2023 Automotive Insights Symposium Day 1 Panel The Consumer Challenge: Electric Vehicle Affordability Transcript

MARTIN LAVELLE: All right. We're going to talk about consumer affordability. Starting off in general, what's going on now, and then we'll get into the EV space after talking about general conditions at this point.

So I'm pleased to be joined this afternoon by Dave Gohlke, Energy and Environmental Analyst from Argonne National Lab; Pete DeLongchamps, Senior Vice President, Manufacturing Relations and Financial Services and Public Affairs for Group 1 Automotive; and Lonnie Smith, President of On the Road Lending.

So thank you, guys, for joining us. We're going to do the same thing that we did this morning for this particular panel. Everyone's going to present for 10 minutes in the order in which they're seated, and then we'll get into Q&A, hopefully being able to mix up my questions again with your questions on Pigeonhole. So again, please interact with us that way so that your questions can be answered. So Dave, why don't you lead us off?

DAVID GOHLKE: Thank you so much. And I'll start off-- I'm not going to step down both because I'm short and because I'll fall, but I'll start off the same way that Kristin did a little bit earlier and say these are the opinions of Dave, not Argonne, not the Department of Energy, not the US government. I guess that we're streaming, so I gotta be especially careful to make sure I don't have a hot mic and say something I'm not supposed to say. Though, if you want to talk with me off the record on tax policy-related things to EVs, I do know a fair bit on what's going on with those. So maybe I'll push this button. Not much will happen here. All right, great.

So I'm a research analyst at Argonne National Laboratory which is a research institution funded by the Department of Energy right outside Chicago. We do a lot of information to try and understand what's going on with how can we reduce fuel use overall?

And so we really want to understand what can we do for the whole of society here? What can we do to minimize fuel costs and such? And so this is right here, a little bar graph on the chart here shows some information from a recent analysis that we've published here.

And so we've got internal combustion engine vehicles, which we find are about $0.10 or so per mile. And this is modeled out for a few years in the future. We find that vehicle efficiency, switching to hybrids can reduce that cost by a fair bit, and so can electrification. Fuel switching can reduce those fuel costs. But of course, those aren't the only costs that go into it. If it were, then yeah, sure, everybody would have an EV already. And so we do need to consider the fact that more efficient technologies often have higher upfront costs. And so here are some model vehicle costs plus financing as well to go into that. And we find that, all right, at that point, the BEVs-- and that's a battery electric vehicle-- with 300-mile range meant to represent where the level needed for consumer acceptances, we do see that ends up being a little more costly there than the conventional vehicle. The hybrid can still save money relative to that ICE.

We do note that a comprehensive TCO, Total Cost of Ownership, should consider all operating expenses. And so we add on detailed analysis on insurance and maintenance and repair and the like. And if we go here, yeah, so we break those down broadly into vehicle payments and operating expenses here. And so yes, we see that the upfront costs, those operating expenses are lower for the electric vehicle, but the vehicle payments are more expensive.

As new technologies mature, those costs tend to come down, and there's a graphic here showing some modeled forecasts on how those vehicle prices might change. Those are 2 years old and are already well out of date because that's just the nature of trying to understand these cost forecasts there.

It's also using fuel costs from 2020, and conveniently, fuel costs have been perfectly steady since then. So at least that part. We've got a pretty good grasp, but we it's very volatile.

So this is total cost of ownership as a whole, but we also break this down and to see what goes on during the life of the vehicle. So I've got 2 different curves here, or 2 different stacked charts. One showing the cost year over year based on an expected VMT, of Vehicle Miles Traveled that you'll have based on changes in fuel costs and changes in maintenance and repair.

And we see, OK, a very large spike for whoever buys that vehicle new, they're getting a big hit in depreciation, they've got the sales taxes right away when they buy that vehicle. There's a gradual growth in maintenance and repair costs as the vehicle ages. New vehicles are typically not falling apart. That countering, the increased depreciation. So we're looking at that asset value in year 5 versus year 6, a lot smaller than year 2 versus year 1.

And what we find is starting around year 7, the EVs can be cheaper than the ICEVs. So that's a great story, and these are going to go ultimately to the markets that need them if you can get one. So I didn't put it on the slides because I wasn't certain if I would finish the analysis, but I ran some numbers on the new used vehicle tax credit, and said, all right, let's estimate how many of these vehicles might even be eligible.

And it's looking like less than a million of these vehicles will be eligible for this tax credit this year on account of being over $25,000 when you buy them at the dealer, because that's one of the stipulations there. And so this really means that over the next 3 or 4 years, we're probably talking about 100,000 or so transfers per year.

That's very tentative-- thank you. That's very tentative numbers. It is showing that there's so few of these vehicles, when we compare that to the almost 300 million vehicles that exist on the road, as much as I would love to talk about EVs for the rest of my time, I'm mostly not because they're not making a play yet. Over the next 5 years, 10 years, 15 years, they're coming on. We talked about market forecasts earlier. But for now, mostly looking at conventional gasoline vehicles.

So we also did an analysis looking at that-- we called it energy affordability. And so we can look at all parts of the vehicle cost, but we really focused on electricity-- sorry, the fueling costs right now. And we did that partially because we're a Department of Energy Lab and you let's go where we're actually being funded to do the work.

But also because those vehicle-- those fuel costs are historically one of the most volatile or probably the most volatile component of the estimated cost of ownership. And so we did this for everywhere in the United States, considering what we have here, that equation in the corner, the cost per gallon, the gallons per mile, the fuel economy, and the annual expected travel behavior, the miles per household. And we compared that to the household income.

And we see-- this shouldn't be too much of a surprise-- a large spatial variation in the cost of fuel, much more expensive in California. That data from this May when costs were really spiking for gasoline. And we do see, looking over historic trends, that while electricity prices are less volatile, that's definitely a potential opportunity down the line. Gasoline prices, very volatile even week over week, but certainly over a long term of owning a vehicle.

Looking at how much the fuel economy varies, this map is very interesting to me, maybe less so for others, but we see a whole lot going on here. We see that fuel economy-- and this data is a little out of date here, but the story is still true now. We see fuel economy is a little bit better out towards the coasts in kind of these big cities.

And there's a few things going on. One, we have bigger, bulkier, truckier vehicles throughout the Midwest, so you end up with worse fuel economy really in the Great Plains, that's a lot of what's going on. We also have newer vehicles in urban areas, in richer areas in the coastal cities.

And so here's a zoom-in of Michigan, for instance. So this graphic is pretty convoluted here, but the red represents places where newer vehicles were and then moved away from. So model year 2013 when they were a few years old and then when they were midlife.

And you see that they move away from those places in Oakland County, for instance, and they'll move out to-- oh, that's a different color than it was supposed to be, but they'll move out to the rural areas. And they'll also move over to the cities, to these lower-income neighborhoods there. So we do find that you end up with this migration of vehicles, which means that the cost burden is going to be-- we need to account for that as well.

There is an eye chart here, which I don't expect you to try and look at, but we really broke down how much those vehicle driving changes as a function of household dynamics and household income and we accounted for this and you can certainly see that the rurality of it makes a big difference where you have large splotches of the Midwest where they drive a lot.

Conveniently, fuel prices are relatively low when we pull all of that together, so the burden is comparatively high, but not necessarily egregiously so. So this map here-- and this research has all been published. You can really dive into the data if you want. But we look into how that varies from place to place.

