By the Scotiabank Automotive Finance Team
Significant industry attention and focus currently exists in the automotive industry on innovative technologies and advancements, namely electric vehicles, autonomous vehicles and ridesharing. While it is inevitable that change is coming, questions arise as to timing due to ongoing technological, regulatory, infrastructure and consumer acceptance hurdles that need to be overcome.
Automotive manufacturers face the challenge of making significant research and development investments in electrification and autonomous technologies for future long-term benefits, while maintaining a current pipeline of traditional vehicle sales that account for 95%+ of their revenues.
While the automotive industry transformation is occurring more slowly than media expectations, Scotiabank recognizes the need to innovate and transform our offerings to meet future industry needs while maintaining our market leading position in automotive finance in Canada.
Below, we delve into the key emerging trends in the automotive industry, including our perspective on the timing and realities of these changes, as well as what we are doing to support the trends.
Scotiabank and CAAR
CAAR is an acronym often used in the automotive industry to describe its transformative emerging trends — Connected, Autonomous, Alternative Fuel, Ride and Carsharing. Let’s take a closer look at what they are and how they will impact how we finance consumer loans and leases.
Connectivity
Connected refers to the increasing technological innovation with cars related to connectivity through mobile devices, apps, telematics, Wi-Fi and digital platforms. Some automakers are leading the trend in Canada with fully connected, over-the-air software downloading capabilities.
Customer increasingly expect more from their vehicles, and manufacturers must keep up with development requirements, including having to partner with Big Tech companies such as Google and Apple. Connectivity, once completely adopted, can be a threat to the traditional dealership model. Electric and connected vehicles will require less servicing at the dealership as vehicles will last longer, with less wear and tear due to fewer moving parts in the vehicles. According to one source, customers maintain their electric vehicles on average 7-9 years versus Internal Combustion Engine (ICE) ownership, which is typically 5 years or less.
Scotiabank continues to finance vehicles from low- to high-tech and our advancement in payments, as a Bank, enables our customers the opportunity to use digital wallets for things like in-dash purchasing or perhaps even mobile app integration one day.
As for dealerships, we strongly believe there will always be a need for them. Today’s innovative dealers are focusing on how to enhance the customer experience by adding value in stores, such as offering technical “genius” hours to assist customers with the new technology in their vehicles, ensuring that the dealership is still a very relevant part of the vehicle ownership experience.
Autonomous
Autonomous is an innovative way to think about the future of driving. For years, there’s been an ongoing shift into looking at how the industry can develop fully autonomous vehicles that do not require human drivers (i.e. Level 5 autonomous vehicles).
Autonomous vehicles fundamentally shift the makeup of the auto industry. It is likely there will be significant transformation in auto design, sales, financing, insurance, car ownership and regulations with the introduction of autonomous vehicles. Autonomous vehicles will lower the cost of ride-sharing due to greater efficiencies and lower downtime, which will increase ridesharing usage. For some individuals, could the lower cost of carsharing serve as a tipping point to abandon private vehicle ownership?
According to a May 2020 report by VynZ Research, there were 17.7 million autonomous vehicles globally in 2019; the number is expected to reach 51.2 million by 2025. Autonomous vehicle development has been occurring for over a decade but has faced numerous challenges, and with the impact of COVID-19, forecasts may require revisiting. A prime example of development efforts in this space is Waymo, an autonomous project by Google that started in 2009. Waymo has been through many testing cycles over the last decade with the full support of its parent company and recently opened rides to the general public in Phoenix. In the Canadian market, current regulations and development of full autonomous technology (Level 5) has lagged in expectations. The Canadian market is a leader in regulatory transformation for autonomous vehicles, led primarily by the Province of Ontario, however, the federal government does not allow anything greater than Level 3 autonomous (human driver in control). Autonomous vehicles are anticipated by many to threaten current retail ownership levels as consumers may not need a vehicle on a full-time basis if autonomous vehicles become more efficient. However, autonomous vehicles also support a model that enables those who are unable to drive to “drive.”
