An in-depth discussion with the Australian Automotive Dealer Association

Our focus is to inform people about new cars, and in so doing we generally deal directly with carmakers and their representatives, plus representative body the Federal Chamber of Automotive Industries.

But the auto landscape is a many-sided die, and one area where we have less focus is on the dealer network. Most car dealerships are franchisees to car brands (OEMs), rather than direct subsidiaries. That means the person you buy your new car from doesn't actually work for the car brand in question.

Yet this vital part of the market has its own peak body, called the Australian Automotive Dealer Association. The AADA is the peak industry advocacy body exclusively representing franchised new car dealers in Australia.

To use its own stats, there are around 1500 new car dealers in Australia that operate about 3500 new vehicle outlets. Dealerships range from family-owned small businesses to larger businesses, including three public companies operating in regional Australia and capital cities across all States and Territories.

The economic impact of the new vehicle retailing sector to Australia is also significant. The industry’s total turnover/sales amounts to over $54 billion and the estimated total economic contribution is over $12 billion. The industry also generates over $9 billion in wages and $3 billion in tax revenue.

We know the stereotypes: people hate car dealers, they make them uncomfortable, they hear stories about rip-off merchants etc. So it seemed appropriate to sit down with three of the AADA’s most senior people to cover some industry issues. After all, CarAdvice intends to be an independent voice open to all arguments.

Issues vary from seeking a new dealer code, data sharing with independent repairers, EV infrastructure in dealerships, inequal arrangements requiring reform to collective bargaining agreements, policy around test drives, and fuel quality standards. I warn you, this interview is really for industry followers more than casual observers, and brief it is not...

The guests here are CEO David Blackhall (former boss of Jaguar Land Rover Asia-Pacific), executive director of policy and communication James Voortman, and executive director of operations Brian Savage.

CarAdvice: Let’s start with reform around mandatory data sharing between OEMs, dealers and independent repairers, which we know the AADA has cautiously supported, if it's done judiciously.

But on the flip side, cars are really complex today and repairers need up to the minute training to fix them right. So can independents vouch for their skills like dealers can? And moreover, given that dealers are relying on servicing for a bigger chunk of their revenue now, are their concerns about this positioning?

For instance, I could see a case where OEMs might have to sharpen their capped-price service offers even more to counter the independents. Are you getting some concern from your constituent dealers about all this contrary to your position?

David Blackhall: Whether we like it or not, the market speaks. And the way the market speaks is as follows: about 80 per cent, maybe higher, maybe closer to 90 per cent of all new car buyers default to the authorised dealer network. Why?

You've just laid out between $20,000 and $150,000 for a new device. And I think over the years the brands, the OEMs in particular, have done a good job of reinforcing their qualifications and appropriateness of their authorised networks.

There is an outlier group that take it to their mate or whatever, go to their local independent during the warranty period. Perfectly legal and we've never said you can't do that, never. We do say, ‘we strongly encourage you to deal with your franchise network and if you choose, you know it's a democracy, it's a competitive environment, you get to go down the street, and get Ultra Tune, have it. Good on you’.

Outside the warranty period it defaults completely the other way. Well over 60 per cent of all consumers go to an independent. Why? Because the perception is, that the authorised retail network will be more expensive. And there's plenty of evidence to show that it actually is more expensive. And the reason for that, the cause of that, is the input costs are higher.

So, my view is this issue of choice and the implications of sharing data in the way in which the code envisions. The implications for the franchise networks are much overstated.

Brian Savage: The dealers by virtue of their agreement with the manufacturers are required to have ongoing training. Every new model, as you probably know, the dealers all get trained in. They have to have all the special tools and equipment to be able to repair those. All the facilities.

It's not a choice they make. They don't choose that, they have to have it. It's part of their agreement with the manufacturer. That's just how it is. No one complains about it, that's just how it works.

The aftermarket... I'm a qualified motor mechanic by training, but I haven't worked on a car for 20 years. I don't know what goes on, I'm a motoring enthusiast but I don't know how to fix a car anymore. I'm well out of date, miles out of date. If I got my licence 30 years ago and I've done nothing about updating ever since, I'm well out of date.

