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  • Writer's pictureMike Entner

Rethinking Revenue: Shifting from Vehicle Servicing to Services

By Michael Entner-Gómez | Digital Transformation Officer | Entner Consulting Group, LLC.

In the automotive industry, vehicle servicing is a key component of the Original Equipment Manufacturer's (OEM's) revenue model. This stream, recognized over the vehicle's lifetime, varies considerably. For example, if an OEM sells a vehicle for $50,000 and generates $5,000 in aftermarket revenues each year under contract, the average annual services revenue would be 10 percent. Additionally, the aftermarket lifetime value for some products can be substantial. For instance, if an OEM receives service revenues equal to half the vehicle's original sales value over its lifetime, the aftermarket lifetime value would amount to 50 percent.

Parts sales at most OEMs provide gross margins of over 30 percent, much higher than the average of 10 percent for maintenance services. This significant margin from parts sales often makes the most substantial contribution to average annual services revenues. Many OEMs offer maintenance services at little or no profit to increase part sales. In markets lacking third-party components from Tier-1 or other aftermarket suppliers, these margins might be even more enhanced. The industrial or specialized vehicle sector exemplifies this, where limited alternative parts sources might enable OEMs to command higher prices and, in turn, higher margins.

Theoretically, the shift towards electrification in the automotive industry is poised to dramatically alter the Total Cost of Ownership (TCO) landscape. Electrification brings with it the promise to substantially reduce TCO by eliminating numerous moving parts, thereby reducing mechanical complexity. The current unknown, although we are beginning to see a trickle of data, is the battery packs which must be replaced when they lose potency — presently at great cost. This evolution not only impacts the frequency and nature of required maintenance but also potentially reshapes the entire revenue model for OEMs accustomed to the conventional service and parts sales structure. It also impacts the revenue potential for dealership franchisees. To adapt, dealerships might need to diversify their services, potentially focusing on specialized EV maintenance and the sale of renewable energy solutions, such as home charging stations.

A Paradigm Shift in Servicing Vehicles

The eventual transition to electric vehicles (EVs) marks a significant change in maintenance needs. With fewer moving parts and simpler mechanics compared to traditional internal combustion engine vehicles, EVs inherently require less routine upkeep. This reduction in maintenance demands challenges OEMs to rethink their traditional service-based revenue streams, which have long been a cornerstone of the automotive industry.

Alongside this, the transition to EVs necessitates specialized training for service personnel. The industry now faces a dichotomy, requiring a balance between software and mechanical skills. As vehicles become increasingly software-driven, the expertise required for servicing evolves, creating a demand for technicians skilled in both software and mechanical aspects. This shift represents not only a logistical challenge but also a strategic opportunity for OEMs to establish leadership in service innovation and expertise.

This service model change not only results in less frequent servicing but also necessitates significant investments in new tools and skilled personnel. Traditionally, these costs have been borne by dealerships, but in the emerging direct-to-customer models, OEMs may need to absorb these expenses. This situation presents OEMs with a challenging balance: decreased revenue from traditional service intervals versus increased costs for equipping service centers and training staff in EV technology. It sets the stage for innovative service models, such as the integration of remote software services with localized mechanical work — a hybrid approach that can effectively address these new dynamics.

Hybrid Service Models as a Possible Adaptation

As the electric vehicle (EV) industry evolves, the need for OEMs to explore innovative service models becomes imperative to enhance efficiency and sustain revenue streams. A promising direction is the integration of remote software services with localized mechanical operations, effectively combining the strengths of both domains to offer a comprehensive and efficient service solution.

Centralized remote software services would enable OEMs to harness global expertise and maintain operations across time zones, thereby reducing costs. This setup could facilitate specialized teams to manage software diagnostics, updates, and troubleshooting remotely, optimizing resource utilization and leveraging economies of scale and regional cost differences. Concurrently, local technicians, acting as the physical extension of this model, would undertake tasks such as parts replacements and hardware-related services, guided by remote directives. This method would ensure efficient handling of the tangible aspects of vehicle servicing.

This hybrid service model opens up diverse monetization opportunities for OEMs, including subscription-based models for continuous software maintenance and updates, fostering a steady revenue stream. Moreover, the cost-effectiveness achieved through remote software servicing could enable competitive pricing for hands-on servicing tasks, potentially enhancing market share in local service contexts.

From the customer's perspective, this model is poised to deliver a more streamlined and efficient servicing experience. Complex software issues could be addressed by specialized remote teams, thereby reducing downtime and elevating service quality, while local mechanics would ensure prompt and direct maintenance services. Issues confined to software could potentially be resolved without necessitating a mechanic visit, further enhancing convenience for customers. This dual approach is likely to significantly boost customer satisfaction and loyalty in the highly competitive EV market.

