Observations on global changes that will impact Canada: Part 1 of 2

The IAA Mobility conference held in Germany recently was deemed a success with more than 500,000 visitors coming to see new vehicles, brands, innovations and trends.

Having moved in 2021 from Frankfurt to Munich, the automotive conference has reinvented itself to be focused on mobility per se, rather than merely showing new vehicles.

It also coincided with the German Statistical Office reporting a national record in car ownership, with 78 per cent of German households having at least one car and a national park of 48.8 million vehicles in the country. A far cry from concerns around peak cars and certainly a reason why ever more challenger brands are entering the market.

From a Canadian perspective the IAA showcased some emerging trends and innovations that likely will be arriving on these shores soon — if not already present.

The success behind the week-long conference, is the now established approach to have both a trade-based conference, alongside and an attractive consumer presence known as the Open Space, spread across various locations in downtown Munich.

Prospective new car buyers could walk throughout the city centre looking and test driving not merely the newest EV offerings from domestic and imported brands like BMW, Mercedes-Benz, Volkswagen, Cupra, BYD, Lotus, Polestar or XPeng, but also try out a series of new e-bikes or e-scooters. A Community Lab was also set-up in-front of the iconic Rathaus showcasing community ideas around new mobility.

The key themes of the event were electric, the expansion of Chinese OEMs into Europe, micro-mobility, autonomous driving, charging, connectivity and sustainability.

The Chinese OEMs came in full force, not only with BYD, the world’s largest EV manufacturer presenting its models to the European market, but a series of less familiar Chinese brands growing — or planning to expand — their presence in Germany and beyond, including, Leapmotor, Dongfeng, Series and XEV.

The ambitions of Chinese OEMs in Europe are clear with ABI Research recently forecasting that 1.2 million Chinese EV imports will arrive annually by 2030 into Europe. New entrants showing their products at the IAA, as well as more established Chinese players, like SAIC’s MG, Geely’s Lynk & Co and Polestar, as well Great Wall-Ora, NIO and XPeng, as well as products produced in China for western brands from the likes of Tesla, BMW or Mercedes-Benz are expected to be included in the million plus imports coming from the middle kingdom.

With attractively priced products, a strong grip on battery technologies and supply, and increasingly improving quality, as recorded by J.D. Power’s IQS studies over years, Chinese brands present a real threat to the legacy brands and jobs across Europe.

Not surprisingly, European Commission President Ursula von der Leyen, announced on 13th September 2023 that there would be an inquiry into EVs coming from China, saying: “I can announce today that the Commission is launching an anti-subsidy investigation into electric vehicles coming from China. Europe is open to competition. Not for a race to the bottom.”

This hasn’t stopped major dealer groups, however, like Emil Frey Gruppe, Senger Gruppe or Sternauto-Gruppe establishing franchise and agency opportunities with Chinese OEMs, especially to feed the ever-growing demand for EVs.

With attractively priced products, a strong grip on battery technologies and supply, and increasingly improving quality, as recorded by J.D. Power’s IQS studies over years, Chinese brands present a real threat to the legacy brands and jobs across Europe.

The requirement to provide lower priced EVs and greater range of models, to a market transitioning away from ICE vehicles by 2035 across the 27 EU markets (and 2030 in the UK), can only be welcomed by consumers and retailers alike.

But as new Chinese OEMs presented their products at the IAA, it was also interesting to see that VinFast pulled out late in the day, and that NIO had a limited presence at this prestigious event. No announcement of an expected partnership with Mercedes-Benz was given during the keynote speech by NIO’s CEO Li Bin at the IAA, highlighting how some challenger brands won’t find it easy to establish a successful presence in a very competitive market like Europe.

Though micro-mobility vehicles may not resonate in Canada as a major growth sales opportunity, the increasing restrictions on vehicle usage, particularly in urban centres is not unique to Europe.

Smaller vehicles, be it from XEV with their YOYO 2-seater, UK-based and Chinese built MEV City, Spanish Silence SO4, or Swiss brand Microlino, demonstrate the expanding range of micro vehicles on offer. Often designed for short, single-person journeys, these micro-vehicles underline a growing trend in Europe for new urban mobility solutions.

Notably, with the increasing popularity of households to install solar panels and the ability to charge at home, avoiding high energy costs so evident in Europe, make micro-vehicles an interesting add-on to home energy eco systems, something that energy companies, charging providers and retailers are exploring.

Make sure to read part two of this column in our December issue.

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How can dealers manage the new subscription-based upgrade model without alienating consumers?