Now that's not to suggest [otherwise]... there are really good independent specialist repairers who are well up to date on the vehicles that they repair and service and good on them. They're equipped, they're trained, they have ongoing training, they make sure they get the most information, they're all over it and that's great.

But to automatically suggest that everyone is in the same boat as them, it's not the case at all. So our view is that, the manufacturers will classify the information. Especially safety, security, and environmental. They'll classify it as they see fit we presume. It is incumbent on the independent repairers to demonstrate their competency in being able to use that. That's not saying they're not competent.

It's probably safe to say then that given the statistics around in-warranty servicing, it’s probably a bit overblown. This sort of fear attached to it.

David Blackhall: Bear in mind that the warranty periods on new cars are extending all the time. You've now got seven-year warranties… so now there's a revenue stream, for quite a few years, in terms of your question about capped price servicing, that's a competitive device that's used.

By the way, if you interrogate the sharing of data in the United States and the United Kingdom, it's a ripple in the pond.

CarAdvice: The sky hasn't fallen in.

David Blackhall: No. And you know, long ago, we took the principle decision with our board. They supported us after obviously the great debate. This is happening. The government said it's doing it, and the alternative government said it's doing it.

So this train is coming down the tracks, and you’ve got two choices. You can lie across the track and get run over or you can get on the train and help to steer it hopefully. That's what we're trying to do.

CarAdvice: You've touched on the power imbalance between franchisors and franchisees. It's obviously a pretty intense multi-franchise space and I guess the counter argument is that your AHGs and your AP Eagers are bigger than most importers so, clearly there are clearly differences in sizes.

David Blackhall: That argument falls on its own sword just on fact. Every importer is owned by guess who?

CarAdvice: HQs overseas.

David Blackhall: So who's bigger?

CarAdvice: Well of course, but I'm merely stating what their argument is.

David Blackhall: I know what their argument is, but I'm saying to you their argument doesn't hold water, and I know because I've been inside of this process for 30 years. When I ran a big chunk of Ford Motor Company, when I ran Jaguar/Land Rover in this country, and I was CEO of Asia-Pacific based in Sydney, I had a lot of power. I could make my rules. Rules that worked for Australia.

Today, the people that are running all the major import subsidiaries in Australia, I would suggest to you, are middle-to-lower rung employees on the international scheme of things... So, the policies and the procedures and practices are dictated by Detroit, or Tokyo or Korea or wherever.

So, my view is to argue that AHG is a more empowered organisation in this relationship than say General Motors Holden is nonsense. They need to look at [GM CEO] Mary Barra, not at [Holden CEO] David Buttner. Dave might possibly be a slight outlier here, so bad example by me. Dave is a hugely experienced industry figure, and General Motors will have enormous confidence in him – far more than they would most OEMs give to the normal middle- to lower-level international employee that cycles in for three years.

But look at some others. I mean just, I won't name them but you can figure it out for yourself. There are brands there that are run, in my opinion, by very junior people, and it shows. In the way in which they mismanage their networks and the way they mismanage their businesses.

CarAdvice: So this Sword of Damocles that is hanging over dealers, you've got to take on cyber cars, you've got all these different pressures, and the fact that their franchise agreement can be torn up. So it’s the position of the AADA then there needs to be a bit more equality between the two partners?

David Blackhall: I think you can't have people with bone-headed ideas running the local subsidiaries and threatening you [dealer franchisees] with existential issues that are impossible for you to address. Who would be in such a business?

I often talk to people in Canberra, I often put the position to them, would you be in a business that is cash-flow negative, margin negative, right out of the gun everyday you open the doors? Or would you run a business where you are guaranteed not to make any money and you are guaranteed to be negative cash flow until the bonuses drop, if they drop. Right, would you be in that position? No, that's stupid. But that's the position that has evolved in the new car business.

CarAdvice: The fact that most, well not most, but I don't know the exact figures, but a lot of dealers are selling new cars either at breakeven point or even at a loss before bonuses come in.

Obviously the upside of that is customers getting really, really good deals, but does something have to break there eventually? You know, people are being unrealistic about car pricing now right?

