise that so many dealerships closed prematurely. This is in spite of EV dealers investing just 5% of ICE dealers but enjoying much higher margins.
Ultimately the customer suffered, and EV sales growth has been affected.
Going ahead, many existing ICE dealers would be opening up EV dealerships with manufacturers announcing EV models. Existing EV dealers who are serious about long-term sustainability realize that to succeed, they would have to ramp up their infrastructure and be professional.