California doesn't do all that great for fuel affordability because while the vehicles are comparatively efficient, they're not necessarily driving more. They have much higher-- and they've got fairly good income. They have much higher cost per gallon of the fuel. So you have different stories from place to place. A place like New York City, this cost burden is very low because both high income and very low VMT every year.

What we have on the bottom-right is a crazy-looking graphic that shows-- looking at all 70,000 Census tracts, neighborhoods in the United States, how that distributes. And what we find is that very low-income neighborhoods-- and I guess you can't read that sign there, they have a much higher cost burden, a fuel cost burden than high-income neighborhoods. So you see a downward trend from that line.

And this leads to really a disappointing question, because oddly-- it's not really odd, It's not a surprise, but the households that are buying these vehicles are almost invariably in neighborhoods on the far right. They are the high-income neighborhoods.

But these particular households are specifically the ones that are least bothered by volatility and fuel prices by more expensive new vehicles, all of these factors here. And so this is an interesting question. Luckily, I always stop just short of policy, but this is a really interesting question of, how do you match this question of, OK, you've got these new vehicles, but there's not really incentivized to get the fuel economy?

We used the discount rate of 1.2%, for the economists in the room, for our TCO levelized cost of driving modeling. But if we were going to do a consumer behavior model, we would have probably used like a 15% discount rate to say, oh, people care about their fuel in the first few years, but not long-term, because nobody's buying a vehicle thinking about, ah, what's useful for the next person who buys the vehicle?

So there's a lot to go into it. We're currently working on extending this analysis to the full of TCO, looking at depreciation, insurance, maintenance, and repair at a very hyper-local level. I was hoping to have that done before this meeting, but, well, really, the IRA got in the way more than anything else.

But in any case, we've got an ongoing active research here. I'll put up these slides only to show that it's there. If you download the links, you can see them when the slides are shared. Pete?

PETER DELONGCHAMPS: I think-- is my lavalier working OK?

SPEAKER: Yes.

PETER DELONGCHAMPS: All right. Terrific. I'm going to-- because I'm tall, I'm going to step down here. That was terrific. Thank you. Never thought I'd have to follow a guy from a laboratory. Lonnie-- you'll have a much easier, Lonnie, I promise you.

So my name is Pete DeLongchamps and this is my 41st year in the auto industry. I started out working in a dealership in college, and then worked at General Motors and BMW Corporate, and was actually a dealer for a while, and now I work for Group 1 Automotive.

And we're the 4th largest seller of cars in the US. We are a publicly-traded company. So anything I talk about today will be our third quarter results annualized. Earnings are in 2 weeks, so the numbers I give you are all annualized numbers off of our third quarter.

We own 149 dealerships in the US, another 55 in the UK. So full transparency, when we talk about ICE, BEV, hydrogen, we don't care. Our job is to sell cars for the manufacturers, to do the best job we can in selling and servicing automobiles, that's what we do.

We're the largest seller of cars in Texas and Oklahoma. So we have interesting insights to BEV demand that we can talk about during the fireside. We also have a huge presence in the Northeast. We've got 40 dealerships in the Northeast area, big concentration in Boston.

So we've follow the SMILE strategy. You'll notice, we only got 6 stores in California. We've got 2 Mercedes, 2 Toyotas, a Honda, and a Volkswagen. And that's strategic. So that's the overview of the company.

I thought it'd be interesting for everybody to see our brand mix. We're very heavy with Toyota/Lexus. 25% of our business is Toyota/Lexus. and I heard some of the previous speakers talk about the Toyota strategy. We think it's very good. They're taking a very measured approach to the marketplace.

Followed by what we call a balanced portfolio approach with 13% BMW, 8% Ford, another 8% Audi, a big Audi concentration in the UK, Volkswagen, General Motors, on down the line. I think that when we talked about affordability, one of the previous speakers talked about Hyundai and what they're doing with affordability. We agree with that completely, along with Kia and Toyota.

I thought we'd take just a minute to-- we saw some SAAR slides earlier, but I think this is a really interesting slide because when you take a look back and some of the previous speakers had talked about, we think 16 and 1/2 million is trend industry, but you go back all the way to, I mean, 2005, SAAR was, what, at 17. So we're talking about 17 and 2025, '27.

But you see the big dip during the recession. And then you see what's happened over the last 3 years. I mean, we're literally selling cars at recession lows today as a result of lack of availability. We feel there's still a lot of consumer demand. We see it in our dealerships.

When you look at demand and you look at sales, it's so dependent on brand availability. And when you look at the Toyotas, the Hondas, they're still in mid-single digit day supply. They've got a long way to go to catch up to where they were 30, 40, 45-day supply. You've got some of the domestic manufacturers that now have higher day supply, but a lot of them don't have the proper content.

But when you look at the overall business, we think that over 6 million cars have come out of the cycle in the last 3 years, which will affect the used car business-- that was mentioned earlier as well. But we think that this business has a really positive road ahead based on overall consumer demand and what's happening with the current availability.

One of my responsibilities is the finance and insurance business. And Lonnie is more of an expert on this than me, but this past 2021, we did almost $8 billion in originations for loans. This 2022 will be closer to 9.5 billion.

We do not have a captive finance company. Some of the big retailers do, we do not. We support the banks. When you take a look at whether it's Wells Fargo or Chase or Ally, Cap One, B of A, Santander, we do big business with all those banks, and we think it's important.

And what we've seen of recent times with the rise in interest rates, we are seeing more cash. We're seeing more penetration with credit unions. So our financing penetration rates are down right now because consumers are looking for a more affordable way.

So some of these interest rate increases have certainly affected the banks. And when you look back at the recession in 2008 and '09, auto loan portfolios were some of the best performing asset classes for the banks. So people pay their car loans. And when you take a look at-- and we'll get to delinquency rates in a minute, but you take a look at-- this is our company and this is data.

So it's pretty close to what we saw earlier today, but we look at average amounts financed, you go back to 2019, it was $38,000. This year, it's going to be closer to $50,000 amount financed. Also interesting is look at the down payment amounts. When you see the almost over $9,000, that was about the time that our government was handing out free money and consumers use that money to put down the cars. So the down payments are still higher than pre-pandemic, but I think that's a very, very interesting chart.

Following that is monthly payments. When you take a look-- this is from JD Power, but on a new car, it's gone from 2015 to $500 a month to over 700 through this year. Used has gone from $383 to 550.

So that's real stress within the marketplace, and everybody in here knows how automotive drives this country's economy. And when you take a look at the used buyer, and I know Lonnie is going to talk about it, they're a little stressed right now.

Taking a look-- speaking of rates, you go back to the beginning of January for a used car, it was 8%. Now it's approaching 10 on average. Used rather than new about was 5 4 and 1/2 years, 5 years ago. Now we're up to 6. You see in May of '20, we were at 3 and 1/2% rate during the pandemic. And so you've almost seen a double in new car interest rates.

As a result of that, we're starting to see delinquencies. Now delinquencies and repossessions are very different things. And the banks are prepared for this. They've got higher reserves in place. But when you take a look at-- especially that lower FICO score, we're seeing a big spike in delinquencies today, all due to affordability.

So this is an interesting chart for our company. We've always taken the position that as retail car dealers, we're going to sell what the manufacturer sends us. That's our job. But we provide the real services and the parts and service arena.

And I thought it'd be very interesting because it was mentioned earlier, when you look at our customer pay business-- so this is in the after sales parts and service. Our company-- and these are same store. So we've done some acquisitions, but I wanted to do apples to apples. 2019, we did $515 million in customer pay business. Annualized this year, it's going to be closer to $670 million.