Scotiabank continues to partner with automakers that are working on various levels of autonomous technology and in many ways leading the trends in terms of innovation. We are following this trend very closely and we are prepared to continue financing retail or commercial fleet opportunities whichever way the pendulum swings.
Alternative Fuel
Electric drivetrain vehicles (and variants) are beginning to increase in market penetration and many foresee that they will completely replace traditional ICE (internal combustion engine) vehicles due to environmental climate concerns and ongoing government regulations. According to BloombergNEF’s Electric Vehicle Outlook 2020, “Some 13 countries and 31 municipalities or regions have announced targets for phasing out sales of new internal combustion vehicles, mostly by 2030 or 2040.” In addition, according to the same source, by 2025, EVs will make up 10% of global passenger vehicle sales and increase to 28% in 2030 and 58% in 2040.
We’d expect targets across the globe to expedite the penetration of EV sales but as important will be the affordability of the vehicles compared to ICE and accessibility to charging stations. Today, consumers can expect to pay a premium for a fully electric vehicle, but this will change as production levels increase and manufacturers find economies of scale. Based on the above forecasts, can we expect price parity to take place by 2030? Likely. A fully established ecosystem for charging stations is also a dependency for consumers to have comfort around range anxiety and commit to transitioning to EV.
Scotiabank is drivetrain agnostic and finances both ICE and electric vehicles indiscriminately. Scotiabank has deep partnerships with electric vehicle manufacturers as well as those that are starting to invest heavily in this space. As a result of these partnerships we continue to learn and evolve our product offering, including our ability to separately finance EV chargers for customers as part of their auto finance contract with Scotiabank (i.e. there is no need for customers to use separate payment or financing to purchase their in-home chargers).
Ride and Carsharing
The advent of ridesharing companies such as Uber and Lyft has created a new option for transportation without car ownership.
As consumer use of ridesharing increases, sentiment has been that auto ownership will fall. As well, advances in autonomous vehicle technology further enhance this effect as autonomous vehicles, due to higher travel efficiencies and lower downtime, lower the cost of ridesharing and make ridesharing a more attractive option. However, with the effects of COVID-19 and social distancing requirements, ride/carsharing may have lost some of its momentum, which may increase car ownership instead.
While individual vehicle ownership may fall, commercial ownership may increase as ridesharing providers or drivers will need vehicles to provide transportation services. Increased wear and tear from constant driving will also require more vehicles in a shorter time period. Scotiabank is responding to alternate ownership models with a new platform called “Boro”, which allows customers to book a long-term test drive or vehicle rental.
Conclusion
The near-term outlook of vehicle financing remains largely unchanged. Most vehicles will continue to be sold to retail customers through a network of franchised dealers or by manufacturers direct-to-customer, both of whom have deep relationships with Scotiabank.
We believe that the bricks-and-mortar dealership model will continue as consumers show a preference to touch-and-feel vehicles before purchase. However, we understand that there are times when the purchase decision happens online in advance, as consumer visits to multiple dealerships are down. We may see that the current dealership model will shift focus from a real estate intensive model to a retail showroom model that works hand in hand with digital channels.
We expect mobility and autonomous vehicles to impact the demand for transportation but not reduce the supply. Rather there will be opportunities to provide financing to end-customers who wish to acquire autonomous vehicles or commercial enterprises who look to autonomous vehicles as inventory for transportation businesses (rideshare).
As a leading Automotive Finance Provider, and Best Bank in North America in 2020 for Innovation in Digital Banking, according to The Banker magazine, Scotiabank will continue to develop digital solutions for our auto manufacturing partners and self-serve tools for our dealers and customers. We have an experienced, dedicated and talented team of Automotive Finance professionals, including a dedicated team focused on Automotive Finance innovation within our Digital Factory. We are committed to continue to innovate and add value in this important industry in Canada.
