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How Auto Dealerships Can Profit from Cheap Oil and Used Hybrids

Posted by Tom Lombardo | Wed, Apr 01, 2015 @ 03:30 PM

Given the ever-expanding variety of powertrains available and the increasing likelihood that Americans will be able to afford them, auto dealership owners and managers trying to guess what consumers will want in the next model year might be tempted to assume that the price of gasoline will be the most important consideration.

But knowing that it’s not the only one, lessons from the growth of the Internet might give us a more circumspect – and perhaps more accurate – understanding.

Didn’t See That Coming…

Oil companies always take a long view of their business because it can take decades to bring new sources to market. It’s worth noting that despite this, not a single one anticipated the phenomenal growth of U.S. shale oil production that has caused oil prices to tumble by half in the past eight months.

Now analysts at British Petroleum think it will be a long time before oil prices return to their historic highs. In fact, they think the U.S. might become self-sufficient by the 2030s.

Especially, they say, if energy efficiencies continue to improve, and that’s directly related to sales of alternative powertrains.

So, if we compare the development of the Internet to the development of hybrids and electrics, we might get a glimpse into the future that can help us anticipate demand.

It Grew How Fast?

The Internet’s commercial start date was 1989, when the TCP/IP protocols that make the whole thing work went international. That’s also the first year American businesses could buy commercial access.

Since the development of the Internet depended upon the development of the personal computer, the two didn’t really work together at practical speeds until fifteen years later, enabling Facebook and YouTube to emerge in 2004 and 2005 respectively.

Then what happened? Well, this map showing how many people are connected to the Internet worldwide should blow your mind:

We might consider 1989 analogous to the first commercially available hybrid, the Toyota Prius, which came out in 2000.

Incredibly, alternative powertrains developed faster than the Internet, probably because a lot of people didn’t “get” the web at first, while everyone understands that a high-mileage car can save them gas money.

We’ll return to the price of gasoline momentarily, but first let’s look at another interesting parallel. Tesla released its all-electric Roadster, with a six-figure base price, in 2009, so for most consumers it wasn’t until Nissan released the Leaf in 2012 that electric cars truly became available.

We might compare the Leaf to the first consumer-friendly internet-enabled smartphone: Apple’s iPhone, released in 2007.

And what happened this time? Well, here’s the percentage of each country’s population with a mobile Internet subscription:

Internet Connected Cars Subscriptions

Notice that in the developed world, over 100% of the population is signed up. It’s interesting to wonder if this is where hybrids and electrics will be by the time the U.S. hits British Petroleum’s self-sufficiency date of 2030.

Batteries and Bandwidth

That may depend upon the cost of gasoline. As you can see in the chart below, the whole time the Prius market was developing, the cost of gas continued to climb. If we skip over the recession, we can see that it somewhat stabilized between $3 and $4 – until U.S. shale production ramped up and it fell into the $2 to $3 range.

Cost of Gas

BP thinks it will stay here for up to a decade, and some analysts think that the drop has already negatively impacted demand for hybrids and electrics.

One argument they give is that the resale market for electrics failed to meet industry expectations. Nissan leased more than four out of five of the Leafs on the road, and Chevrolet leased about half of the Volts. They expected healthy end-lease resale values, but that hasn’t materialized.

Hybrid Resale Costs

 

This might reflect a drop in demand caused by cheaper gasoline. But it might be more complicated than that.

If we compare batteries to bandwidth, we might find that today’s electric car battery resembles the bandwidth available when Facebook and YouTube went online. At first, neither of them worked very well over common connections – especially YouTube, which would often take a few minutes to “buffer” the video feed before it could begin playing, and then it would stop during playback to do it again.

It’s All About Being Cool

When shopping for a used Leaf, today’s consumer will certainly know that after five years the battery will hold about 90% of the charge it could hold when it was new. If the car was driven in a hot climate, it decays even more. And since a full charge on a new car gave you a relatively short range – around a hundred miles – a 10% loss matters, especially since you know that at the eight year mark, when the warranty expires, the battery will hold only 80% of its charge.

So looking at a used Leaf, many consumers might incorporate replacing the battery – a $5,499 expense – into the price of buying or owning the car.

It’s at this point that we call into question whether or not the unanticipated drop in resale value actually has anything to do with demand.

It may be that tax incentives for purchasing new cars has a lot more to do with driving down that resale value. Buyers can get a $7,500 federal tax credit on a new electric, or they can take advantage of aggressively priced lease options. In both instances many consumers find that they can get a brand new car for not much more than the used ones were supposed to cost, which may also cause the used market to crater.

And let’s not forget the cool factor, either. As Facebook became essential to social life and YouTube matured into the Millennial’s favorite source of entertainment, consumers jettisoned slow computers and old-fashioned phones that couldn’t deliver the experience they wanted.

Getting a new car with the latest technology in a dynamically evolving market may have the same cool factor. Not surprisingly, now that Apple has perfected the art of generating mass demand for each new version of its iPhone, they're now entering the electric car market, perhaps to pursue that same “Buy the new one!” mentality but in a whole new market.

And what about those government incentives? Well, the Feds didn’t tax the Internet for decades, which contributed significantly to its phenomenal growth. If the incentives remain in place for the same length of time it may be wise to expect alternative powertrains’ used value to remain depressed.

Which isn’t to say that it will disappear altogether. In fact, people needing a limited driving range – say 80 miles or less – may look at these lower prices and conclude that now is the perfect time to pick up a used car. Make sure that when you close the deal and that customer tenders you a check, which happens in nearly 70% of car sales, that the revenue is guaranteed to you. Find out how today.

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Topics: Auto Dealerships

Written by Tom Lombardo