Guest commentary: 3 auto industry trends to watch this year

For most industries, 2023 will sit heavier than a holiday meal. It will be a time to digest inflation, higher interest rates, supply chain woes, economic nationalism, war in Ukraine and a potential recession. For the auto industry, however, this year will be more like a triple espresso shot on an empty stomach: bitter for dealerships, energizing for automakers and anxiety-raising for electric vehicle adoption.

Three related issues are coming to a head. Automakers and dealerships, increasingly distrustful partners, are clashing over the future of direct sales. The unbundling of vehicle options into monthly subscriptions, potentially a massive source of revenue, could strain that partnership further. Meanwhile, a shortage of charging infrastructure for EVs — a significant barrier to adoption — could force automakers and dealerships to the negotiating table. Let's consider how all this could play out in 2023, the opportunities for mergers and acquisitions that may follow, and the implications for how marketing dollars flow through the automotive sector.

Legacy automakers envy the profitability of Tesla, the company that skirted U.S. dealer franchise laws to sell directly to consumers. Executives at Ford Motor Co. and BMW hint they, too, will introduce direct sales in the U.S. This threatens to turn America's 18,666 new-car dealers into delivery and service centers. Direct sales could also shift billions of dollars in advertising spending.

For years, Tesla took the lead in suing or petitioning states for the right to sell directly to consumers because it had no franchisees to anger and therefore nothing to lose. Legacy automakers are in a different position, as events in Australia illustrate. Starting in 2023, Mercedes-Benz is forcing Australian dealers to adopt an "agency model" under which the automaker owns all inventory, and dealers sell the vehicles at a predetermined price and commission. In response, 38 out of Australia's 55 Mercedes dealerships are suing the automaker for $650 million in damages.

In the U.S., keep an eye on Lucid Group's federal lawsuit in Texas to overturn the state's ban on direct vehicle sales from a physical location. Currently, Lucid can lease and rent its EVs in Texas, sell used vehicles and sell directly to Texans from out-of-state dealerships, but it can't open a dealership in the state. The suit filed on Nov. 1, 2022, alleges that Texas's ban "violates the U.S. Constitution's Due Process and Equal Protection Clauses," meaning the ruling could set a national precedent.

If the floodgates open for direct sales, the three tiers of auto advertising — automaker, regional dealer associations and individual dealers — will be disrupted. Automakers, which traditionally run brand awareness campaigns on national TV, will have to compete for clicks and digital sales across search and social media. Dealer associations and dealers will have to reassess their spending on local TV and radio. Will it still make sense to compete against their own automakers for sales?

The industry has big plans for subscription revenue but opposing ideas about how to generate it. One approach is to unbundle vehicle features into subscriptions. This idea has already hit resistance. In September, New Jersey state lawmakers proposed a bill that would ban charging a subscription for vehicle features that are already installed in the vehicle and able to function "without ongoing expense" to automakers, dealers or third-party partners.

As an example, New Jersey lawmakers cited heated seat subscriptions, which BMW infamously launched in South Korea last summer with costs ranging from $18 per month to $415 for "unlimited" access. The lawmakers argue that subscription components will raise the purchase price of a vehicle, whether the consumer activates the associated feature or not.

The opposite approach is to bundle the vehicle and costs of ownership into a monthly subscription that disrupts traditional leasing and ownership. Genesis, Jaguar Land Rover, Kia, Nissan, Porsche and Volvo are in this car-as-a-service, or CaaS, market.

So are venture-backed companies such as FreshCar, DriveGo and Autonomy along with rental car companies Hertz and Sixt.

The CaaS model seems promising. Let a consumer enter a credit card online with little or no money down. Bundle insurance, maintenance, registration, etc., with high margins. Give subscribers the right to switch cars monthly or yearly. Eventually, sell the used car.

Dealers are the obvious point for delivery, service and resale, which raises questions about how subscription revenue will be shared. CaaS also raises questions about whether automakers have the services, skills and technology to build direct relationships with customers.

Every automaker selling EVs has a common problem: providing enough charging infrastructure for EVs to scale beyond affluent, single-family homes. Dealerships might be part of the solution.

EVs represent less than 1 percent of the 250 million vehicles on U.S. roads. Edison Electric Institute, a trade group representing the power industry, estimates there will be 26.4 million EVs in the U.S. by 2030, representing 10 percent of the country's 259 million light-duty vehicles. Edison Electric Institute estimates the country will need 12.9 million charge ports by 2030, with 17 percent public and 83 percent private. There are 140,000 public ports in the U.S. today, and the Biden White House is promising 500,000 by 2030 — less than a quarter of the 2,193,000 public ports Edison Electric Institute recommends.

Software will ease the shortage. Level 2 (i.e., slow) charging ports in apartment buildings, airports, parking garages and public transit depots likely will use daisy chains and software so one port can charge multiple cars, prioritizing vehicles based on how often and how far they are driven. Software could also train ports to draw power from the grid when demand is lowest and renewable energy is most plentiful.

Daimler, Ford, Hyundai, Stellantis, Tesla and Volkswagen, among other automakers, will continue to invest in public charging networks that generate subscription revenue from members and recurring revenue from charge-ups. General Motors, additionally, wants to partner with its dealers on installing 40,000 chargers in their communities. According to GM, 90 percent of Americans live within 10 miles of a GM dealership.

Maybe GM realizes that America's dealerships can use their real estate as leverage when negotiating direct sales and subscription revenue shares. If automakers hold new vehicles and only deliver them to dealers after they're sold, then emptied dealership lots might be prime locations for DC fast charging.