David Blackhall: I don't think it will break. The model is offshore plants… to be at scale in the volume market segments, you have got to have a plant that'll make at least 450,000 cars a year. That's a minimum scale plant to get economies. And you've got them all over the world. Last year we sold just under 80 million new cars globally, and we’ve got capacity that’s probably a few million above the demand level. It's coming on stream all the time. In China, they're just building new plants.

What does that mean? That means constant pressure to feed the machine. That's how it works its way up in the market. I don't think it'll ever change. I think there'll always be incentives at the front end dangling with a KPI list, you've got to jump through those flaming hoops, and then you might get your money.

In the meantime, you back yourself in as a dealer to be good at other things. Good at finance, insurance… [there are things tightening there too]. So you then say okay, I'll be good at used cars. Well, some new car dealers are good at used cars, a lot are not.

To me, the business model needs to reflect a wider skill set for new car dealers than it does today. They need to be much better at a lot of other things. A lot of dealers don't have panel shops. Some do. Those that do usually do it well because it's a big investment business. Brian can tell you, I don’t know what costs to set up a certified panel shop to, say, Mercedes, but I reckon it's probably millions.

CarAdvice: So dealers are being squeezed now on finance, they're being squeezed now on cyber cars/demos from the OEMs, they're being squeezed from all sides really, they must be feeling a little bit under attack, it would be safe to say?

David Blackhall: That's why we're fighting hard to get a code that will at least give us some weapons to push back on some of the things that are causing that margin compression.

CarAdvice: Is there a precedent somewhere else in the world that you're looking at? Is it a bit healthier in other places than it is in Australia?

James Voortman: We've just come back from the US. Every state has its own automotive specific franchise laws, but they're very much written in favour of dealers in that country.

For example, we met with the Californian dealer association, they're in the process of trying to amend their franchise law. It's already heavily skewed in favour of the dealer compared to the dealers in Australia, but what they're pushing for over there are things like 10-year moratoriums on further investment. You upgrade your facility as per the manufacturer's instructions, and for the next 10 years you don't have to make another investment against your will.

The other thing is, establishment of new stores within your PMA [primary market area]. What they have in some states in the US is a 10-mile rule in which a new dealership cannot be opened very easily and certainly not as easily as can be done in Australia. They don't generally run on term agreements as they do over here. They have rolling agreements. It's very difficult to terminate someone over there. They've got these first class protections and when you hold it up to what we've got, which is a generic franchising code, it's chalk and cheese.

CarAdvice: To pivot here, you're a supporter of electric cars, we know, but there was a line recently that intimated that wasn't the case, which is clearly not correct. But people are disinclined to like dealers sometimes…

David Blackhall: That's true. I go back to logic all the time, so my argument to anyone that wants to talk to me about that is think through this loop for me. How does the dealer make money? The dealer makes money by selling something to someone that wants to buy it. If electric cars were available in volume, and they were priced competitively, and they had a range that was realistic and a charge infrastructure that made sense, dealers/consumers would buy them.

We would happily stock and sell them, because guess what, we need to sell a product. So if they're not buying fossil-fuel cars, they're going to buy electric cars. Great. Give us electric cars. But until the car is priced competitively, specced competitively, has a range that makes sense, and has an infrastructure that supports recharging conveniently, people are going to turn away from them.

You know how many pure EVs were sold in Australia in 2018?

CarAdvice: It was about 1500 I think.

David Blackhall: 1352. You know how many of those were bought by private citizens?

CarAdvice: I would have thought a third at most.

David Blackhall: That’s right. The rest were bought by the government, or fleets.

CarAdvice: Well it's all about posturing at this point, perhaps.

David Blackhall: Yeah, that's a point. Around 0.15 per cent of the total sales of passenger vehicles in Australia are pure plug-in EVs at the moment. Why is that? Oh it's because, according to Tesla Owner's Club’s testimony at Senator Storer’s EV Inquiry we don't stock them, and we don't want sell them. We would love to sell them if they would sell.

CarAdvice: I suppose the other one is, we're seeing it elsewhere in the world, incentives. On this note, is there a co-funding model for infrastructure at dealers that you back? What would be your position on chargers in dealers?

