Berkshire Automotive CEO says "there's no question, we're going to have an EV future"

It’s gotten a lot more expensive to buy a car than it used to be. What? What’s going on? What’s the feeling out there? What’s the mood? Well actually it’s a great day to have this conversation cause the industry just came off a stellar month and showed some sequential improvement in sales this month at a 16,000,000 SAR. But the overall landscape has been driven by an increased in new car availability, OK, which has stimulated more sales. But unfortunately there’s healthy tension with higher interest rates and the higher transaction price driven by inflation over the last four or five years. How much, how much has the sticker price gone up over the last? Believe it or not, the sticker price is up almost 25% over the last five years and the average transaction price for a new car is now about $45,000. And we’re getting just a little bit of relief in recent months because again, as supply of new new vehicles have increased, the manufacturers are introducing somewhat higher incentives and dealers like us are also having to discount in order to help consumers reach a monthly payment that’s affordable to them. How? How much of the increase that you see in the manufacturer’s suggested retail price, how much of that is because components went up, How much of that is because cars have so much more electronics, so many more electronics in them than they used to and they do a whole lot more things than they used to. Well, it’s a very thoughtful question. Certainly, the commodities that go into all the moving parts of an automobile have experienced inflation, but obviously there’s a lot more telematics, state-of-the-art safety equipment, consumers. We like all the whistles and bells. And so certainly higher content has also contributed to the average price of a vehicle. One other thing, the mix of vehicles, obviously over many years there’s been a shift from almost a balance of 50% cars and trucks slash SU VS, Now it’s more like 80% trucks and SU VS, and they carry a higher price than a sedan. And so that’s also contributed to that higher transaction price. Is that a reflection of lower prices at the bump, lower gas prices, like you don’t buy an SUV when gas is above 4 bucks? Well, it’s a thoughtful observation. You know, we’re blessed in this country with relatively low energy prices and that’s been pretty stable now for many years. And there’s no question that if there were to be a significant spike in prices at the pump that you would see consumers start to think more about cars with higher MPG and maybe a shift away from larger SU VS and trucks back to some of the better mileage sedans and and other CUV vehicles. Well, what do higher interest rates mean just in terms of how difficult it is to get somebody into the car? I’m sorry, higher, higher the higher interest is significant. Since early 2020, the average new car payment is up about 30% at the average is about $735 a month. The average used car payment is up a little over 30% to about $546 a month. So that’s significant. 85% of the people that drive an automobile have a car payment and the two things that make up that payment are the price, which we’ve already acknowledged has been impacted by inflation and the interest rate. And so that has really held back a full recovery of automobile sales. We still haven’t got back to pre COVID levels, even though there’s now pretty healthy inventories of new cars available in the industry today. And I think it’s that dynamic that’s holding it back. Affordability is top of the mind with all consumers right now, but they’re more resilient than we would have predicted. Again, sales are up year over year for our industry, but they’re up single digits and not back to pre COVID levels. What’s the mix between new and used vehicles? Well, the used vehicle market is much larger. So you’ve got about 40 million vehicles a year sold in the used channels. The new vehicle market this year will be in the high 15,000,000 mark. Normal market or pre COVID market was about 17,000,000 units. But remember in that used car channel, you’ve got three channels. You’ve got dealers that are selling those, you’ve got independent used car dealers and then you’ve even got hand to hand sales between individuals. So a much larger market. There’s about the motor pool’s about 275,000,000 units that are on the road and so all of those are obviously pre owned. Yeah, if if you’re just finishing up, you just finished April and you had a 16,000,000 annualized run rate and you’re thinking it’s going to be 15 at the end of the year, you think it’s going to get harder to sell cars from here now. So far it’s been below 16 and I think most economists and analysts in our industry are calling for 15-5 to 16. And so you know I I think it’ll be at the high end of that range I always have. And certainly April was encouraging because we saw some sequential traction and we also saw great brands like Toyota and Honda that had not had full new car availability in the last couple of months. They’re trending back to normal inventory levels and that’s been a real catalyst for increased sales for the industry in our company. OK, let’s talk about electric vehicles. There’s a big government push for government