And we've done it by a few different ways. First of all, we had to make sure pricing was right. But our retention rates are way up. So to earlier comments, customers are fixing their cars. Can't afford to buy one, they think they'll just fix it. Also, during the shortages, can't get a new car, I'll just fix this one.

But more importantly, what we've done is we've adjusted our work schedules, so we have 4-day workweeks. We were able to hire 300-plus technicians this past year. Wages are up. But if you're going to pay a technician 5 more dollars an hour, but you get that kind of result, you'll take that as a business person all day long.

But it's very interesting to see how the consumer's changed. And look at the warranty line. We're doing less warranty work. Certainly cars are better, but we're doing more customer pay. So I think it's a very interesting dynamic in the marketplace today.

And when you look at us compared to our competitors, our line is steeper, we've had better increases just because of the actions we've put in place, but you're seeing it across the board.

So I just-- I took some data from internal and just did a couple of ICE and BEV comparisons just for everyone to be clear about what's happening out there. This is from our dealerships. We looked at a traditional F-150. It takes about 3 to 4 months to get one equipped like you'd like it. You can get a stripped one pretty easily right now, but 3 months after order submission, it's going to cost you $65,000 is what the average is. Miles per gallon, 506 to 572 depending on your towing.

The Lightning average transaction price is 85,000. We've got a long list of orders. And it's an $85,000 car if you can-- truck if you can get it within-- probably more than a year to get. You're going to get 320 miles best case scenario. If you're towing, cuts it about in half. So we're seeing a lot of interest within the city, but not so much in the rural areas.

This chart just shows the comparison between starting prices, and it's pretty evident that the acquisition cost for a Lightning over an F-150 exponentially higher. 50% on a Lariat.

The other thing that we get asked all the time about is, is it more expensive for an ICE or a BEV from a service standpoint? And so we did a 5-year maintenance comparison. A Nissan Leaf versus a Corolla, $2,850 to 3,301. Extended warranty of comparable BEV and ICE with Tesla Model S and Lexus. Tesla's more expensive. Insurance rates, Tesla's more expensive than an LS-500.

So when you look at affordability, and I always joke, I go by the Tesla service station and they're full of Teslas that never were going to break, and they do. And actually, we fixed them a lot of them. Our customers that have a Lexus and a Tesla, they'll ask us for help. So I think it's a very interesting dynamic.

And then just looking at charging. Put a home charger in, you could do can do a level 2 charger, and gosh, at $1,300, if you can handle-- if your electrical grid can handle it. If not, it's a $5,000 investment. Level 2 chargers can take you to 4 to 10 hours of charge. The fast charger is 20 to 30 minutes. But we've got serious infrastructure issues, as we all know within our communities.

And the last slide I'll show, and Dave hit the nail on the head, it all works, and it's about break-even at about the comparable sedan. That's about 9-year break-even with BEV and ICE. The big issue that we're starting to see with Leafs and some of these other cars is that when it comes time to replace that battery at 8, 9, 10 years, it is expensive.

So as I started with, as a retail car dealer, whether we sell ICE or BEV, I mean, it's our job to do the best thing we can for our customers and our communities, but to echo everyone's statements, we think we've got a long way to go before we can get to the point where we've got 30, 40, 50% adoption. So I will leave it there and look for everyone's questions.

MARTIN LAVELLE: Lonnie?

LONNIE SMITH: All right. All right, thank you, Pete. Appreciate that. So who is on the road lending? We're a social enterprise. We were started 10 years ago by our founder who wanted to use impact investing to solve a social issue, which is really transportation is a significant barrier to low-to-moderate income families having the ability to live their best lives.

I think David talked a little bit or-- the previous presentation before lunch talked about hourly workers. So that's who we're working with in terms of having access to quality transportation.

There is a spatial mismatch in our country in terms of where jobs are located and where people live. I was just reading a report in Kansas City. Several great jobs making close to $60,000 a year, but really located in the boonies without access to mass transit.

So how can people-- and this is typically a question that people ask on applications. Do you have access to reliable transportation? And so this is a significant barrier for people either being able to obtain a quality job, and then being able to maintain that quality job.

So that's why we exist. We work with individuals who have 0 credit or who have some past credit challenges. So we're a nonprofit, and we're also a community development financial institution. So with that our mission is to focus on low-to-moderate income individuals. Our average FICO is a 510. So we're working in the deep subprime and subprime markets.

So what are our current footprint? We're not as big as Group 1. Maybe one day we will be, but we're working with individuals that are low-to-moderate income. So our average, I think, income from a client standpoint is 39,000. So we're working with individuals who are either entering the workforce or trying to upskill from a job perspective, but we're open to everyone. But as a mission, as a CFI, we need to serve at least 60% low-to-moderate income.

What we're trying to provide is a healthy alternative to individuals so they have access to an affordable product that is not predatory. Our product is 50% to 60% cheaper than what someone would be able to get out in the marketplace. It's a challenging marketplace for an individual who feels like they have no alternative other to get a buy here, pay here loan or work with a predatory lender. So that's the marketplace that we're in.

What I would say is that our results are phenomenal. We have a default rate that's less than 4%, and typically in the subprime market, that's typically 30% to 40%. So what is our theory of change? It's about affordability and it's about reliability. So as David described, we go through with each prospective client to make sure that they're recognized what is the total cost of ownership and can there budget support that?

So we conduct a budget review right upfront to see, hey, can they take on the responsibility of a vehicle loan? And keep in mind, we're a second chance, sometimes a fifth chance for individuals who might have some past credit challenges, or again, might be completely new to credit.

We work with returning citizens who are formerly incarcerated, immigrant groups, individuals who just have had a hard go at it and just need someone to say, it's OK. What we do is we want to understand the circumstances that got them in the situation that we're in, and then we provide financial mentoring throughout the life of the loan, which typically is 5 years.

Now the model, as we talk about reliability, we source vehicles that are 2 to 4 years old, less than 60,000 miles with an extended warranty, which we finance into the loan, as well as gap coverage. We want to insure because many of our working families are living on very, very tight budgets, that they don't have to worry about costly repairs, even knowing that takes place.

On average, our clients increase their credit score by over 150 points over the life of the loan. So we're serving as a bridge to access prime credit or re-access prime credit.

Currently, these are the 4 states. We're in Alabama, Georgia, Texas, and Mississippi. We're coming to this district by the end of Q1. So we'll be in Illinois, Indiana, and Michigan, and those are the additional states that we plan to be in by the end of this year in 2023.

I don't know if you can read these pie charts, but it gives you a demo profile of who we're serving. So if you look at the far-left-- bottom far-left, we have 15% are very low income, 45% low income. So we're serving our mission. So we're working with individuals who have some challenges. Close to 80% are female and about 90% are single. So you can see also our profile mix in terms of vehicles. So as Pete talked about their profile mix in terms of vehicles, we have 31% that are Toyotas.

So I thought I'd profile one of our clients. Alie was working on his masters. He had student loans. He also was paying for his kid's student loans. And he had a 2001 false Volkswagen-- or Volvo Station Wagon that continued to break down. Constantly break down. And it didn't pass emissions.

And so we worked with him to source and put him into a more fuel efficient vehicle. And with that, he had 32% less emissions and 31% better environmental impact score with this vehicle. So we tracked that with each vehicle. We tracked the previous vehicle of our clients and then we track the vehicle that we put them in. So we're able to track the fuel efficiency, and again, these are ICE primarily vehicles that we're sourcing.