David Blackhall: We haven't got a position on it because we think that interferes too much in the way in which a brand might want to set itself up competitively. It's not our business to do that. But obviously co-funding is one. The governments are hellbent on having publicly funded infrastructure. Good. Knock yourself out. Figure out a way to pay for it.

We're not arguing against any of this. We think it's great. Build the infrastructure, find ways to build the infrastructure. Until it's ubiquitous, and the charging times are realistic for people who are living their lives, then you're still going to have some pushback. This goes to the issue we talk to the minister about on adoption curves for electric vehicles.

Pick a curve. You can invent a curve, you're an expert. You've got credentials, you're a motoring journalist, you know what you're talking about, and you can write that we'll have say 300,000 by the end of 2025. Based on science or black magic or voodoo, it doesn't matter, there's lots of curves out there, right? But what I'm saying is unless the enablers come into play, it won't get there. They just won't be bought.

The enablers are, we have got to have a product. It's got to be a product that ticks those other three boxes I mentioned, and you've got to build the infrastructure. Reflect back to 1903, 1904, 1905. What happened? People started building gasoline-powered buggies, and wealthy people started buying them because they were pretty bloody convenient. But you had to have a place to put the gasoline in. So as the price of those early cars came down, the petrol station network spread. All right, that's what will happen here with electricity.

But the enabler in that case was just pure capitalism. People could make a profit setting up a petrol station that's selling you petrol because many people started to buy cars. Here the difference we have is that the default position always seems to be, especially from the EV lobby, we love those guys, but the default position is always tax dollars. Why is it tax dollars? If I buy an EV, I'm paying no fuel excise at all. I'm free riding on the road. And you're paying 41 cents a litre.

My argument is, why is the default request always that the government must subsidise the infrastructure?

CarAdvice: Usually the argument is scale. The only way to get prices of batteries down is scale, and the only way to get scale is to artificially create demand. That's usually the argument.

David Blackhall: Okay, and I accept that, and maybe you have that to start with that and then move to private enterprise... I don't know, I don't know what the answer is, it's not our job to solve it. All we're saying is, there’s an enabler that must come in to play.

CarAdvice: I suppose one thing I can easily foresee, and I'm sure you've seen it too, is OEMs want to be able to take a lead in electric cars. It's a nice thing for them to be able to say. They could easily, with the alleged power they've got over their networks, try and force or cajole their networks into investing in an unfeasible way into EVs, to push them, which could hurt their business model.

David Blackhall: They certainly will control the dealer's participation in the charging infrastructure. You've seen that already. Jaguar Land Rover's… dealers are building charging stations at their dealership.

I also think this is the manufacturers enabling the charging network. When gasoline cars were invented, they let the oil companies do it. My argument with the energy minister would be, the Government is talking about making the Paris number in a canter, you're talking about big adoptions of electric vehicles by 2025, so what are you doing with your colleague the minister for infrastructure? What are you doing for enabling infrastructure?

Editor’s note: This interview was conducted before we learned this.

CarAdvice: Just to pivot slightly. Tesla doesn't do franchise dealers. Genesis has sort of mooted its own particular model. More and more pop-up stores like Subaru Do, Mercedes Me, which has no real dealer involvement. A lot of the activations and shopping centres do have a transactional dealer involvement, but clearly it seems that OEMs are exploring ways to cut dealers out of the process to some degree.

David Blackhall: Absolutely.

CarAdvice: What are your thoughts on this entire issue, I suppose? If you can encapsulate it.

David Blackhall: I think the model has to morph and change and evolve. It's easy to get a knee-jerk going and saying ‘My God, they're threatening us’. Well, yeah, but there's a bigger principle involved here, Mike. No-one's going to stand on the shore like King Canute and stop the tide coming in, you can't do it.

Change is coming. It's under our feet right now. It's not coming, it's here. Tesla is a good example, Genesis maybe another example. There may be other models. There's virtual stores, there's pop-up stores. There's all sorts of things being experimented with. My issue is this: transparency, honesty, timeliness, and a plan.

