Published on September 30th, 2018 | by Maarten Vinkhuyzen0
Compliance Cars In USA — But Not In Europe
September 30th, 2018 by Maarten Vinkhuyzen
How often have you heard the complaint that all the electric cars on the market aside from Teslas are only compliance cars and that the carmakers have no intention to make enough of them to sell the cars in high numbers? I know that I have heard this complaint way too often. And while the Fiat 500e is just a compliance car, with the CEO begging the public not to buy it, most are honest efforts to make a first step on the road to electric mobility.
That most cars are hard to come by is not a problem created by the carmakers. It is just hard and expensive to sell those cars in the United States. And the worldwide battery situation makes all cars not made by Tesla production constrained.
Selling in Europe is easy. The customer visits a dealer showroom, where there is probably a single item on show. If the customer is really interested, an appointment for a test drive a few days later is made. But often there is no car on display and none available for a test drive. Based on experience with similar cars and the brand, serious prospects place an order for delivery a few months or over a year into the future.
Perhaps they will go on a test drive when a car becomes available, but often, the first time these buyers get to drive in the type of car they ordered is after they receive their vehicle. This sales process is standard in most of Europe and is called “build to order.” For the car salesman, there aren’t many cars on the lot that aren’t accounted for, because to most European dealers, an unsold car on the lot is a waste of money. For the car buyer, part of the fun (and expectation) is to spec the car exactly to all the wishes of the entire family.
If there is a car on the lot, that is for the sucker that comes around, a cheap car that the dealer hopes not to lose too much money on. It is like food with a fresh date of yesterday. The profit is on the cars that are ordered with all the bells and whistles that the customer desires.
The interaction between car salesman and car buyer is a lot like the interaction when buying a new kitchen. While the car salesman has an incentive to sell as many options as possible, pushing the price too high can kill the sale. Creating the best car within the customer’s budget (or just above it) is the way to create a repeat customer, which is the most valuable customer. The result of this process is a custom-made product, possibly a completely unique one.
Compare this with what is customary in the USA. The process of buying a car is not much different from buying groceries at Walmart. Visit the dealer, pay, and drive home, preferably within an hour. This sales model is called “build to stock.” This is in part because car prices in the USA are a lot lower than in Europe. Besides the European sales tax of ~20%, there is often a “luxury tax” that can scale from a few percent to over 100%. Buying a car in the USA is not as great an expense as in Europe, where it can be like buying a home.
But this is likely due mostly to natural development long ago, with long logistics lines, slow communications, a sales push with the product that is already close to the buyer, and perhaps a few other factors. The result is a dealer with a large parcel of land to store a large number of cars that the dealer has to sell. The dealer buys the cars from the carmaker, financing the unsold inventory of the carmaker. This financial link or service the dealer and the carmaker have justifies the non-competing laws that protect the dealer from direct competition by the carmaker.
The money the dealer has to invest in land and inventory adds extra costs to the sales process. Selling from inventory limits the customer’s choice to a few trim levels and options that just happen to be available at the dealer. To sell what is just a bit different from what the customer really likes, the haggling process is needed. The salesman will try to sell the car with no more discount than is absolutely needed, but the customer does not like to pay for options he does not want. This discount is another cost that is expected with every car sale.
|Kia Soul EV||1,728||2,157||907||4,417||5,551||4,132|
|Hyundai Ioniq EV||432||233||6,117||5,126|
Why send a car to sit for weeks or months unsold at a dealer’s lot when you can use it to fulfill an order? And remember that it’s an order for a car with no discounts to a customer that has been waiting for months to buy. For a carmaker, it can be cheaper to buy the ZEV credits from Tesla and sell the car in Europe or Asia than to send it to the USA in the hope of earning a few credits in the future.
Indeed, the USA has an EV sales problem. Selling cars in the USA is expensive, uncertain, and less profitable than selling the cars in other markets. Look at the table that compares USA sales with European sales of BEVs that are in both markets — for the first 7 months of 2018 and the whole year for 2016 and 2017. And realize that GM could have sold more Bolts in Norway alone than it sold in all of the USA — the market for Bolts in the rest of Europe is at least as large as the Norwegian market.
As long as there is a supply shortage in the rest of the world, American customers who want an electric car other than a Tesla will have to learn to use the build-to-order process. Not doing this will cause the USA to fall further behind China, Europe, and the rest of the world where people are willing to wait for their cars.
Expect the differences in that table to get worse in the coming years, not only for the cars on the list, but also for the new models announced for 2019 and 2020 that will show up in very limited numbers at American dealerships — just enough to show that the cars do exist. Unless American customers are willing to buy cars like the Europeans do, however, they will be hard-to-come-by “compliance cars.”