But I think Alie is a great illustration of the data points that we track in terms of our alignment with UN sustainability goals. So over 80% of the clients we work with, we're putting into more fuel efficient vehicles. Again, thinking about those older vehicles like that 2001 that Alie owned.

We also sometimes will put individuals in a hybrid vehicle. We talk about accessibility. We're accessible whether it's a rural market or it's an urban market. So by design, since inception, we've had a virtual operation from the beginning because our clientele-- our transportation challenge, we want to make sure they have access.

So our focus is access to credit as well as access to quality transportation, because as you know, having a vehicle impacts every facet of your life. I came from a transportation-challenged home. We got a vehicle probably when I was about 9 years old from a neighbor that sold it to my parents for about $500, and it opened up avenues of opportunity.

My brother and I were able to play organized sports. We were able to play instruments. We were able to go to church and not rely on people. And forget about trying to get groceries in bulk if you don't have access to transportation. I remember carrying big bags of groceries on the bus with our mom, and somehow she seemed to order-- or buy a lot of cans. So that was heavy.

So when we had our own car, my parents would have the biggest arguments about my dad loaning out the vehicle to family members for $20. So anyway, that's what we're about. We plan to expand. As we think about the landscape, interest rates are having a significant impact on us in terms of our cost of capital.

We are, as Pete described in terms of some of the delinquencies, we're seeing some stress points I think Chairman Powell even talked about low-income individuals are impacted disparately more when we talk about the current environment we're in. Rent is up by 10%, groceries are up by 10%.

So all of those are felt acutely, and those are also households that really can't withstand those type of impacts. So with that, Martin?

MARTIN LAVELLE: Thanks, Lonnie. So one of the things I do for the bank is contribute to our Beige Book. That's our update on current business conditions. So I'm actually going to start off with some Beige Book-type questions.

First for Pete, I guess just a general update on where consumers are as far as accessing credit to finance vehicles. So maybe more specifically where are we at as far as delinquency rates go, loan lengths, that side of it, because there's obviously some are worried that we're heading into a situation that could be similar to a decade or so ago, but where are we actually at?

PETER DELONGCHAMPS: So there's still plenty of there's still plenty of access and money available. As I mentioned, auto portfolios performed very well in 2009. People paid their car notes so they could get to work. Delinquencies are up, but repossessions have ticked up not as high as the delinquency rate. So people are getting behind but, they're still paying.

72-month, 73-month loans, I mean, when we started this business, who'd have thunk of it, right? LONNIE SMITH: Right.

PETER DELONGCHAMPS: So clearly loans are getting-- terms are getting longer in order to lower payments.

MARTIN LAVELLE: And then where are we at on-- well, I guess, where are you guys at on the pricing on parts, pricing on the commodities needed? How is that impacting how much you're trying to maybe pass on to consumers to pay for those services? Any relief in that part? Supply chain performance improving?

PETER DELONGCHAMPS: So we buy all of our parts from the OEM. So we've got a standard markup, and certainly some has been passed along to the consumer, there's no question as the OEMs have raised their prices.

MARTIN LAVELLE: And then do-- with the proportion of cash sales increasing, after-sales parts sales increasing, credit union penetration increasing, does that signal anything about where the market is right now? Is that usually signs of something or is that just happens to be a characteristic of what?

PETER DELONGCHAMPS: I think it's a characteristic of the consumer trying to maximize all their opportunities from a cost standpoint.

MARTIN LAVELLE: OK. Lonnie, you talked about a couple of these at the very end, but what stressors are your consumers feeling at this point? I'm sure it's been a pretty challenging last couple of years, but especially right now given where-- especially with where inflation has and those-- not only the couple of categories you highlighted, but other categories that are especially exposed to.

LONNIE SMITH: Yeah, I think the clientele we serve are filling these issues probably more acutely with the inabilities to be able to put that on. But as Pete described, people are making their car note a priority. So we have seen a little tick in terms of our default rate. It used to be below 3%, and so now it's ticking up to 4%, but people are still working with us.

And I think that that's the good thing about what we're seeing with that. So we are seeing delinquencies in terms of 60 days-plus go up. And we're seeing some visible stressors in terms of just the cost of living. Groceries, rent, people are describing, this is difficult and I'm trying to make it work. But again, we're seeing people are making a commitment to stay in their vehicles, which is good.

MARTIN LAVELLE: And I wonder if-- because through my conversations with some, that the barrier to work that is transportation access has reemerged, but I don't if it's reemerged to the same extent as it was pre-pandemic because that was a common thing pre-pandemic.

LONNIE SMITH: So Martin, I think the biggest piece, because we solely source vehicles in the used car market. But I think Manheim, I think, said used vehicle prices are up 56%. So what we've seen is that's put a pressure point in terms of the minimum requirement of individuals in terms of household income that they need to be a part of our program.

So we've had to tell people no, which in the past, pre-pandemic, we probably would have been able to put them into a vehicle. So we've seen maybe our average vehicle go up significantly from a $17,000 loan to a $23,000 loan. So that's a significant cost impact.

And we haven't gone beyond 66 months in terms, but typically we would only do a 5-year. But as Pete's describing, there's some significant pressure points associated with that.

And again, as we think about our cost of capital with interest rates having a significant impact in the marketplace, what we also did is we entered into the refinance market. So we were able to help people get out of bad loans, so that's a pivot that we made as an organization to continue to be viable as we think about the higher cost of used vehicles.

MARTIN LAVELLE: And I'm inferring a little bit from one of your charts in which one of your core consumers have been females. And I guess I'm inferring that you have some working moms, a demographic that's been under great study, especially during the pandemic, and whether or not in what numbers are they coming back into the labor force. What's their experience been like?

LONNIE SMITH: So it's difficult, but I think that that's the beauty of single moms, they've always made magic happen, even in stressful times. And primarily they're living in stressful times, even if it's a pandemic or not.

But what we experienced, as we tracked our clients in terms of where they come from, in terms of workforce, and 40% were impacted by COVID because they worked in the service and hospitality industries and they were acutely impacted in terms of lost wages or reduced hours.

And now we're starting to see-- we've had a lot of government support that helped carry people through. And so we'll begin to see, as some of that no longer exists, what that's going to look like for some of our clientele moving forward.

MARTIN LAVELLE: So Dave, you don't really fall under the Beige Book umbrella, per se, with a current business condition update, but I was curious with the work you've done, as more consumers start to think about and then buy EVs, given where the consumer is now--

And we've had I think a pretty thorough background update on consumers so far up to this point today, given where consumers are now and with what's to come or what's planned to come, what-- are consumers ready? Do you think consumers are ready for this given the transportation burden costs they're already under?

DAVID GOHLKE: So when you say ready for this, do you mean electrification?

MARTIN LAVELLE: Yeah, increase-- yeah, increased electrification.

DAVID GOHLKE: Yeah, so I would argue that really, somebody-- it was said in the very first the introduction talk that we've been supply-constrained for the last 3 years. Well, I would argue that for electric vehicles, we've been supply-constrained for the last 13 years.

There hasn't been, from a new vehicle purchase perspective, a lack of demand for vehicles that just aren't really selling. There have been a couple of models that have been a little iffy, but largely there's been that.

But readiness is more than just, is the consumer willing to put their butt in the seat and drive away with it, they need to be able to do everything else that goes into it. So charging infrastructure is certainly something that is still an open topic both for research and for just understanding business models and things of that nature.