If I'm sitting on a $20 million investment for your franchise and you are at the same time encouraging me to update that investment, put the new CI out, do the new tiles and all that stuff, if you are at the same time saying we're gonna develop an alternative channel that'll be a virtual channel or it'll be pop up stores, or it'll be company-owned stores, or whatever the solution is, you have a clear obligation to tell me.

You have to tell me, you have to give me good sound business reasons why you're doing that, and you have to offer me participation as a current dealer. Or if you're going fully-owned company stores like Tesla, you have to give me an exit plan that's written down with milestones, and you have to give me compensation. That's only fair.

CarAdvice: This comes back to that power imbalance issue I suppose, doesn’t it?

David Blackhall: See we know right now that some OEMs are experimenting with deploying models that cut the dealers out completely… That's why it's more important than ever to get those protections in place. The minute you start saying things like how do we stop that, you sound like a troglodyte. You sound like a Luddite.

James Voortman: The balance of power thing, it's not about ensuring a... We don't want a dealership for a lifetime arrangement. We're not looking to be protected, we're just looking for a system that's fair.

CarAdvice: I know time's getting away from us. JD Power put out some data recently talking about how some buyers felt like their test drive wasn't long enough. Having been in dealer land, I understand that facilitating test drives is difficult, especially on Saturdays when there's 100 people wanting to drive a car.

Holden's got 24 hour test drives. There's all sorts of things coming into the market. Clearly buyers do want more time in the cars. I suppose is there a bit of encouragement for a rethink to current test drive practices or do you tend to leave that to individual dealers to decide?

David Blackhall: I think that's an individual brand decision. I like Holden's 24 hour offer. It's not the first time it's ever been done. But I like it. What I do know from my own personal experience running brands is that if you get the buyer in the car, and Mike you know this from your time selling, get them in the car and you handle the test drive correctly, the chances of selling that car quadruple. We're in favour of it, but we don't intervene on this. We think it's up to the individual manufacturer.

James Voortman: The only thing I can say as a consumer, with all of the tech coming on board, you need more time in the car now to understand the different autonomous technologies and I think that's what most people we speak to say.

CarAdvice: Car salesmen and journalists are equally quite low on the pecking order when it comes to respected jobs, and I've done both, so what does it say about me?

David Blackhall: You should go into politics.

CarAdvice: Complete the triumvirate. Is the perception of dealers improving among the populace as far as you notice? Do people still loathe going to car dealerships, or have they come around to the idea. I guess, where is the relationship at? I know it's a very broad question.

James Voortman: You see headlines in newspapers like the Financial Review calling us dodgy dealers and it's an easy beat-up quote. I think when you spend time with people in Canberra like we have and with the bureaucrats, the politicians, and they sort of understand we run sophisticated businesses, we explain to them how technical and sophisticated the workshops are.

The investments we make. I think the message has gone through at that level. That we shouldn't be lumped together with the used car operators in this world, but it's difficult. It really is. It's a difficult perception to break.

CarAdvice: The last one I've got for you is a bit of a tangent. It's only loosely connected to you guys but the OEMs, especially the premium ones, are screaming about fuel standards at the moment.

David Blackhall: So are we.

CarAdvice: Yeah. Clearly 2027, Euro 6... but we're starting to get to the point now where Mercedes and Volkswagen aren't bringing in their latest product, which is obviously not going to be good for dealers.

Three or four years time when Hyundai have petrol particulate filters, it will be the same for them. It seems that it's really only the AIP that opposes this. Is there any scope for movement on this?

David Blackhall: You're right. The AIP [Australia Institute of Petroleum] opposes it and they've been quite successful in convincing Canberra that if investments have to be made to bring down the sulphur content, that those refineries, the four remaining refineries will potentially be unviable. No-one really knows if that's true.

CarAdvice: We’re approaching a point where the best quality petrol here won’t be good enough for some petrol cars, that require 10ppm stuff. This will reduce consumer choice and clearly impact dealers. It’s a problem. Anyway, I see that time is up. Thanks for your time, gentlemen.

Note: Shortly after this interview, David Blackhall announced his intention to reduce his full time commitment at the end of his current contract on June 30, and to continue in a consultancy and advisory role until December 31. He will join the board of massive dealer body, Automotive Holdings Group Ltd, as a non-executive director.