Industry Trends Driving Change in Automotive Retail

Greg Uland: Cliff Banks, founder of the Banks Report, one of the preeminent industry publications on M&A, and a lot of that activity says Thanks so much for for chatting a little bit.

Cliff Banks: It's great to be here. Thanks for having me.

Greg Uland: Yeah, absolutely. So, Cliff, you probably are in the know as much or more than anybody else in the industry. So I just wanted to get your take on a few kind of hotter topics. I guess things that that have been around for a while but are not going away anytime soon. So the first one is really around inventory issues, chip shortage, supply chain at a high level. You know, what's your perception of that? Is it going away anytime soon? Where are we at?

Cliff Banks: Well, I think a couple of weeks ago, we would have had a different answer. But now, with the Russian invasion of Ukraine, it remains to be seen what it looks like. There's going to drag out for a lot longer and for so many factors may have a greater impact. And even the chip shortage does RITS has had over the last several months, certainly on the heavy side. I think the manufacturing of the wire harnesses that are critical to the heavy manufacturing should be, I guess, vehicles you're. The big question is, what kind of impact are we going to see on that? So it's going to be it certainly is going to impact, I think, the Eve plans of some manufacturers moving forward. The chip shortage, you know, such as the chip shortage, it's also a raw material shortage. The big questions are China what China does from me?

Greg Uland: Export import. Mentality and certainly what they do with.

Cliff Banks: With some of the materials that we get, we get from them. Hmm. And it's not just vehicles, it's across the board, right? I did. That impacts society as a whole. I think. Going a little bit different direction to just on the inventory. Is the gas prices continue to explode? Are we going to start seeing customers wanting to turn in their trucks or SUVs? I'm starting to hear some anecdotal evidence that that's the case already. So what is the second to do to? Vehicle prices today on the right, you see, you know, certainly, I think one of the biggest concerns a dealer. Has today. Certainly one that solves a lot of used vehicles is how to time that market, when when is that pricing going to start declining and you don't want to be sitting on an inventory full of these vehicles when the market goes south? So. That's I think that is the an immediate concern.

Greg Uland: Yeah. So let me ask you about that, sir, because we were talking about that two years ago, right? April 2020.

Cliff Banks: April 2020. Oh yes. Sure. OK. OK, thanks. OK.

Greg Uland: All right, so so let's dig into that a little bit, right? So the U.S. Vehicle pricing and inventory levels and things like that, we've been talking about that since about April 2020, where when this falls off, it's going to be bad. Yes, because we started seeing this climb April, May and it's like, Well, yeah, but it's a bubble and it's going to pop. Well, it has. It hasn't popped, right? So do you think it's going to be a pop or do you think it's going to be a gradual decline where it's a little more controlled? And or do you think it's not really going to go back to what what it was?

Cliff Banks: I'll be honest, I don't know. And that's the problem, I don't I don't think anyone really. You're right. Has has a good answer there because we don't know what's next, what's going to happen next week. Or tomorrow? Yeah. You know, I think we're in a world right now that is uncertain. Not just from an automotive manufacturing perspective, but also just from a world perspective. We had COVID. I think, you know, any day we could wake up. I don't want to be down or pessimistic, but it looks really easy. You can wake up and not have access from ERA perspective. Yeah, you know, I mean, cyber war cyber warfare is a very real thing that's going on and. You know, the war in Ukraine spreads to other parts of Europe. So I think again, dealers. Dealers seem to be nimble and need to be able to pivot quickly. You have to pay attention to what's going on both in your local market. Yeah, certainly because I think there's there's a lot of things that we may be talking about nationally or internationally that maybe aren't impacting. The local market, but then again, there are some local markets are going to be on the leading edge, right? Sure. And it just, you know, paying attention to what's going on in the world. Yeah, and it being. Ready to act quickly. Having the mechanisms and processes in place to get our plans in place to offload that inventory fast, if you have to fix it, I'll tell you when. You know, it was interesting watching the inventory levels of a caravan at CarMax and so many others when we first started entering the pandemic. Date unloaded vehicles very quickly before anyone else really knew what was going on. So they were on top of it. And now they had to go back in inventory at a much higher price, so maybe didn't work today. But again, it's to the point of the uncertainty that I talk about often right now you have the uncertainty long term of manufacture strategies with dirty potential strategies of direct to consumer. What you your how he's going to impact retail network. But any connected vehicle, which I think is going to have a huge impact over time, but right now. That's amplified a thousand times because of the uncertainty of what's going on in the world and its day to day uncertainty.

