AutoMobility Insights - August 2024 edition

We have argued persistently that a more integrated downstream, between the NSC and Dealers, not only makes sense, but will be necessary to take out significant cost and achieve more impact. The heavy setbacks witnessed in the introduction of the agency model highlight the complexity for OEMs to fully take over dealer roles. It is becoming increasingly clear that successfully implementing an agency model requires a common playbook with dealers-to-be-agents, to avoid interrupting customer impact and local efficiency. This involves shifting the operating model towards seamless integration of existing systems and end-to-end processes, while ensuring effective data-sharing between OEMs and dealers. Which increases distribution capabilities / efficiency, but also simply "replaces" the dealer in the host of local tasks he accomplishes. Central pricing had been one of the drivers for considering agency models, avoiding inter-dealer cannibalization. It can however also lead to massive losses in price-sensitive periods, or by not respecting structural differences in preparedness-to-pay across regions. Our interpretation of events in a nutshell: If a functioning agent model is optimal, a streamlined dealer model is superior to a dysfunctional agent model.

After delaying the roll-out of its agency sales model in in multiple European markets at the end of last year, Stellantis has decided to again postpone its implementation in Germany until at least 2027. This decision is due to significant challenges encountered in its pilot markets Austria, Belgium, and the Netherlands, showing substantial setbacks with declines in market share. 
 
In Belgium, market share dropped to 11% (vs 25% in 2019), with brands like Opel and Fiat experiencing significant declines of -40% and -39% respectively, while similar trends affected Opel and Peugeot in the Netherlands. Key issues include IT system problems, unclear processes (e.g., for marketing campaigns or exhibition vehicles), and a lack of customer understanding regarding newly introduced fixed car prices with no possibility for discounts. Within Stellantis, these challenges have raised concerns about the agency model's viability and readiness, prompting a cautious approach. Before fully implementing the agency model in Germany, Stellantis plans to conduct a pilot phase with selected dealers to ensure all systems and processes are functioning correctly.

Overall, this postponement mirrors broader industry trends, as multiple automakers are also postponing or moving away from their agency models (e.g., Jaguar Land Rover) due to operational hurdles and market resistance.

CVA perspective:

We have argued persistently that a more integrated downstream, between the NSC and Dealers, not only makes sense, but will be necessary to take out significant cost and achieve more impact. The heavy setbacks witnessed in the introduction of the agency model highlight the complexity for OEMs to fully take over dealer roles. It is becoming increasingly clear that successfully implementing an agency model requires a common playbook with dealers-to-be-agents, to avoid interrupting customer impact and local efficiency. This involves shifting the operating model towards seamless integration of existing systems and end-to-end processes, while ensuring effective data-sharing between OEMs and dealers. Which increases distribution capabilities / efficiency, but also simply "replaces" the dealer in the host of local tasks he accomplishes. Central pricing had been one of the drivers for considering agency models, avoiding inter-dealer cannibalization. It can however also lead to massive losses in price-sensitive periods, or by not respecting structural differences in preparedness-to-pay across regions. Our interpretation of events in a nutshell: If a functioning agent model is optimal, a streamlined dealer model is superior to a dysfunctional agent model.

Zenith’s is one of the leading independent LeaseCos in the UK, particularly active in the EV space. 41% of Zenith’s 60k funded vehicles are BEVs, 44% of its order bank. Its performance has been impacted by weaknesses in used car prices, in particular BEVs, as shows the publication of its results of the financial year ending March 2024.

Its turnover increased by 16.1% to £788.4 million, also boosted by growth in corporate schemes, such as salary sacrifice. Gross profit was down over 20% to £137.3m. A decrease of remarketing profits by 40% was due to an overall weakening Used Car market, but especially due to massive decreases on BEVs. Also, Zenith stated an impairment loss on fleet vehicles of £51.4m. Interestingly Tim Buchan, Zenith’s CEO said according to FleetNews that ensuring a healthy balance of BEVs and ICE vehicles helps driving the success of the company.

