The past few months have caused automobile dealers to question what exactly the future holds in relation to electric vehicles and whether their businesses have risks that even a short time ago did not exist. This is especially true of Ford dealers given recent comments made by CEO, James Farley, and the bifurcation of Ford between internal combustion engines and electric vehicles (EVs), which have caused dealers’ discomfort.
Very recently, Ford made its intentions clear – it intends to increasingly focus on the EV market, and it is going to rely on its dealership network to sell those vehicles. Unfortunately, the ability to sell EVs comes with quite a price tag and a very short timeframe (October 31, 2022) for dealers to commit. As a result, the news from Ford feels more like an ultimatum as opposed to a business opportunity.
Should a dealer commit to becoming EV certified, they will have the option to be either a Model e Certified or Model e Elite dealer allowing them the ability to sell EVs beginning in 2024. The Model e Certified option will allow dealers to sell 25 EVs per year, but the dealer will neither have any inventory or demonstration vehicles.This option comes with a $500,000 price tag. Whereas the second option, the Model e Elite dealer, will be allowed to have some inventory, demonstration models and an ability to sell EVs as allocated by Ford. The required dealership investment for this option is $1,200,000. Dealers will be required to invest in chargers as part of their investment and spend $75,000 annually in training costs. Ford informed dealers that they will provide proformas to them detailing expected sales volume, chargers needed, potential profits and the like. Those dealers with whom we have spoken, described the proformas as less than adequate offering little in the way of detail.
Any dealers not opting in by October 31, 2022, will not be able to enroll until 2027. So not only is the timeframe in which to decide very short, but those not opting to sell EVs are penalized by having to “sit out” the next four or so years.
The decision to opt into one of the two EV options is a difficult decision to make without knowing the validity of the proforma information. It is impossible to know the potential return on investment.In addition, the cost for the two options is significant. To quantify the “cost” of investment, if one assumes a historical 2% pre-tax profit margin (from internal combustion engines), a $500,000 investment in the Model e Certified program essentially equates to investing the profit on $25.0 million in sales. Similarly, those opting to become Model e Elite dealers are essentially investing the profits from the first $60.0 million in sales. Simply stated, the economics of the investment need to be carefully reviewed. Any decision must also factor in Ford’s requirement that non-negotiable prices be posted online. As a result, the “rush to the bottom” by dealerships looking to recoup their investment will likely ensue.
In addition to initial outlay, there are other factors for consideration, including Farley’s statement that dealers need to reduce selling and distribution costs by $2,000 per vehicle, in order to be more competitive with Tesla. So not only is Ford requiring its dealership network to bear some of the cost of the electrification of its vehicles, but it is already putting pressure on that same dealership network to cut costs. Compounding this is the already-existing cost of image programs and the fact that Ford is not selling a “novel” product as virtually every other car maker is chasing Tesla in their bid to change from combustion to electric vehicles.
Having spoken to a number of dealers, the programs being offered by Ford feel very much like a way for Ford to shed its smaller dealerships who do not have the financial wherewithal to make the investment, while simultaneously limiting the profitability of the very dealers who commit to the program. As a result, we are urging our clients to consult with legal counsel before committing to this program. Many dealers are questioning whether they will have the ability to opt out of the program if certain metrics are not met.
The dealers we have spoken to are not at all happy about the program requirements set by Ford. Many view it as a way for Ford to force dealers to share in the cost of Ford’s conversion to electric vehicles as it tries to compete against Tesla. Some dealers are even questioning whether they wish to remain Ford dealers, especially those who sell other nameplates.