Herbert Diess, former CEO of The Volkswagen Group, commented at the end of June that global revenues for the automotive industry are forecast to reach circa CAD $6.5 trillion by 2030, up from CAD 2.6 trillion today, with around 25 per cent coming from software-enabled revenues. He stated that the future of the Volkswagen Group is not merely reliant on building well-designed vehicles, but as a manufacturer of edge devices, providing connected mobility solutions for a rapidly changing market.

As consumers increasingly look forward to a world of autonomous driving, the in-car experience will become more important and lucrative for service providers. Volkswagen’s investment in its own underwhelming, proprietary software solution, CARIAD, which was possibly one of the key reasons for Dr. Diess’ recent departure, highlights the importance Volkswagen places on winning the in-car software battle.

Indeed, OEMs across the globe are increasingly looking at how they can evolve their business models beyond selling vehicles via a franchised network, to managing fleets and ensuring recurring revenues are generated throughout the lifespan of each vehicle.

Vehicle-as-a-Service (VaaS) is becoming a common mantra from leading OEMs as they look at transitioning away from the traditional sales model with the dealer as their end customer to a more direct connection with end-customers via an increasingly complex array of intermediaries. 

The move away from a purchase finance and lease model to a subscription approach is driven by the increasing need for OEMs to find alternative revenue streams with richer margins partly to help invest in new EV initiatives, as well as counter the lower service revenues being generated by BEVs.

Research from Germany-based automotive consultancy, Berylls Strategy Advisors, expects a third of Gen X and half of Gen Z EV buyers will take-up a VaaS offering. With each subsequent subscription for the same vehicle offering incremental onboarding profits, Berylls expects the long-term profitability for OEMs to increase by 40-50 per cent with VaaS.

This subscription model has naturally created a run of new providers entering the space, including Finn, Sixt and VivelaCar in Germany, Flexigo, Onto and WagonEx in the UK, as well as OEMs like Audi, Jaguar, Land Rover, Lexus, Lynk & Co and Porsche providing direct subscription offerings. Volkswagen recently purchased Europcar, a major rental provider in Europe, as a base to offer subscription vehicles to their customers.

The subscription model is attractive to customers as it offers greater flexibility and transparency to the ownership experience, with a simple-to-understand monthly payment plan, inclusive of insurance, taxes and maintenance costs and the ability to hold the vehicle for only one month or over several years based on individual customer requirements.

However, as attractive as VaaS is for customers, the jury is clearly out when it comes to advancing the option to include actual features in the car.

Subscription-based upgrades have worked for other industries such as gaming. For example, 30 per cent of revenue from Electronic Arts’s highly successful FIFA 2020 game came from its Ultimate Team payment add-ons. Printer manufacturers moved away from making money from the product, rather now from their high-margin OES replacement toners, and Nestlé reinvented the coffee business model with the introduction of Nespresso capsules. However, for vehicles, the change in approach may be harder to achieve due to the far higher prices, emotional attachments, safety concerns, as well as image questions that play in the customer’s mind. 

BMW ignited indignation recently in some European markets when it was discovered that the brand was charging extra for front heated seats in selected models and markets. This approach would be inconceivable in Canada and other cold climate markets. However, for the OEM, it was an example of how it can look at connected services as additional features, with the required hardware already embedded in the vehicle as part of a manufacturing efficiency process, initiated and charged for through over-the-air (OTA) updates.

Audi, Mercedes-Benz, Tesla and other premium automotive brands are also offering connected services be it: Remote Parking Assist, Beginner and Valet Modes or Adaptive High Beam Assist by Mercedes-Benz in some key markets, or Tesla with Enhanced Autopilot (EAP) in Canada. Such additional features can be seen as offering more choice to the customer.

From a remarketing standpoint, being able to add-on a popular feature at a click of a button can be a powerful tool to lock in a new subscriber or buyer, as well as new software features that can be remotely updated into a used vehicle that could add instant value to the car. However, how does it work for the end-customer?

Interestingly, across different industries we have seen divergent trends. Some companies are trying to make the customer’s life easier with simplified price points, and with no hidden charges—think Airbnb, Discover Bank, Genesis, Uber, Zappos. Or, consider the more differentiated approach, where customers are offered a base price—say, on an airline booking—and then subsequently asked to pay for additional ‘standard’ features, including seat selection, airport charge, baggage and/or booking fee alongside ‘additional’ features, like lounge access, advance boarding, travel insurance, and even pre-ordered food on board or a text message confirmation. Though providing choice, it never leaves the customer feeling particularly happy with the final price unless they go for the very basic option. It certainly doesn’t feel like a premium or luxury experience.