CVA perspective:

In all markets, Corporate fleets are the spear tip of the EV transition, both due their need for decreasing the CO2 balance, but also to their capability to afford more expensive vehicles (at least partially). Their “EV Transition Front-Rider” role is exposing them to serious risks, due to the decreases of EV Used Car prices, even more pronounced than those of EV New Cars prices. Taking the tangible assets (£1.03bn) from Zenith’s balance sheet, and 41% BEV share, £51.4m of impairment losses likely represent ~10% of BEV asset value. If this hurts with 40% EV share, it would be catastrophic at 80%, not to mention 100%! LeaseCos have not yet found their EV model, which leaves them extreme choices to “stay away”, impacting market share and portfolio size. Or to fully engage with an ill-adapted model, which opens existential risks. Or yet, to take a balanced approach as suggested by Tim Buchan, which will however limit their capacity to accompany the EV Transition. Opening the question: If LeaseCos don’t pick up the structural need for operating lease of EVs, who will?

Volkswagen is partnering with Rivian to overcome software challenges in its EV development. This collaboration involves an investment of up to five billion dollars and focuses on integrating Rivian's technology into VW's future vehicles. Rivian’s innovative software architecture organizes vehicle electronics into zones with fewer control units, reducing them from 17 to 7 in its latest platform generation. This efficiency and scalability are crucial for VW, which has faced delays and challenges with its in-house software development, impacting model launches. This joint venture continues VW's strategic shift towards eclectically leveraging external innovation to stay competitive in the evolving EV market, a shift preceded by the investment in XPeng for the critical Chinese market. The partnership provides a cost-effective solution to enhance VW's software capabilities while supporting Rivian’s financial stability amid ongoing losses. By collaborating with Rivian, VW aims to improve its software efficiency and maintain a competitive edge in the EV market.
 

CVA perspective:

For incumbent OEMs, software development has become a core competency difficult to acquire. After an ambition to create this competency in-house, with Cariad, VW now takes a more pragmatic route, as time is running out. Already earlier, VW has invested in XPeng, to co-develop software for the brutally fast Chinese market, also to radically reduce costs cutting the development time by 40%. All incumbent OEMs need to catch up with Chinese competitors like Xiaomi (have a look at the SU7 !), who seem to set a new standard with cheap, performant and entertaining vehicles. And it is likely that EVs and younger generations will increasingly shift European market expectations away from "noise, smell and vibration" towards features, entertainment and comfort. Partnerships can bridge transformational gaps vs new industry players like Xiaomi, Tesla... by bolting on expertise and competencies, at a moment when there is no more time to learn and experiment.

Renault's electric vehicle division, Ampere, is set to revolutionize its battery strategy by incorporating lithium iron phosphate (LFP) batteries, shifting from the more expensive nickel-cobalt-manganese (NMC) batteries. LFP batteries, once criticized for low energy density, have seen significant advancements. For example, CATL has recently developed an LFP battery capable of over 1,000 kilometers range, demonstrating substantial improvements. Ampere plans to fast-track the integration of LFP batteries, expected to commence by 2026 Ampere's new strategy involves forming a robust European supply chain with CATL supplying LFP cells from its Hungarian plant and LG Energy Solutions providing both NMC and LFP cells from Poland.  This approach will satisfy the needs of the Renault and Alpine brands up to 2030. The battery assembly will occur at Renault’s facility in Douai, France, without a module level, utilizing cell-to-pack (CTP) technology to enhance efficiency. Ampere plans to reduce battery costs by 20% by 2026 and overall vehicle production costs by 40% before launching the next generation of vehicles. The goal is to achieve price parity with combustion engine vehicles by around 2027/2028.

CVA perspective:

Ampere's decision to incorporate Lithium Iron Phosphate (LFP) battery technology represents a significant change in Renault's approach to electric vehicle (EV) production, aligning with the industry's shift toward more cost-effective and durable battery solutions. This change addresses market volatility and technological advancements and positions Ampere to reduce costs and enhance vehicle profit margins. Establishing a European value chain, including partnerships with CATL and LG Energy Solutions to supply LFP cells, emphasizes Ampere's dedication to strengthening industry relationships and bolstering its supply chain resilience. This strategy is complemented by the introduction of cell-to-pack technology, which streamlines battery assembly processes and further reduces costs. Ampere's forward-looking battery strategy aims to mitigate risks associated with expensive battery chemistry and capitalize on emerging opportunities in the EV sector. This shift is expected to drive significant growth in EV production, aiming for one million electric vehicles by 2031 and expanding market presence in regions beyond Europe.