for electric vehicles and subsidies that go along with that. But we’ve seen some pushback recently, people saying maybe they don’t want an EV. What do you see? Well, E VS, there’s no question we’re going to have an EV future. However, the pace of adoption and the magnitude of adoption was clearly overestimated by so many people in and around the industry and you’re seeing now today in fact this year true Bev’s battery electric vehicles are are really flat year over year in sales. You’ve got some growth in plug in electric vehicles, plug in hybrids that are up about 40%. The total market for EVs, when you put those two together is about 9 1/2% of the market. So EV sales have stalled, that’s in the headlines and consumers are beginning to recognize that they have a lot more choices. Like you and I were talking before our interview that you just recently bought a hybrid, a Toyota hybrid. Congratulations. And what’s great about that vehicle is you’ve got an electric motor and a traditional internal combustion engine. They both have separate batteries. You’re benefiting from improved mileage, but you’re also helping reduce emissions and Toyota’s goal of 0 carbon future. And a lot of consumers are beginning to learn more about hybrids and learning that that’s a great fit for their needs. Well, because I don’t have to do anything different. I mean, you don’t have to do anything different and you don’t have range anxiety. The three big objections to electric vehicles are a price. Just up until recently, they’re significantly higher price than a internal combustion or even a hybrid vehicle. Concern about the availability of charging infrastructure, the convenience and availability about finding a way to charge that vehicle conveniently and efficiently, and then finally, unknowns about the battery life. How long will a battery last? How much does it cost to replace? What are some of the environmental considerations about recycling or disposing of that battery? And so those are the three big obstacles that the industry’s working hard to overcome to get consumers more comfortable with EVs. But at Berkshire Hathaway Automotive and really you know the smarter manufacturers, we want to sell what consumers want to drive. It’s a powertrain, A propulsion system and whether they choose a traditional internal combustion engine, a full battery electric, a Feb, we call it a plug in hybrid or now even some innovation around hydrogen, we just want to sell what are going to meet consumers needs. And obviously recently with your purchase of a Toyota van, you have determined that the hybrids have been a great fit for you and your family. Hybrid sales this year up about 36%. Remember EV sales, true EV sales are only up a few percent, so you’re seeing growth there. This is important a lot. Hybrids are getting a lot of news right now, but hybrids were really introduced in 1997 by Toyota and when they launched the Prius, a very innovative vehicle and they’ve sold over 15,000,000 of those vehicles in North America since 1997. But I think when EVs were launched and and really pushed on to the consumer marketplace, it caused everybody to pause and recognize that they needed to learn more and that maybe there was a better solution. Well, Tesla is still the 800 LB gorilla in the EV. Year to date, Toyota is only 50, excuse me, year to date, Tesla is only 50% of the EV market. In fact, last month in April, they were less than 50% for the first time. If we’d have looked at that number just four or five years ago, they were close to 100% of the market. So as the legacy or the traditional manufacturers introduce EVs and now just about every other OEM has introduced at least one EV model, obviously that is putting pressure on Tesla sales. And in fact Tesla sales are down in absolute numbers year over year. And I have to take a minute to promote the franchise dealership model because one advantage that I think the traditional manufacturers Fords, the General Motors, the Toyotas, the Hondas, the Subarus, the Hyundais have is they have a very established dealer network to take care of the customer after the sale, to provide service after the sale, to be their advocate, a conduit of communication with the manufacturer and really have a personal relationship with those dealerships. Tesla only has a drop off Certi service center. They chose a direct sales model and they don’t have dealerships. And I think over time you’ll see that consumers are attracted not only to the terrific models, but those traditional OEMs are introducing. Ford’s got some incredible vehicles, a Mach E the the Lightning. You know, obviously we’ve already acknowledged Toyota, Lexus. Actually, Hyundai last month was the second largest seller after Toyota, third largest seller after Toyota and Ford. But they’re going to be attracted to those brands because they have an established retail automotive network, a franchise dealer in their local community who’s there to take care of their needs If the car breaks down, if they need maintenance, if they have a trade in, if they need help arranging financing. A lot of value is created in that dealer relationship. That’s excellent. Jeff, wanna thank you for your time. It’s always a pleasure to see you, Becky. Thank you. Have a great meeting. You too.