It's cheap enough to charge an electric vehicle even at direct current-- DC fast charging stations. At that point, it becomes typically comparable to a gasoline-fueled vehicle per mile. So it's still, even when that's much higher than your home rate, it's still relatively cheap.

But you do have to be able to plan for that. You don't know if this charger's-- the charging station is going to be up or not. Home charging is great, workplace charging is great if you've got the access to it, but that's certainly something that will be potentially something that the market needs to look for.

But I do think that it's really just-- when consumers are familiar with these vehicles, they tend to be quite accepting of them. But the used vehicle market is pretty much what the new vehicle market was 10 years ago.

So 10 years ago, there were 3 or 4 electric vehicles on the market ready to be used. And so the availability is just not there. And I'm the one buying up all the used EVs, I think, because I'm like, oh, that's a great deal. But I know that there's not enough of them to go around, so I apologize for my suburban Chicago pile of cars.

MARTIN LAVELLE: So in getting ready for this, I thought, affordability can mean different things. And so Dave, can you, I guess, expand on even further about the transportation burden vehicle owners have, especially by vehicle type, and the rural versus urban dichotomy?

DAVID GOHLKE: Yeah. So there's a lot. So really, in our overall comprehensive model, we did break down things like insurance cost, maintenance and repair costs as a function of vehicle size, as a function of vehicle powertrain. Those make a difference, but it's really more of an issue of it's related to the original vehicle cost.

And the vehicle cost is upfront. We definitely see large differences between cars and light trucks, taken broadly, and between conventional gasoline vehicles and electric vehicles-- electric and electrified vehicles.

And while those cost differentials for the powertrain do seem to be coming down, at the same time, the market is certainly shifting more towards larger vehicles. And that's the market nationwide. Certainly in rural Nebraska, the market has always been strong for pickup trucks, and so that's expected.

But we do see that trend shifting more towards these larger vehicles. SUVs, there's, from what I've read a shift towards pickup trucks over the historical norms in the last few years as well. So those larger vehicles tend to be more expensive upfront and have worse fuel economy, which means they have these higher operating costs of across the board.

There's potential opportunities for smaller vehicles to be able to be a lower-cost thing, but again, assuming that they are available I think more than anything else. So I'm very curious, as we've heard, the luxury size of the market grew overall, the bottom of the market seems to have fallen off a bit more than the higher end part of the market. So affordability, it's-- yeah.

And again, as I noted at the very end of my presentation, there's the first owner who may not be as quite as price-sensitive and the subsequent owners who may be more price-sensitive, and I'm very curious to see how that plays out over the next 6 or so years when the new vehicles of the last-- of the 2020s become the used vehicles of the mid to late 2020s.

MARTIN LAVELLE: And then do you project out as far as what's-- back to overall transportation burden and what it will take to install the necessary infrastructure in maybe some of those places where current presence isn't widespread and may be slower to adopt going forward?

DAVID GOHLKE: Yeah. So one way of looking at the overall availability of the infrastructure is to say, OK, what do you need to have a nice robust network backbone? Can you drive from Seattle to Maine? From Portland to Portland, I guess. Is that possible? So do you have enough chargers to satisfy those long-distance trips?

And there's been a lot of work on figuring out what network is needed. Sure, you're going to have to figure out exactly where to site them, but that's something that there's been a big push for, and it's-- I mean, it's not solved yet, but it is something where it's a pretty clear route forward.

What I think is a little bit tougher to understand is, what's going to be your demand for chargers within a neighborhood? So I have access to home charging, and yeah, just charge in my garage at 100-volt charger or 110-volt wall plug, and it's fine for me.

But if the overall number of vehicles becomes larger, especially in multi-unit dwellings, then you're going to need to figure out where to have these-- where to have these charging stations sited. There's a lot of federal funding, state funding for this national electric vehicle infrastructure plans that states had to submit to figure out-- or, yeah, to come up with plans of where you can site those, but that's going to need to be-- in my opinion, it's going to need to be iterative.

We've got good ideas on where to model it, but as-- it's a dynamic market. It's a dynamic understanding of how the vehicles will be used. So I think that that will require iteration. There is funding for it so far, so hopefully these will be able to be built.

Hopefully they will be maintained after they are built, the charging stations, but I do think that while we're not necessarily ahead of where we need to be, I do think that there is this trend to be at where we need to be as the market grows. So if we hit 100% EVs in 2023, we might be very far behind. So we'll see what the market bears for the new vehicles, but I think we are trending in the right direction there.

MARTIN LAVELLE: Pete, another issue with affordability can be consumers not being able to find what they want. And we talked a little bit about this morning. On the ground, what inventory do you have and what are consumers actually demanding? To what degree of a mismatch are you seeing, if at all

?

PETER DELONGCHAMPS: So that's a good question. And when you look at the overall day supply of vehicles on the ground, it's pretty widespread when you take a look at what Toyota and Honda have versus maybe what Stellantis has. And the Toyota demand is very, very high.

Because they're building cars with proper equipment that consumers want. Some of the OEMs have built cars without the safety features that people want. Adaptive cruise control, lane departure warnings. So if you're going to buy a 60 or $70,000 car, that's what you want.

And so when you look at this dynamic right now, you've got OEMs that are building cars for the sake of building cars and to meet production schedules, then you have ones that have been very disciplined and ensuring that they're going to keep their brand image in place and that they're going to sell what the consumers want, even if those consumers have to wait.

So we're one of the largest sellers of Toyotas in the country and we've got, I don't know, a 5-day supply. But we'll report probably a 30-day supply of Stellantis, that's a big difference. Ideally, you'd want a 30-day supply of cars and a 45-day supply of trucks ideally. And in the past, we had 90, 110, and it was a push system, and there's stuff in the channel, and then you saw the charts earlier with the OEMs are having to put massive incentives on the product and it wasn't profitable for anybody.

So hopefully there will be some discipline there, but as I mentioned earlier, there's still so much pent-up demand. And what was really interesting over-- especially in the summer at the height of we can't-- I can't get it, so I want it mentality, was the consumers, when they were ordering their vehicles, they were ordering with a lot more equipment than what we would normally order. I mean, these big suburbans and Yukons and Expeditions, they were loaded up.

And so when you look at some of these numbers, it's like some of this was self-inflicted by the consumer. But I think now, as the rates have gone up and we're seeing some of these monthly price points, there's some moderation going on.

MARTIN LAVELLE: And then another thing is maybe once you can get it, are you getting the value out of it that you want? You referred to this earlier with the towing capacity for EV trucks. what kind of consumer feedback are you getting specifically about differences? And are consumers changing their minds about what they want?

PETER DELONGCHAMPS: I think it's too early to tell, especially like on the Lightning and the Hummers. There's haven't been enough delivered and we're still gauging how much of that demand is real versus people that put speculative orders in hoping to get the car and then flip it and make some money on it.

So, I mean, we're delivering the Lightnings to customers who have been longtime customers of ours that will keep the car. And they're generally around-town type of buyers, not ranchers who are hauling hay. So it's still, I think, a little bit too early to tell, but there's clearly demand there.

But as I said earlier, you can't get a F-250 King Ranch right now, forget it. Same thing, Lariats with equipment are very, very short. Can get a standard model F-150 without the equipment, but Fords been very good about it, not overstocking those, but it's nice to have a few in stock.

MARTIN LAVELLE: Lonnie, with some of the inventory issues just overall in the vehicle market, how is that impacting which vehicles you can get for your consumers?

