In his opening address to the 2022 AADA convention the association’s chief executive James Voortman says the world has changed profoundly since the last dealer convention in 2019.
“Back at our last convention I had never worn a facemask, nor had I heard of Zoom, nor did I think it possible that we could close our borders to the outside world and even lose the right to travel interstate,” Voortman says.
“In 2018, our industry was struggling. Profit margins sat at less than 1%. A third of dealers were making no profit at all. Supply of new motor vehicles exceeded demand leading to an incentive-driven discount war. The model was broken.
“Fast forward two and half years and the industry could not be more different. The pandemic unleased a set of forces we could never have expected which supercharged demand. An aversion to public transport, driving holidays replaced flying holidays, motor vehicle dependent home delivery businesses boomed.
“Furthermore, money became cheap, individuals were allowed to access their superannuation, business were given very generous investment incentives, house prices boomed seeing an increase in perceived wealth for many Australians. All of this led to a demand for both new and used cars.
“And while demand increased, supply went the other way. Initial factory closures and a subsequent critical shortage of semiconductors have cruelled supply and blown out delivery timelines. Russia’s invasion of the Ukraine has created pressures on global supply chains.
“For the first time in a while, certainly since we stopped manufacturing passenger vehicles in Australia, we are learning how vulnerable a small right-hand drive market at the end of the earth is in the long and complex supply chain that is the automotive industry.
“While this situation has put an end to the discounting that we saw pre-pandemic and greatly assisted dealer profitability, it has created a very difficult operating environment for dealerships managing impatient customers.
“This difficult operating environment is being compounded by an economy-wide skills shortage driven by the closure of pour international borders,” he says.
Changes at home
“The last three years have also seen some major developments in dealer networks and the franchising model,” Voortman says.
“Weeks before the pandemic took effect in Australia, General Motors announced that it was withdrawing the Holden brand from Australia terminating its 200 odd dealers in the process.
“Soon after Honda announced that it was terminating a substantial portion of its network and moving to the agency model. Mercedes-Benz followed suite adopting the agency model on 1 January 2022. Unfortunately for each of these case studies there is now legal action in train.
“I am certain of one thing and that is that no dealer craves going to court with their OEM. The Government has been watching these developments and over the course of the past two and a half years has introduced two tranches of reforms to automotive franchising,” he says.
Where are we going?
“In our industry, we constantly scan the environment and develop and adapt. Time and time again dealers have been exceptional at adapting to changing circumstances,” Voortman says.
“We have a changed Government which introduces an ideological change. It also matters because we are facing an uncertain and complex set of economic circumstances and an uncertain international environment.
“The election result has brought climate change to the fore and we can expect our industry to be asked to do more. This means a focus on such areas as a vehicle emissions standard, but also incentivisation of electric vehicles. We have already seen state governments provide subsidies for EVs and the new federal government will be cutting Fringe benefits tax and customs duty on EVs as of 1 July.
“We can expect more action on this front and while we as Dealers would love to sell an EV to every Australian, we do need to be realistic about the challenges. The supply chain issues we are currently experiencing apply even more to EVs which are seeing a surge in demand, but which require not only more semiconductors than traditional ICE vehicles but also a range of critical minerals which will in turn require a significant upturn in mining activity.
“All of this is possible and incredibly exciting with potential benefits to Australia as one of the world’s mining superpowers. However, we need to be realistic about when battery electric vehicles will become affordable and more widely adopted,” he says.
Supply chain and skill shortages
Voortman says both global problems will continue to have a profound effect on the industry.
“Of equal greater concern is the effect it will have at the economic level in terms of its contribution to lower productivity, but also its contribution to inflationary forces,” he says.
“Australia, like other nations across the world is experiencing high inflation, something we have not seen for some time. Interest rates will rise, house values could fall, and businesses will hold off on investing – all of which is certain to affect demand for cars.
“High inflation will also influence government spending as central banks and the treasury will be warning against putting more money into the economy. Programs such as the instant asset write off and apprenticeship funding which have benefitted our industry will come under pressure.
“When will our supply chain normalise? This is the million-dollar question and simply beyond our control. However, it would be wise when conducting scenario planning to factor in a possible situation where this runs longer than expected.
“I hope that we as an industry never go back to an oversupplied new vehicle market, because it wasn’t good for us, and I would argue it wasn’t always good for the customer.
Unlike, supply chain issues, the skills crisis is something that is not entirely outside of our control. Yes, we will be talking to Government on such issues as making our skilled migration program more responsive and more affordable. But there are strategies we can put in place to attract and retain staff.
“Frankly, I think this is an area we need to work closely with the OEMs on because staff shortages hurt us all. During negotiations with OEMs elements such as capped price servicing and warranty procedures should be discussed in the context of their effect on staff retention and the ability to adequately remunerate staff.
“In terms of our relationships with OEMs, the question is, will we see more fundamental changes to the model from some brands. I don’t know the answer, but what we have consistently said is that major changes to networks and franchising relationships need to be conducted fairly, transparently, in good faith and with compensation when appropriate.
“We are ready to work collaboratively in an open and honesty manner with OEMs.
“These are some of the challenges on the horizon, and there will be others in the form of issues such as consumer law changes, potential scrutiny on our finance and warranty operations, an outdated tax system and many others. But there will also be immense opportunity and I am certain that dealers will be ready to capitalise on those opportunities and successfully pivot where necessary,” Voortman says.