Greg Uland: You're right. So let's go there with with EVs, so electric vehicles. It's all you see in any advertisement, right? And dealers are prepping up and then they need to, right. It's coming. But at the end of the day, when you look at the grand scheme of things, how many new vehicles being sold are electric vehicles? And maybe more importantly, what percentage of used vehicles being sold are electric vehicles. You know what? What impact is this going to have where we go and kind of where we are today? How far out are we to? This is a real thing. I.

Cliff Banks: We're still in the world of hype. And much of what we see talked about for the manufacturers is really designed to to drive up investor interest in and create that message that, hey, yeah, OK, there's Tesla, there's lucid, there's Rivian, but we're in the same game, right? The manufacturing capacity on EVs with the Ford GM and others, right, still isn't there. Finally, Jim Farley announced this week that just last night, in fact, at a conference that I think day they have capacity for 200000 Lightnings. They have reservations for 200000, and that's all they're building. So I think she has a. So it may sound like next year, next month, the whole world's going to be. It's not it's still a gradual process, and it's certainly with some of the world issues going on impacting manufacturing. The Battery Street strategies, the battery still. Yeah, that's a huge deal. Yeah, that's why you're seeing manufacturers building battery. Factories here to us all over me, all over, so. And again, the other part to that is, are there strategies going to play out? Yeah, we don't know. But again, to your point which you mentioned the dealers. Dealers are being asked to invest. Hundreds of thousands, if not more, dollars into their facilities to prepare for this salami. Yeah, that's coming.

Greg Uland: So is there is there an opportunity, though, so they're going to invest this money? Yes. And and they're they're going to have to and a lot of ways they've had to do things like that all the time. But is there a good way for them to capitalize and shorten the return on investment on some of these things, especially with with certain manufacturers, maybe where they are going to allocate EVs to dealers? Are there ways for them to take advantage of this as an opportunity rather than, you know, to spend all the money and wait for the car?

Cliff Banks: Yes, I think certainly being able to. Understand. It's night in this search is an easy question today. It's also a question of overall inventory, how you're engaging with the customer. Mm-Hmm. And is there an opportunity for dealers to change their their model of engagement? Because the customer you order a vehicle, you're not going to get it for a year and you don't hear before the manufacturer or the dealership can the dealer. I think. Communicate and keep the customer updated in a way that the customer is not having to call and find out. I think the dealers, they can show that they have processes like that in place are going to be ones that winning the market is still a IT. It's still a. A world in which the dealers that are smart. Have the right processes. Are the ones that are going to win? Yeah. I mean, you see them and we're seeing that today still, even with even in this world, I mean, the dealers, they can figure out a way to to get inventory and write their dealers have done that. Absolutely. Yeah. So you having a plan in place? But. The main factor is going to have a much greater role in dictating what that retail process looks like. So understanding where the manufacturers are going and being able to set up your dealership. Finding the vendors, finding the solutions that will help you meet what are accomplished with the manufacturers dictating you're going to be a much better position as a dealer to get inventory and to be one of the the chosen few. I think at some level, many factors are going to have to determine and choose which dealers are going to get which inventory.

Greg Uland: You're right. I mean, you talked about the Ford Lightning, right? How many F-150 are sold each year, you know? Oh, yeah, 900000 million like that. Yeah. And so you're talking about 200000 cars over the next three years. You don't need the same dealer body to sell those. So.

Cliff Banks: Right, right. You just right. So he's allocation is going to be, you know, tough. And I think that's across the board with any menu, with any of the manufacturers and some of the heaviest coming out. Going to be a limited number to sell. Yup. Going for free for the next few years, at least so. Part of it is driven by the fact that you need to have profitability in these sales. Yeah. So, you know, I think the the ice engines, the ice driven vehicles are still very profitable, right? So at some point by the end of the decade, maybe they will supplant that, but it's

Greg Uland: still going to take a while. Yeah. When you see, you know, certain OEMs really taking the what? Well, it's the work that Tesla has done over the last five or six years with with the legislations in different states across the country and leveraging that to find ways to go either actually direct consumer or in a hybrid direct to consumer model. So when you see that, you know, what impact do you think that has a little longer term on on the dealership franchise model? Is there a concern there? Yeah.

Cliff Banks: Yes, certainly there is a concern. I don't know that we can have much clarity on how realistic that is until. We see how successful Rivian and Lucid and some of these other direct to consumer plays are doing. Certainly, Tesla's been successful to this point. But are they getting to a point where there's the number of sales or sales volume is going to be negatively is negatively going to impact a retail process? It's possible it takes a lot of money, an investment to to manage a customer relationship. So listen, if Rivian, if a couple of these, if direct to consumer models are successful over the next two three years, then I think that puts the franchise model at greater risk. If it does, if they're not successful, then I think that's that's going to be a, you know, I think that'll be beneficial

Greg Uland: to the franchise. So we're rooting against Rivian.