LONNIE SMITH: Yeah. So we do get a lot of requests and demands for F-150s but people don't have a F-150 budget, so we have to recalibrate that conversation and say, what can your budget, from a total cost standpoint, support?

So it's difficult for us to source vehicles. The inventory is not there. And so it delays our process. And as it delays the process, people get frustrated and may fall out of our program because they're thinking about, how can I get this sourced more quickly?

So we've been working not only with traditional dealerships, but we've been working with rental car used sales to be able to source the vehicles that we typically are putting our clients into. But it's a consistent recalibration of expectations. Huge demands for chargers, huge demand for F-150s, but the budget isn't-- the money's not there.

PETER DELONGCHAMPS: And we're not helping any because as-- the other-- the interesting thing about-- with the used car prices with inflation was that customers actually had more equity in their cars when the used car prices were at their peak. So for a reference standpoint, they used the Manheim index and it always floated around 120, 125, 130. And it got 225.

So as a result of inflation, these higher used car prices, the customers actually had equity, so they would come and trade. And maybe this car had 90,000 miles on it, where traditionally maybe we wouldn't keep that car, but because quality is better, it's 10 years old, instead of sending it to the auction, we'd recon it and keep it, where in the past, that's your perfect car.

LONNIE SMITH: That's our car.

PETER DELONGCHAMPS: So sorry.

LONNIE SMITH: That's OK.

[LAUGHTER]

MARTIN LAVELLE: Lonnie, how much longer has your typical process for getting somebody into a vehicle, how much longer has that gotten?

LONNIE SMITH: So it's-- again, it is individually focused. It's motivated by each perspective individual. But we've seen it increase by 2 weeks in term-- 2 to 4 weeks, actually, in terms of-- and so if someone's in need of a vehicle, sometimes we've lost that person through that process, so that's had an impact.

And again, we made the pivot, a strategy shift to start doing refinancing to help individuals that already had the vehicle. We didn't have to worry about sourcing the vehicle and we could still provide our program, be mission-focused, and get them into-- saving them hundreds of dollars on a monthly basis as well as thousands of dollars. And then we could convert them to our traditional program. So a strategy shift. We just had to implement to be responded to the market.

MARTIN LAVELLE: And can you do anything for your consumers on the insurance side of things?

LONNIE SMITH: No, we're completely out of that. And so credit is used in the modeling process. And so again, we try to make sure that people are-- to David's point, that they're contemplating what's that cost going to be. Individuals might have a DUI, so you're going to be a higher risk profile, and that's going to be a significant higher cost.

So when you start thinking in totality, what is it going to cost you to own that vehicle? That needs to be contemplated. But we don't have any role in that part. Our founder's like, I don't want to touch that part of the business, but we did start thinking about, how can we provide additional value through the whole experience?

And so we did start up a dealership in Texas to start thinking about, can we buy vehicles at auction so it can lower our costs and we can serve and source vehicles directly to individuals without losing people with that expanded time frame?

MARTIN LAVELLE: And how do you see your process changing as electric vehicles become more commonplace?

LONNIE SMITH: So with luxury vehicles, that's just really not our niche space. It's really more your Corollas or, quote-unquote, starter vehicles. That's really more our niche market.

But what we have seen with the refinance market is we are seeing vehicles that we traditionally would not have worked with, BMWs, that kind of product mix that Pete shared, we are seeing some of those vehicles with the refinance program that we've implemented. But I don't see us foresee us in the future originating vehicles in the luxury vehicle space.

MARTIN LAVELLE: And then we talked about this before, but another thing that comes with affordability maybe with your consumer group is what can you do with those who drive for Uber, DoorDash?

LONNIE SMITH: Yeah, so that's a great question. We have a lot of individuals who are in the gig economy. We do not put people in the vehicles if they're driving for Uber or Lyft. Part of the reason is because of our theory of change. We're trying to put people in lower-mileage vehicles.

But what I would say is that we are working with-- we're in conversations, at least, with a gig economy that has part-time folks that don't put as much mileage on the vehicle because Uber or Lyft, you could put at least 100,000 miles on a vehicle in one year, and that, for us, is not a recipe for success in terms of how we're trying to help-- the individuals we're trying to help.

But with this gig work group that has part-time work, and their mile of radius that they're driving is a lot more smaller, we think that there's some possibilities with that.

DAVID GOHLKE: Can I comment on that a little bit? So if-- yeah, if we're talking about a household affordability, that's-- everything he said, yes, I agree with all of that. We do note that-- so we've done some analysis on these vehicles-- the ride share, the ride-hailing.

These vehicles that are more heavily utilized, when you think about that, that means that they're operating costs become disproportionately bigger relative to their upfront costs. And so this is a good opportunity for fuel-efficient, especially hybrid vehicles, and also electrified vehicle-- electric vehicles.

The bigger problem, though, is if they're running 100,000 miles a year, they're running 100 miles more and more a day. And so then charging becomes a big issue. And so a lot of these people who drive in the gig economy are in multi-unit dwellings or they're far-flung from where they're operating. So ex-urban San Francisco as opposed to in downtown.

And so it becomes a very difficult question on, how do you provide charging during the day? So if they need to come and drive into the city, well, as I said, plugging in at home, that's typically pretty cheap. But if you have to pay gasoline-level rates for your electric there, it becomes more difficult to make that break even.

But I do think that we're probably all familiar with you get into an Uber or Lyft, most of the time it's going to be a hybrid because they do see that total cost of ownership when they're going through that.

MARTIN LAVELLE: So good segue into, then focusing on equity, which I think is important in this space. So Dave, when looking at the Inflation Reduction Act, the credits available to consumers for EVs, do you think that will improve access to the EV market, especially for low-to-moderate income consumers?

But especially with, as you pointed out, older EVs depreciating faster than newer EVs in which those consumers may want to get in the-- may only have access to those older EVs first, it seems somewhat disconcerting for a challenging-- maybe for a market already challenging.

DAVID GOHLKE: Yeah, absolutely. So Kristin summarized these on a good slide earlier. There's a lot of vehicles that will help bring-- excuse me, a lot of credits that will help bring down the initial cost of the vehicles. For new vehicles, for new commercial vehicles, and also for the manufacturing of the batteries.

So those are likely to help bring those vehicle initial purchases closer to cost parity with the gasoline field vehicles. So probably by the end of the decade-- I mean, there's been talks about when do we hit cost parity? Is it 2020, 2025, 2030? It is that the cost parity at purchase or after you account for driving it and get your fuel cost, operating cost benefits there.

So there's a lot going on in the new vehicle space. There is this used vehicle credit, but as I noted, it's going to be, just by the very nature of the existing car park, it's going to be constrained early on, that there's just not a ton of those vehicles.

I am very optimistic that that will help grease the wheel of getting those first owner to second owner. The market is still young enough that I don't think we have much data to really talk about-- and certainly, the tax credit has been in play for what, 10 days now?

So I don't think we exactly what's going to happen with those used vehicle credits, but they are a potential way of helping reduce the cost. They're meant to be focused for low to moderate-income-- I guess moderate-income households especially. So that is certainly a route there. Yeah, and I think it's-- you just need to have the vehicles available before we really start seeing that uptake in this kind of equitable perspective to get them in places that there aren't.

One thing you'll note, though, you said these first generation depreciates sooner, if they're-- and maybe this is an education, a consumer outreach kind of perspective, but if people are in the right vehicles, maybe there's-- maybe we're not so far off.