As the EV market continues to grow, this hybrid model of remote software services and local mechanical work is positioned to become an industry standard. It is in harmony with the ongoing trends of digitalization and connectivity in EV maintenance, equipping OEMs to adeptly adapt to the evolving demands of electric vehicle servicing.

Navigating New Revenue Opportunities

My last trip to the Mercedes dealer for servicing my Metris van turned into a financial nightmare. What began as a simple recall service quickly escalated into a staggering $5,000+ estimate, with $1,200 alone for changing the spark plugs. This experience highlights the significant revenue from servicing traditional combustion engine vehicles, a revenue stream that is at risk in an EV-dominated future. To compensate, OEMs are eyeing data monetization and subscription services. Data monetization can leverage vehicle-generated data for various purposes, while subscription services could range from advanced navigation systems to regular software updates.

While OEMs are considering data monetization and subscription services as new revenue streams, these approaches are not without challenges. Consumers often distrust OEMs with their personal data and may question their ability to manage and monetize this information effectively. This skepticism suggests that OEMs pursuing data monetization might be venturing into a domain better managed by third-party specialists. In parallel, subscription services for features like advanced navigation systems and software updates pose their own challenges. There's a delicate balance between offering premium, subscription-based services and meeting customer expectations for what should be included as standard in the vehicle. OEMs must carefully navigate this terrain, understanding that over-reliance on monetization strategies could lead to consumer resistance, especially if customers perceive they're being charged for essentials. Remember the BMW pay-to-play heated seats fiasco (BMW Keeps Nickel and Diming Customers With Subscription Plans)?

Envisioning a further evolution in the automotive sector, a revolutionary model may emerge where cars are offered entirely as a service, akin to smartphone upgrades. This approach could bundle the car, insurance, lifetime repairs, and regular upgrades into a single subscription package, allowing customers to seamlessly switch to newer models as desired. Such a model would not only align with modern consumption trends but also alleviate the fear, uncertainty, and doubt (FUD) commonly associated with new EV ownership. Additionally, it offers OEMs a sustainable way to manage their fleets, either by recycling returned vehicles or reintroducing them into the secondary market, thereby stabilizing and smartly managing their revenue streams.

Consumer Perspective on the Evolution of Vehicle Ownership

The shift towards Electric Vehicles (EVs) and car-as-a-service (CaaS) models presents a complex array of consumer expectations and concerns. Consumers are drawn to the simplicity and convenience of subscription-based services, similar to smartphone upgrades, but concerns about affordability, choice flexibility, and long-term value persist. Traditional car owners, in particular, might view this as a significant shift, questioning their control and ownership permanence. The adoption of these new models may also show generational differences, with a coexistence of traditional and innovative service models reflecting a gradual shift in consumer preferences and trust.

Another emerging concept in this evolution could be a Vehicle-as-a-Service (VaaS) model. This innovative approach, integrating various transport formats like electric and autonomous vehicles with public transportation, would revolutionize how people perceive and use transport services. A VaaS construct could cater to the growing demand for convenience and environmental sustainability. However, its success would hinge on addressing key consumer concerns, ensuring service transparency, and aligning with customer needs.

The transition to VaaS and similar models poses significant challenges, including consumer education, infrastructure readiness, and regulatory support. OEMs and service providers must focus on clearly communicating the benefits of these new models and building robust, user-friendly platforms for their efficient management. The ultimate goal is to create a more community-oriented approach to transportation, reducing reliance on individual vehicle ownership and promoting sustainable, shared resources. This evolution in vehicle ownership, driven by consumer needs and preferences, marks a pivotal shift towards more integrated and sustainable transportation solutions that could be easily monetized across adjacent transportation industries.

Adapting to a New Era of Automotive Monetization

As the automotive industry shifts towards Electric Vehicles (EVs) and innovative models like Vehicle-as-a-Service (VaaS), the focus on monetization and replacing traditional revenue streams becomes increasingly critical. For Original Equipment Manufacturers (OEMs) and other industry players, this transition is an opportunity to innovate and diversify revenue through data monetization, subscription services, and new mobility solutions. These strategies are essential not only for sustaining profitability but also for staying relevant in a rapidly evolving market.

The responsibility also extends to policy makers, who must foster an environment that supports this transition, and to consumers, whose preferences will increasingly influence these new business models. As the industry reinvents its approach to monetization in the face of changing technology and consumer expectations, all stakeholders must collaboratively navigate these changes. Embracing this new era of automotive innovation will be key to thriving in a landscape where traditional revenue streams are being reimagined.

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