In German, they refer to perceived unfair incremental increases in the base price, with hidden additions as Abzocken, or in English a ‘rip-off’. The sense that the OEM is trying to find every way to charge extra, even at very low amounts to build up a larger revenue stream per customer. Naturally, it can be argued that all these features are bespoke options, but with a car, and especially a premium vehicle, it may be expected that some of the optional features should be standard. Moreover, for core infotainment and comfort, as well as all safety features, it is hard not to expect them from a premium brand included in the base price.

Adding complexity to the sales or subscription process may be attractive for the OEM in terms of incremental revenue, but for the dealer trying to communicate the value of each additional upgrade it may be harder to achieve than expected. A recent North American example is GM’s decision to require a three-year subscription to OnStar and GM Premium Connected Services for all 2023 model year Cadillac, Buick and GMC vehicles. Dealers were put in an awkward position trying to explain why these previously optional services were now mandatory. Many US customers cancelled their pre-ordered vehicles. In Canada, GM recently changed the approach to include these services as part of the MSRP, at least for Cadillac vehicles—for now.

Moreover, any transfer of ownership needs to be handled efficiently with no surprise costs to both the former and new owner. Who wants to keep paying for a feature they either don’t use, can’t use, or don’t want?

Although such subscription services are only in the nascent stage in Canada, the trajectory is clear from some major OEMs. The opportunities to gain greater earnings from VaaS is surely attractive for both new and established players, alike, but it also highlights a challenge to some traditional players who may be squeezed out of the market. 

While the increased complexity of the ownership experience will be interesting to follow, for it to be accepted without hurting a brand’s image, it needs to be seen to add value for the customer, and not a burden. In essence, it requires an effective communication strategy on why some features are standard and others are additional cost-based items. In the end, the customer needs to feel they own the experience and are gaining the best value whatever the price-point. Dealers are in the best position to accomplish this objective, being closest to the customer, at least in the transition period towards what is expected to become a VaaS future.

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What can Canadians learn from the European experience with selling electric vehicles?

The Canadian auto dealer team asked me to reflect on lessons learned from the growth of electric vehicles (EVs)—battery electric vehicles (BEVs) and plug-in hybrids (PHEVs)—over recent years in the UK and Europe, and what Canadian dealers and OEMs could do better to support the consumer transition to electric.

The dangers of making such broad comparisons are obvious at any time but even more challenging during a period of restricted vehicle supply, and concerns around energy security as Putin wages his odious war in Ukraine. However, I accept the challenge.

Sales of electric vehicles in the top three auto markets in Europe continue to break records: February 2022 EV registrations reached 25 per cent of total vehicle sales in Germany, 26 per cent in the United Kingdom, and 20 per cent in France.

The smaller markets of the Netherlands (EV share of 28 per cent), Sweden (52 per cent) and Norway (86 per cent) show how far it can and likely will go. Compared to less than 6 per cent EV sales in Canada in 2021, Europe is considerably farther along the EV adoption journey.

As the prominent German economist Rudiger Dornbusch famously remarked: “…in economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”

It is now clear that EV adoption in Europe has surpassed the early adopter stage and now is hurtling down the Autobahn towards mass adoption.

For example, Tesla outsold Porsche in Germany in 2021, Nissan Leaf was the fastest selling used vehicle in the UK last year, and the Fiat 500e is proving to be an increasingly trendy EV for the growing number of low-emission zones and chic-urban centres in Europe.

The sales journey hasn’t been without its challenges. Aside from the obvious barrier of limited models on show (now thankfully starting to change with improved new models entering the market from all main legacy OEMs and challenger brands, alike), six areas have frustrated the European consumer, dampening EV adoption:

1. Unprepared sales channels: Both direct and brick-and-mortar sales networks across Europe have (and some continue to) struggle promoting the core benefits of EV ownership.

With limited information online, and often with ill-informed sales consultants, consumers often knew more about an EV model than the retailer. As a senior head of a leading UK automotive dealer group told me: “Salespeople were intimidated by these customers.”

With investments in training, however, OEMs and dealers have adopted a more product focused approach to selling EVs and forward thinking dealers are now better prepared to meet the needs of EV buyers. As European markets have transitioned from early adopters (highly informed) to mass market consumers (less informed than early adopters), automotive retailers are now back in the driver’s seat.

2. A smorgasbord of terms: EV terms are a nightmare, ranging from inconsistent references to range measures (WLTP versus kWh/100 km), multitude of charge types: CHAdeMO, CCS, Type 2, Tesla Type 2, Rapid DC, etc. as well as confusion around charging times, capacity requirements and charging limits.