So you noted everybody wants an F-150. I want an F-150, but I don't even if it will fit in my garage. So it's nice, but I make do with my normal sedan car. And so people are-- how do I say this? We're streaming, aren't we? People are pretty bad about saying, oh, I want this because it's what I want and I'm going to have to tow this trailer to my in-laws' house across the country maybe.

So we buy for the thing that we do once or twice a year if that. And so if right-sizing-- if there are vehicles that are available that are more appropriate to the use, maybe a 80-mile generation one electric vehicle is sufficient. It would be a great daily commuter for most people in the United States if you can afford it, if you have 2 vehicles.

So there is potential for increasing uptake of these vehicles in otherwise communities that don't have them much with the older vehicles maybe.

MARTIN LAVELLE: Lonnie, do you want to--

LONNIE SMITH: Yeah. So Martin, I just wanted to really highlight a point that Charlie made in the previous presentation in terms of talking about health of batteries. And so if we think about battery life, as we go through first generation, second generation, what's going to be the quality of life of batteries?

Then you're talking about an expensive burden that's being passed on to our clients that we're working with and serving. So that's a significant barrier as we start thinking about adoption of EVs, is solving this whole issue of cost of batteries, because that can be expensive.

DAVID GOHLKE: Yep. And while from a total cost of ownership, I would push back and say, well, you buy a battery, then the vehicle is more valuable, that doesn't really help somebody who then has to make that expenditure immediately. Great, you're better off 10 years down the line, but good luck today.

LONNIE SMITH: Right, right, right.

MARTIN LAVELLE: Pete, anything on your take on the Inflation Reduction Act? Does it help?

PETER DELONGCHAMPS: Well, the only thing I would say is it's a little confusing. And I think that as-- maybe there'll be a little more clarity, but my understanding is that there's income caps to qualify for the incentives, and these cars are way more expensive.

So you've got people that can afford them, but they're not going to qualify. And then people that can't afford them will qualify. So I'm trying to understand where the big benefit is to the incentives on this.

And we've got dealerships that-- I mean, here we are, 10 days into it, and we don't sell a lot of electric vehicles because of our footprint, but, I mean, at some point, there's going to be a question of, do I qualify don't I qualify? They put it on their taxes then they don't qualify, and they're going to come back to us and you thought-- you told me it'd qualify. So it's interesting.

DAVID GOHLKE: Yes. So my understanding-- and not a tax lawyer, but at least-- we have one of the back over there. Andy Copeland's' from NADA, the top car lawyer in the country.

DAVID GOHLKE: But starting later, I think it's 2024, that is available as a point of sale rebate, which I think will alleviate some of that. But it's, for the most part, especially right now on day one for sure.

MARTIN LAVELLE: So another-- maybe a different equity piece, Pete, is-- again, we've had the increased frequency of preordering vehicles not everybody can do that necessarily. So what might be a way, if that be remains maybe not as common as it was during the pandemic, but still remains relatively common, how do more people get-- how do you think people should get better access to being able to do that? Because that might be--

PETER DELONGCHAMPS: For the rebate or just in ordering cars?

MARTIN LAVELLE: In general for any vehicles.

PETER DELONGCHAMPS: I think what was really interesting is that the consumer who wanted to buy a car today and couldn't, they used our digital application, AccelerRide, which is touted as industry-leading, they ordered their cars online and they waited.

And it was-- I never thought-- well, I never thought that we'd sell less cars as an industry, whether it's dealers or OEMs, and sell those cars and make more money, but that's what's happened. We saw the charts earlier.

But the consumer showed an incredible amount of patience. We worked with them on their trades. And so it's a pretty good ecosystem when you've got the proper supply with where the demand is, and maybe you're one short and you have to wait a month for a Camry or 3 months for a F-250, or the Audi e-tron's has been very popular, the EQS has been very popular with Mercedes, and consumers are-- they're waiting.

And it's exciting. I mean, that's the model in Europe. You order your car and it comes in in 4 to 6 months, and coordinate it with the plate change month, and it makes it a special occasion. And we'd like to see more of that.

MARTIN LAVELLE: Lonnie, you're--

LONNIE SMITH: We share the story of Alfie. So he was catching the bus, getting rides from people. He needs the vehicle yesterday. And so that's probably not necessarily a luxury for the clientele that we're serving to preorder a vehicle although people are patient through our process as we mentioned because of stresses in terms of inventory. They're holding out for the most part.

But yeah, that pre order piece, it could be a great piece moving forward, but again, for the clientele we're serving, they needed a vehicle yesterday so they can continue to keep their job, to continue to make sure they make life go right for themselves.

MARTIN LAVELLE: And then more for with what you do, and I guess you already talked about it some, but what makes your model in being able to not only reach your customer base, but have them improve their credit score eventually, not default on their loan what makes your approach. So much more successful than what we typically read about with subprime?

LONNIE SMITH: Yeah, so I really think it's a special sauce of building a relationship. And that's the core of what we do. And when you talk about your finances, that's an embarrassing topic to talk about, and especially if you have some shame associated with that. And then you open up because our clients do open up and share about their journey why they got where they were at, it can be difficult.

And so there's a level of compassion that we have to exact every time. And no judgment through that process. Like, well, why the hell-- we don't say that. We're like, that's OK, let's work through this together so we can build that bridge So you can access credit.

So that's fundamental. And so that's how, I think our clientele then prioritize us because of that relationship. But it's not just getting the loan, it's also post-loan. The relationship, the financial mentoring continues to take place throughout the life of the loan.

MARTIN LAVELLE: I'm going to get to some questions on Pigeonhole right now. For Dave, Don Grimes asks, does your study of transportation cost burdens include battery replacement costs?

DAVID GOHLKE: Sure so as I alluded to a moment ago, the one that we're doing with the full TCO, we're going to come out with that locally, we're not accounting for replacement and our baseline, partially because if you replace the vehicle-- if you replace the battery, then the vehicle is intrinsically more valuable, so it's almost like new. And so you do get a boost of that back on the vehicle residual value, which is difficult to model.

But more practically, it hasn't come to fruition so much that there have been that many battery replacements. Sure, the Toyota Prius uses a different chemistry and there were a lot of worries about that in the early 2000s, but that has not-- hybrid vehicles have a longer lifetime than conventional vehicles for comparable A-to-B comparisons there.

For electric vehicles battery degradation and not getting as many miles is maybe a bigger concern, but there's-- as far as is the vehicle just dead, it's not that frequent of an issue. So we haven't accounted for that as our baseline. We're certainly like saying, OK what's a side case? The analytical weeds I'm happy to get into but that's not our baseline analysis for those reasons.

MARTIN LAVELLE: All right. Pete, from Jie Xong, talk about how dealerships will think about markups going forward. We've seen above-MSRP pricing with low inventory. Any change in how that's going to be approached?

PETER DELONGCHAMPS: So I'm proud to say that when all this started, we took a company-wide approach and said, we are not selling over sticker price. And we thought that in our-- let me preface that. If some customer came into our Mercedes-Benz store in Beverly Hills and there's a G-53 and they probably paid a little over sticker.

But for the Camrys and the Corollas and the people in our communities, I mean, we think it's our-- it's incumbent upon us to take care of people in our communities, and if you get taken advantage of, you remember it. And so we put policy in. Our general managers weren't particularly happy about it. But the other piece was the long-term play on affordability of the used. If I'd marked up a Camry $5,000, I promise you in 3 years, they're $5,000 upside-down for starters. So we didn't do it.

And I think that there was plenty of bad press and bad actors, and we saw one of the slides today. But at the end of the day, I think transaction price versus MSRP, this is from NAD, was a couple hundred basis points over 100.

