Tesla-Like Software Updates Put Dealers’ Profit Center at Risk

  • More carmakers, suppliers plan to begin over-the-air fixes
  • Dealers, still needed for physical repairs, aren’t going away

The over-the-air software updates Musk pioneered to add features or fix flaws in his electric vehicles are being embraced by more automakers.

Photographer: Christopher Goodney/Bloomberg

Auto dealers already feuding with Elon Musk for cutting them out of the car-buying process have another reason to dislike Tesla Inc.

The over-the-air software updates Musk pioneered to add features or fix flaws in his electric vehicles are being embraced by more automakers, a potentially grim development for dealers who typically rely on parts and service for as much as half of gross profit.

General Motors Co. will have new electronic architecture and infotainment systems that enable over-the-air, or OTA, updates before 2020, Chief Executive Officer Mary Barra said in July. Delphi Automotive Plc executives have called Tesla’s technology a “brilliant” disruption and are embedding OTA capabilities in the products the company supplies to carmakers in an “attack” on software-related warranty costs.

“Right now, the industry has a very antiquated way of dealing with software fixes: It goes to a dealer, it gets re-flashed, the dealer gets money,” Delphi Chief Financial Officer Joe Massaro said during an investor day in September. In the future when carmakers want to push through a software fix, “We’ll turn it on and fix it over the air. And if they don’t want us to do that for whatever reason, then we’re not paying for it.”

Dealer Profits

Just as online car research sites have brought about more price transparency and shrunk dealers’ profit margins on new and used car sales, the rise of software-controlled functions within cars may chip away at the service and repair business -- the largest source of dealer profits. Auto manufacturers spend $40 billion to $50 billion a year on warranty costs, and more than half of that is now software-related, according to Delphi. Sending those fixes over the air will save $7 billion this year alone, largely by eliminating the need for human labor at dealerships, IHS Markit estimates.

AutoNation Inc., the biggest dealer group in the U.S., had margins of 43 percent in its parts and service business last year, 8 times higher than for selling new cars. Dealership group Asbury Automotive Group Inc.’s were even higher, with parts and service margins of 62 percent. By comparison, Apple Inc.’s gross profit as a percentage of revenue last year was 39 percent.

To be sure, the money automakers pay dealers to cover the cost of repairing cars under warranty is just a slice of dealers’ parts and service revenue, much of which will never be eaten by software. Any part of a car that can wear out -- tires, windshield wipers, shocks -- will always need a physical department or technician, said Jamie Albertine, an analyst with Consumer Edge Research. OTA technology will also be limited to new cars since it can’t be easily retrofitted to those already on the road.

“This is a key gating factor when you think about the speed manufacturers can bring OTA updates to market,” Albertine said in a phone interview. While he estimates parts and service represents 40 to 50 percent of dealers’ consolidated gross profits, that won’t be pinched anytime soon. It’ll be close to 2030 before the share of new cars coming to market with OTA-enabled parts are “well into double-digit percentages.”

In the connected car of the not-too-distant future, predictive analytics will also alert drivers that repair work is needed, potentially sending more business to a dealership, Albertine said. GM’s OnStar telematics service can already prompt customers to schedule repairs.

Jared Allen, a National Automobile Dealers Association spokesman, said the group does not see OTA updates as a threat to dealership service and parts departments. Franchised dealers completed more than 74 million warranty and recall repair orders in 2016, he said.

OTA Abilities

Most of the OTA capabilities going into cars today are limited to infotainment systems, like Ford’s update earlier this year to enable Apple CarPlay and Android Auto in 2016 models, and navigation systems that get fresh maps, according to Colin Bird, an analyst with IHS Markit.

The bigger change will come when electronic control units -- mini-computers within a car’s electronic architecture that control things like emissions, advanced safety systems and airbags -- become OTA-enabled. Today, just 0.17 percent of cars have OTA-enabled ECUs. That will jump to 19 percent by 2023, Bird said.

Tesla has a head start. After a Model S driver died driving his car under a semi trailer that was crossing a Florida highway last year, Musk pushed out updates to Tesla’s Autopilot system so that it relied more on radar sensors and tweaked the automatic-steering software so that it disengages if a driver ignores warnings to keep their hands on the wheel.

That response prompted a change of heart among some auto industry executives, who previously saw OTA updates as expensive tech that wouldn’t necessarily help sell cars, said Mark Wakefield, head of the automotive practice at consultant AlixPartners.

“CFOs in the industry have been aggressively pushing back against engineers who say, ‘Put this X-dollar value thing in because of a possible outcome,” he said. The Tesla update “showed this has got some real value.”

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