Even the home wallbox can be a 3kW, 7kW, 11kW or even higher if you can afford one and your vehicle accepts it, making any consumer’s head spin. Successful EV retailers understand that buyers can be confused and provide their customers with simplified explanations and access to key market-wide information resources.

3. Lacklustre promotions: Despite significant retail advertising and promotion, European retailers initially witnessed more interest among fleet buyers as companies and local authorities were mandated to deliver on their sustainability goals.

The promotion of many new EVs failed to excite new private (retail) buyers, save for Tesla, and a few other players. EVs were promoted to the masses with limited appeal. Fortunately, OEMs and retailers now promote tech, driving fun and convenience, dialling-down on environment attributes and removing dull engineering references.

4. Struggling to communicate Total Ownership Costs (TOC): Consumers (and arguably brands) aren’t clear how to calculate the cost of EV ownership. It remains badly communicated to buyers, with confusion around varying charging costs (home, public, work, etc.) maintenance requirements, and anticipated residual values in favour of promoting headline incentives and grants to countenance the higher ticket price. EVs are not effectively promoted as good value for money.

5. Constantly changing incentives and government grants: The sheer variety of incentives and government grants covering not only new vehicle purchases and the installation of home charging wallboxes, but road duties, business taxes and other benefits in kind, add to the complexity for the consumer.

Further, consumer rebates came with variations related to specific vehicle segments and types, as well as the timeframes applied to each offer. All told, the experience for buyers felt more like an accounting exercise than a straightforward and enjoyable purchase. Successful EV retailers became adept at simplifying and guiding the customer through this maze.

6. Fragmented and limited charging infrastructure: The rapid growth of public charging points typically hasn’t matched the demand where EV owners travel, creating frustration among queuing drivers or unused charging points in locations with low EV density.

Pricing and charging speeds, which are typically badly signed, vary greatly. Moreover, the inoperability of charging stations to accept universal payments, preferring specific Apps or membership RFID cards reduces the access to public charging points for many EV drivers.

It also increases anxiety among owners and dampens consideration among the sizable population reliant on street parking. Retailers have risen to the challenge by encouraging EV buyers to use the best aggregator charging network apps, educate them on journey planning, and providing access to their own free charging stations.

Greens shoots of growth

Despite these challenges, it is encouraging to see the introduction of a large selection of new models entering the European markets across all segments. Increasingly the EV ecosystem is becoming more integrated:

Utility companies and insurance players are now offering EV-tailored tariffs and premiums;

Subscription platforms are being introduced to promote adoption outside of longer, fixed-term financing; and

Concerns related to energy security, alongside a sizable environmental lobby in Europe, is promoting ever greater use of renewables and a focus away from fossil fuels.

Baker said that as EVs are more attractive to female buyers with a greater focus on tech, interiors, sustainability, and fun to drive attributes, OEMs and retailers need to move further away from old ICE references related to torque, engine size, and power.

Untapped potential

However, one major untapped market remains in the automotive industry—its inability to engage fully with female buyers.

A recent study by AutoTrader UK revealed that 20 per cent of women hadn’t considered an EV as their next vehicle compared to only 10 per cent for men. Further, 62 per cent of women were not aware of any government grants available.

“There’s a huge communication piece that is missing between the car industry and women.” says Erin Baker, Editorial Director at AutoTrader. “I think that is partly because women want to be talked to in a slightly different way about cars.”

Baker said that as EVs are more attractive to female buyers with a greater focus on tech, interiors, sustainability, and fun to drive attributes, OEMs and retailers need to move further away from old ICE references related to torque, engine size, and power.

Implications for Canada

So, what does all of this EV transition experience in Europe mean for Canada? In my view, there are five key lessons for Canadian OEMs, dealers and related industry stakeholders:

1. To accelerate EV adoption, there needs to be clearer, uncluttered communication around each product’s key benefits, including clarity as to the cost of running an EV over a 1, 2 and 3 year period;
2. Requirement for the EV ecosystem of players, including government, to work together to enhance interoperability, price transparency, range metrics and charging standards, all key aspects of the EV experience;
3. The charging infrastructure needs to grow in-line with vehicle adoption;
4. Consumer incentives should be used innovatively, with clear guidelines and timeframes; and
5. The wider market must also embrace and address the unique needs of women to accelerate EV consideration and adoption.

As we’ve seen from Europe, the market can move faster than first expected, so best to be prepared now for tomorrow’s rapid growth.

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