So we didn't. And if you look at the reports, our gross profits were lower of any-- of all the publics, we had the lowest gross profit per unit because we didn't do it. But I think that as supply gets a little more normal, then you'll see those markups go away. You'll still see it on the Corvettes and some of the specialty cars.

And the reason a lot of the dealers do that is because people put their orders in, they get the car, wait, and then flip it. And so it's like, if you know somebody is going to flip it, then you might as well make-- we might as well make that money. But I think you'll see some moderation there for sure.

MARTIN LAVELLE: Well, then I'll tack on the opposite. We talked a little bit about incentives this morning. From your experience and how you're feeling about the market, where do you see incentives that by the end of this year?

PETER DELONGCHAMPS: I think you'll see-- depending on that clearly availability, the OEMs will use APRs as their preferred method of subvention and incentives.

MARTIN LAVELLE: OK. Lonnie, not a Pigeonhole question, but I want to keep it balanced. So go back to one of my others. Can you talk about how you work with your nonprofit partners and how you make those relationships work to get your consumers the access that they're able to get?

LONNIE SMITH: Yeah. So many of our clientele that we serve have a healthy skepticism for good reason. They've been taken advantage of in the past. And so we really have to establish a level of trust relatively immediately so that agency, that relationship becomes critical.

So we partner with organizations like Habitat, Catholic charities, organizations where people have been-- they're familiar with that organization, maybe they've been under some case management. So there's an element of trust that's transferred directly to us.

What also happened through going through COVID is we also had to diversify our strategy in terms of how we source clients, because many nonprofits either had reduced staff or they were focused on survival issues of their clients. And it was also I would say, maybe 6 to 8 months typically before someone would onramp with a nonprofit.

So we began working-- sorry, Pete, with credit unions to source clients. If a member was declined by their credit union, then they would source some to us. The loan officer would send them to us, we would help de-risk them, and then there's a pathway back. So they retain that relationship, and that gets us closer to the point of purchase.

So that's helped us significantly because there's a level of trust that credit unions have. They're very localized and community-based. As well as we got onto a platform of a loan aggregator that didn't require immediate decisioning because our process has some intentional-- there's some intentional delay of gratification through that process. We're trying to change consumer behavior through our process to make sure people can actually truly finance and afford to finance a vehicle.

MARTIN LAVELLE: For Pete, this is from Joe white, are people buying F-150 Lightnings for 85K replacing an ICE truck or a luxury brand vehicle or adding the Lightning to a fleet that includes ICE vehicles?

PETER DELONGCHAMPS: So Joe, always good to see you. It's more of a trade from ICE to electric than adding to-- but like I said, it's still so early. Where you get the enthusiasts, the people that are really love Ford and they want the newest.

So I think we'll have more data, because we're getting 1 a month, 2 a month at big stores? I mean it's just such a small take right now. But so far we're seeing is traditional Ford enthusiasts are the ones at the top of the list today.

MARTIN LAVELLE: OK. And Dave, this is from Rich DeWalt. Your break-even calculation between EVs and ICE take into consideration that road infrastructure cost is paid for by gas taxes. At some point, EVs will need to assume some of the costs.

DAVID GOHLKE: I think on net, EVs are actually assuming more of the costs. So federal gas tax, there is that 18.4 cents that has been very steady for year over year, so that's almost nothing anymore. But within each state, many states, I think 2/3 of states have effectively increased registration fees for electric vehicles. Some even have them for hybrid and efficient vehicles, so you pay less in road tax-- gas tax. You're paying more for your registration upfront.

So I don't what it is state by state. Illinois recently upped it by-- I think it was 200 a year. But for most of these states, it's more than they would have been taking for a gas tax in a comparable gasoline vehicle. We don't explicitly break that down because it varies from place to place, but that is something that we are looking into.

And certainly long-term municipalities, governments as a whole are going to need to understand these different revenue streams. So for electrified vehicle-- electric vehicles, you certainly get this.

If we want it, we're not-- this is not the focus of it, but when the discussion about self-driving cars was so big about 3 years ago right before the pandemic, a similar question about, oh, these aren't going to have parking or-- like parking fees or illegal parking are not going to be a thing, tickets. And so municipalities are losing revenue that way.

So anywhere that a municipality or a state is pulling in money, they should be making sure that stream is robust in some way to make sure that they're not having a problem 15 years down the line for sure.

MARTIN LAVELLE: Lonnie, you talked about interest rate pressures. Is that going to pressure the financing rate you're able to offer your consumers at all?

LONNIE SMITH: I mean, philosophically we don't want to move, but it might create a different reality for us. Our cost of capital from financial institutions is a huge component of us being able to provide a product that's 50, 60% cheaper. So we're going to have to review that moving forward to-- and we're monitoring that as we speak.

MARTIN LAVELLE: OK. Pete, this is from Danil Mennicoff. Are consumers getting used to low inventory and, I guess, getting used to waiting? Have they become more comfortable with it?

PETER DELONGCHAMPS: I'm not sure comfortable, but they've certainly gotten used to it. And where it was really difficult is if somebody had an accident and needed to replace their car and there wasn't anything to replace them with. So I think the consumer understood and understands supply chain shortages and they've seen it in all walks of life. So having to order is something, as I mentioned earlier, that has become much more common than I've ever seen in the industry.

MARTIN LAVELLE: And probably the last question from Leric Hale-- this is for Dave, can you measure the environmental impact all in?

DAVID GOHLKE: Yes.

PETER DELONGCHAMPS: Are you sure?

[LAUGHTER]

MARTIN LAVELLE: Would you like me to finish the question? Including manufacturing for consumers using their vehicles for longer, and how does this compare with projected impact of electric vehicle adoption?

DAVID GOHLKE: Great. Yeah, and actually, that end part, where you're using the vehicles for longer. So that is an interesting thing. So for a conventional ICE vehicle, if we're talking about greenhouse gas emissions, about 80% or so are for the lifetime of the vehicle, combusting the gasoline fuel. The other 20% is in the manufacturing of the vehicle.

The manufacturing side for the EVs is typically almost twice as much more because they've got that battery built in. And then they have a much lower emissions rate-- that depends on your electricity mix-- nationwide.

For an operational side of things, we also have to worry about criteria air pollutants. So for an electric vehicle, you're not getting much more than tire dust, which does matter. For gasoline vehicles, you have everything that's coming out of the combustion chain there.

And so as the vehicle ages, that's the only thing that you're getting. So you're getting a disproportionately more of the operational side. For EVs as I said, they're still more on the operational than on the manufacturing, but that ratio isn't quite as extreme. And so cleaning up the upstream supply chain is very important from a CO2 perspective.

It's very weird to think about that long tail pipe from an air pollution perspective, a health perspective because then you're moving your emissions away from the road, which is great because people are walking next to the road, but you could very well be moving those into marginalized, disadvantaged communities. Though that's true for the petroleum refining as well, thinking about down in, say, Louisiana and Texas as well, there's a lot of higher incidence of cancer, I'll leave it there.

But yes, there is a lot of study going into the environmental impacts, both the societal CO2 greenhouse gas perspective, but also the health perspectives. So I'm happy to talk about any of that in great detail and then defer to some of my colleagues on that.

MARTIN LAVELLE: And we will leave it there. Let's give our panel a great hand.

[APPLAUSE]

PETER DELONGCHAMPS: Well done.

DAVID GOHLKE: Thank you.