Cliff Banks: You know, he'd say, you know, want to repeat. I know I'm sensing, Yeah, but I think, you know, there's certainly things we can learn. Yeah, learn from companies like that. But I always think there may be things they may need to learn a lot more, you know, a lot more from from dealers. So I say, great, you guys have heard me talk a lot about uncertainty. Yeah. And it's and to me, that's as party uncertainty over the next few years is whatever how that model evolves. And I don't know that what the manufacturers are thinking it is going to be what they're thinking next year. That's true. Very troubling comments from Farley this week with Ford. I think Stillman's is also in terms of what the model looks like and the the value at which or the number that which they seem to have pegged the franchise model costs per vehicle. It's around $2000. They certainly are looking to reshape how they distribute and market vehicles. So I would think Tier two advertising could be IT be one of the one of the victims here. Weather data presented as direct to consumer, or it's we're going to tell. The dealers, how to sell the car or how to distribute the cars, and this can be an online platform is going to be online. One price only period we're going to dictate the price. You know, again, I think we may see different manufacturers approach it differently. But again, the dealers are going to have an FDA and state association is going to have a lot to say about what these new franchise contracts are going to look like. Yeah.

Greg Uland: So as they should?

Cliff Banks: Yes, absolutely. Yeah. Yeah.

Greg Uland: So thinking about that kind of franchise model, is there an impact that the tech in cars is going to have on that relationship between the OEM, the consumer and the dealerships? Do you think about how many pieces of the car are connected at this point? What impact does that have on that kind of triangle of the relationship?

Cliff Banks: Well, I do think the connected vehicle and as we quickly get into the air and it's going to be connected. More than ever, I mean, sure. So, yeah, so every vehicle coming on time is going to be connected and essentially able to I mean, every part at some point in that vehicle is going to have a sensor that's transmitting data to a cloud based platform ostensibly created by manufacture. Yep. You can have all that service related data. Now, if you buy buy a vehicle from a manufacturer, you're going to have probably download an app from habit. I love it. Yep. Yeah, you love it. Well, guess what? The data is going to be faster than necessarily to the dealer. So my point is the manufacturers are going to have much greater access to the customer than ever had before. So they're going to dictate the messaging they're going to dictate, you know, how that process looks. Yeah, and may impact service department activity also. And again. Different manufacturers are going to approach it differently, and different manufacturers are going to have different levels of execution. Again, you're buying this. This world demands manufacturing execution. With this data, and that's isn't always a given. As we've seen so many times in the past. So. But again, no, I think it's at the very least they're going to have access to the customer.

Greg Uland: Yeah, it'll be. It'll be interesting to see how it plays out because once you know that information, you can start doing things with it, whether you do or not, is the right your point. But as far as what happens in the future, but right when you have when you have the information, when you have the data, there's a lot of really cool stuff that can happen.

Cliff Banks: Right? In fact, as we have the technology today, I mean, to do that now, our industry is fragmented. There's a lot of work that needs to be done. But but the industry is moving there. You know, we're getting there slowly. The pieces? Yeah. You know, I, you know, I hope that, you know, that there's not a bigger player that is going to come in in. And dictate some of that right now. But. You know, this this I mean, this, this this thing is happening quickly, but it's not happening quickly. Yeah, there's a lot of talk about it, but again, it is, for example, to say GM and their EV plans, right? Yep. If you listen to Mary Barra, talk about the evils and listen to their investor presentations and what you would think that they're one of the leaders in electric vehicle manufacturing, well, L.A. auto show there wasn't one TV on this on the show floor in November. I think they sold twenty six total EVs in the fourth quarter. Now, as I say that they aren't laying the pieces, laying the groundwork would say clearly are yep, but still. That it's not it's not going to happen overnight.

Greg Uland: Right, right? No, you're right, you're right. Well, Cliff, you know, I could I could talk to you for hours. I really, really grew out of love. Love having conversations with you. But I want to be respectful of your time, obviously. So anything we haven't touched on that, that you want to chat about any of the rabbit holes you want to go down?

Cliff Banks: Well, no, I just think it's it's good to be back. IT NADA IT certainly seeing the energy we we are in such an uncertain, uncertain period of time. It's exciting. But you know, I think we we have an opportunity to really kind of. Shape what the future of the automotive industry looks like. And that's the people that are here, and that's what I think everyone's focused on. Absolutely. It's an exciting time.

Greg Uland: Yeah, it is. All right. Well, thank you very much for for taking the time to chat. I always, always appreciate the insight. Thank you, Cliff. Banks have a great need to talk soon. Great. All right. Thank you.