HOBSON’S choice has come to mean a course of action that appears to offer choice, but does not, or a choice between two equally bad options.

That, according to Pitcher Partners, is the fate that awaits car dealers as they move inexorably towards the brave new world and the complexity of meeting industry emissions standards that start in just over a month (January 1).

As 2025 approaches, Pitcher Partners, working with the Australian Automotive Dealer Association (AADA), has prepared a paper to help dealers estimate the potential impacts likely to be incurred by car retailers under the new regulations. Pitcher Partners says that the New Vehicle Efficiency Standard (NVES), in its current form, imposes emissions credits or penalties at the point of importation, something the AADA has been lobbying the government to change to the point of sale.

Measuring the emissions credits or penalties at the point of sale is key to ensure the OEMs will not import until they drop from exhaustion to meet the NVES rules; subsequently passing all these unsold cars, and their holding costs, on to their dealer networks to deal with. 

This will leave dealers with the Hobson’s choice of incurring the holding costs in funding the storage costs or likely losing money to sell these cars through heavy discounting.

And the situation could become even more dire if the model choices by OEMs do not align with what their buyers want to purchase.

The report will also be shown to the federal government to highlight the unintended consequences that measurement at the point of entry will have on motor retailers.

Pitcher Partners said that the article is designed to illustrate the impacts of these penalties and the downstream effects that Australian motor dealers are likely to incur as a result. 

They say that the Original Equipment Manufacturers (OEMs) “potentially will increase the number of vehicles arriving in Australia as they attempt to increase the number of Electric Vehicles (EV) sold in the market to offset any penalties faced for their fleet’s emissions. 

“Dealers are likely to face the consequences of increased stock in two possible forms; either: 

• Higher floorplan costs as a result of higher inventory levels
• A loss of margin due to discounting to clear stock
• A combination of both. 

“NVES in its current form will only exacerbate the current stock issues being faced,” the report said.

Pitcher’s report highlights: “The point of NVES is to increase the number of low emission vehicles on Australian roads, not on dealer lots! 

“A change to compliance at the point of sale instead of point of importation is essential to hold OEM’s to account. 

“Under the current system, dealers will be forced to choose between losing money through excessive floorplan charges or through profit erosion resulting from discounting. 

Floorplan Affects Profit

“The rise in floorplan financing costs has proven to be a critical challenge for motor dealers in 2024, affecting both internal combustion engine (ICE) vehicles and electric vehicles (EVs). 

As NVES regulations come into effect, the overall supply of vehicles will likely shift as dictated by the regulations. The impact on dealers is they will be expected to hold larger and diverse inventories that may not align with Australian consumer preferences. 

“Compounding the impact, is the average BEV is more expensive than its ICE equivalent. 

This accumulation of stock will drive up floor plan costs, as vehicles sit on dealer lots for extended periods, tying up capital and increasing interest expenses to maintain these inventory levels. 

“EV models are currently faced with sluggish consumer demand and already, dealers are facing mounting pressure from these financing costs, impacting their profitability. 

“Unless consumer demand shifts significantly, NVES will only exacerbate these issues. The impact of floorplan interest costs can be seen in the following table showing the compounding nature of the floorplan interest costs blow-out.

The above table illustrates the impact of floorplan interest costs on gross profit. As you can see, if a dealer holds the car for only 3 months the impact is 20% of the gross profit consumed by interest. If the dealer holds the stock for 6 months, nearly half the gross is lost to interest holding costs. That’s before the discounting starts.

Discounting

The Pitcher report said the transition to EVs would especially add complexity to inventory management. 

“While demand for EVs is growing, it is not yet uniform across all regions of Australia, leading some dealers to carry excess stock of models due to OEM stocking requirements.

However, these vehicles may require substantial discounting to clear from dealer lots if supply is not aligned with consumer demand.

“NVES will introduce new dynamics to both electric and ICE vehicles due to the introduction of penalties and credits when it is implemented in January. Whilst the policy’s intention is to force OEMs to import lower emissions vehicles, there are currently very few incentives for the market to embrace BEV adoption. 

“This often-overlooked facet of the NVES is a major deviation from other parts of the world that the government is trying to emulate; only implementing the stick approach rather than the carrot AND stick. 

New Zealand provides an excellent example of BEV adoption uptake pre and post incentives. 

“As shown in the above chart, the discounting issue may not be an EV only occurrence, the Pitcher report said. 

“ICE vehicles may see a dampening in consumer demand as emission penalties will likely lead to increased prices. Consumers may be unwilling to accept the increased prices while they face increased cost of living pressures throughout 2025 and beyond. 

“To offset the carrying costs of excess stock, dealers may have no choice but to engage in aggressive discounting, eroding gross profit margins to unprofitable levels. This will no doubt lead to margin and discounting pressures at the OEM and distributor levels as well. 

“Utilising discounting to move excess stock can maintain the desired gross profit in total, however, to do so a dealership will need to sell significantly higher volumes. The relationship of discounting to increased volumes is displayed in the table below:

The Pitchers report said the discounting necessary to move ICE and EV vehicles will place dealers in a precarious financial position. 

“Vehicles that fail to meet immediate consumer demand or rapidly shifting environmental regulations will force dealers to sell at prices significantly below the gross margins required to maintain profitability. 

“This, combined with rising floor plan financing expenses, will create a perfect storm of margin compression, sometimes referred to as the ‘jaws of death’. 

“The extended duration that unsold inventory remains on dealer lots, compounded by financing interest and holding costs, will necessitate swift action to avoid deep financial strain. 

“Ultimately, dealers will be forced to carefully balance inventory levels with discounting strategies and increasing floor plan costs to remain competitive and financially viable under the new NVES landscape,” the report said.

James Voortman

Meanwhile the CEO of the AADA, James Voortman told GoAutoNews Premium: “We have been very clear in our discussions with the Government that the legislation should ensure that manufacturers comply with the NVES at the point of sale. 

“Under the existing rules, there are real risks that dealers will be put at risk by having to carry a large proportion of slow-moving stock.

“It is unacceptable to have a system in which vehicles do not even have to be sold to meet emissions standards. If you look at other markets which have implemented emissions standards, a key element has been ensuring that vehicles actually end up in a customers’ hands and make a positive contribution towards emissions reductions.

“We have a firm commitment from the Government that this will be considered in the context of the 2026 review of the NVES”