What will 2022 hold for dealers?
Barring any shocking external events or radical movements by the federal government, which includes either Washington, D.C., government or the Fed itself, 2022 has the potential to be a historic year at the retail level. It has the potential to be. That’s with a lot of caveats. The world is very fragile these days. And we know we don’t have a great history in the United States of easing our way through difficult times economically.
It’s really not our style. We’re more like a bull in a china shop. But let’s say that the Fed carefully moves up rates a little bit at a time without jolting the market too much. We have a lot of pent-up demand in the market right now. And if you go back to previous recessions and economic shocks, the difference is that we don’t have a demand-driven recession; we had a supply-driven recession, and the demand is locked in and ready to go.
But there are risks: if prices go up excessively, or interest rates go up excessively, or we have a collapse in used-car values dragging down equity. There are a lot of caveats sitting inside of here. But with all of that, I would say the probabilities are favorable to 2022 being an outstanding year, perhaps a historic year at the retail level. At the OEM level, they’re not going to reach their full potential, but their margin is going to be the best they’ve ever seen, so that means the whole system is going to be in good shape.
What about Audi dealers specifically?
The fixed operation business returned. And we had some pent-up demand there as well from people who stayed home during COVID and came back for service. The used-car business was very stable, so we didn’t have the ups and downs of the used-car business during the year, and it was very manageable. And the low interest rate environment meant that our finance penetration went up as a brand. If you look at all those things, they lined up in a really healthy way for us as Audi dealers.
Audi’s shift to a full battery-electric vehicle lineup is gaining speed. What’s it going to mean for dealers and their operations?
I think we’re very enthusiastic about it. We feel like Audi has the right product for the right time. It has the right feel and look to it for what people want right now. We’ve passed a tipping point right now in America about how people think about EVs. They’ve made the decision: We’re going that way. That’s probably being driven by a lot of things. Almost every major company in the United States is now focused on some level of sustainability in their businesses, so there’s a sort of institutional language about this everywhere now. It’s not an outlier, it’s not a countercultural statement anymore; it’s a main line statement in terms of transportation. This new generation of vehicles are coming. They’re fun to drive. They’re very attractive.
You’re impressed by what’s coming?
Audi has the chance to be a real leader in this space right now with all that’s happening. They clearly made a major commitment globally, and I think all of us are looking at what’s the relationship between demand, ramp-up, how all that comes down the path. Audi is making a bold move, and as a company, they’ve been focused on design and innovation. So this is a big step for us. And you know, so far, our customers are responding really well in this present environment. It’s a strategic direction of value, so they’ve done it right: The cars are interesting, attractive, fun to drive.
What are people looking for in an EV right now? Not utilitarian-looking vehicles. That’s not what they want. They want to be fun. They want to have a sporty element to them, both in how they feel and how they look. It’s been the opposite of what a lot of people thought, that electric cars were going to all turn into appliances.
There will be opportunity as this transition occurs for dealers to sell those last gasoline-powered vehicles, I assume.
There are going to be people who want to buy that last internal combustion engine. We’re already seeing that now in the older sports car market. Our job is to respond to our customers’ desires to follow the current we’re in. Overall, the whole current of the United States is moving electric, but we know there’s a large portion of folks still quite interested in ICE-powered cars, and their [fuel economy] ratings are far better than they’ve ever been. So there’s plenty of folks who are going to do that for quite a while. I think there are 300 million of them on the road. There’s a lot for a long time.
Last year, spy photographers in Germany caught Audi testing what looked to be a larger three-row crossover, what we would refer to as a Q9. I won’t ask you to confirm it, but would Audi dealers in the U.S. like a larger three-row crossover?
So I would say it like this: It is apparent that the United States has made a fundamental shift from sedans to crossovers and SUVs, and there’s no returning back to sedans, at least that I can see. Once we make that move, all brands need to have a full range of products in the SUV world that they had in the sedan world if they’re going to compete and, in the end, retain all the customers.
Last year, you talked about setting up “foundational commitments” for how Audi and its dealers were going to work together. Tell us about the progress.
We had great progress in 2021. We worked together on a number of issues where we started far apart, and we listened, we adjusted, we tested things, and we reached agreements together. Some of them were on really big issues, where we believe Audi and its dealers together have the potential to create distinctive value for customers, as opposed to just one or the other, which actually hurts us. We started with that in mind and asked what that looks like every step along the way. We looked for places where we could co-labor together, where there was a goal that neither of us could achieve on our own. We have a whole list of projects that we’re working on right now.
Every brand is grappling with digitalization, data-share agreements, all these kinds of things along the way. Compensation for technicians in working on EVs. If we’re gonna do this, these are the things we have to grapple with. Nobody’s happy with the chip shortage, but we’re not gonna change it on our own. Same with logistics issues. So what are the things we can be looking at, that we look at and say what could change? What does it do? How do we do this? How do we think about cost, value creation? This is the kind of level of collaboration that we might actually try to do. And when we get together, everybody doesn’t hold hands and hug each other; that’s not how it actually works. You start with people’s points of view, their positions, and we talk. We’re in agreement 80 percent of the time, and we’re negotiating the other 20 percent.
When the microchip shortage and production curtailments finally abate, what practices from the last two years need to be continued and improved?
Deep pipeline selling needs to be maintained, and it needs to be improved, with real clear visibility all the way back to the plant and engagement with the customer all the way through the process, so that we can really get into preselling cars and allowing customers to see exactly where their car is when it’s coming, and have real confidence all the way. That radically changes the retail rhythm in our business, and we have proven that we can do it, and frankly, as technology improves, we ought to be able to do it better and better and improve it further. Think about reserving cars way back at the plant, being able to put your name on it when the customer buys the car; there’s so many things you could do, once you get creative in the beginning, to say that this is core to how we should conduct business in the future.
Are there things you’d like to abandon?
Yeah, never knowing where your cars are! Not knowing when they’re coming; nobody knows where they are or when they’re going to show up. This is a $6 trillion industry running like it’s a mom and pop operation. “Hey, we’ve run out of toilet paper. Run down and get some more toilet paper today!”
Just tell us where everything is, in real time. I don’t think it’s impossible.
Are dealerships forever changed by these circumstances?
What we miss right now is that the energy from being inside of a showroom doesn’t exist, and so we all welcome that coming back. You know, there’s no cars in the showroom, there’s no cars for the customers. It’s just a whole different kind of experience along the way with that.
The last thing I would say is that the thing we want to keep up is the push toward classic omnichannel, where a customer can start and go transact — it doesn’t make a difference how we do it. Salespeople morph more into navigators, helping the customer navigate where they’d like to be, intervening at the pace at which the customer wants them to or not. We’re well on the way to that as an industry.
What pressure do Audi dealers feel from Tesla and the way it does business with customers?
When we look at Tesla, we want to always challenge ourselves.
Customers are choosing Tesla, and there’s two reasons for choosing Tesla: one would be the vehicle itself, and one would be the process of buying a car. We need to make sure we’re not the reason that they’re buying a Tesla, so we have to look at everything we do in our sales process to ask: How close are we matching Tesla to what customers value that Tesla’s doing, and then what can we do more that Tesla cannot do? You have to have a radical customer-centric mindset, transforming ourselves into those kind of businesses which are technology-driven, people-enhanced. And so that’s our formula for the future.