Case Study - Questions (1)

9B20M192

AUTONICHE INC.: FACING UP TO DISRUPTION

Professor Andreas Schotter and R Chandrasekhar wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names

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Copyright © 2020, Ivey Business School Foundation Version: 2020-11-18

In March 2020, Emily Chung, the founder of AutoNiche, an auto mechanic shop based in Markham, a

suburb of Toronto, Ontario, was strategizing the 10-year-old company’s growth plan. The 2020–2025 plan

envisioned a 100 per cent growth in five years on three parameters: an increase in annual revenue from CA$0.5 million

1 to $1.0 million, an increase in the number of customers from 400 to 800, and a near

doubling of employees from four to seven. The plan was being developed in the wake of several major

external disruptions that had struck the automotive industry, including its auto mechanics sector, which included AutoNiche.

Chung faced three dilemmas in developing the five-year growth strategy: What should be AutoNiche’s new

value proposition in the auto mechanic service sector, which was changing drastically? How could AutoNiche stay relevant in the auto mechanic service sector, which was becoming increasingly

competitive? How should she find and train new hires when the decline of the internal combustion engine

was imminent, and digital technology had made cars so complex that independent service and repair shops

were becoming less and less able to service them?

The growth plan was also setting new targets for six key performance indicators (KPIs) that Chung was

regularly tracking. These KPIs were the average repair order (defined as the typical amount charged for an individual repair), the car count (defined as the number of cars serviced per annum), the average labour

hours per repair order, the parts-to-labour ratio, the parts margins, and the overall business labour cost.

Tracking these KPIs had served Chung well in the past, but how relevant would they be in the future? Was she missing something? More fundamentally, she wondered, was there space for a small independent

entrepreneur in a declining industry?

THE CANADIAN AUTO INDUSTRY

Canada had been a base for vehicle manufacturing for over a century. It was one of the world’s top 10

producers of light vehicles. Five global original equipment manufacturers (OEMs)—Ford Motor Company, General Motors Company, Honda Motor Company, Toyota Motor Corporation, and Fiat Chrysler

Automobiles N.V.—assembled more than two million vehicles at their Canadian plants each year. As

1 All currency amounts are in Canadian dollars unless otherwise specified.

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Innovation, Science and Economic Development Canada, noted: “They were supported by a vibrant

ecosystem of nearly 700 parts suppliers, including home-grown tier-1 companies such as Magna and

Linamar. Canada was also home to one of the world’s five machine tool, die, and mould–making clusters. The sector played a key role in Canadian economy. With a $19 billion contribution to national gross

domestic product, it was one of Canada’s largest manufacturing sectors. The industry directly employed

more than 125,000 people, with an additional 400,000 jobs created in aftermarket services and dealership

networks.” 2

The automotive sector was experiencing four disruptive trends: electrification, digital connectivity,

autonomous driving, and diverse mobility. Each trend was technology-driven. The first two had a direct

bearing on the day-to-day working of auto mechanics.

All OEMs were getting ready to transition toward manufacturing electric cars. By 2030, North American’s

share of electric vehicles was forecast to range from 10–50 per cent of all new vehicles. Since electric

vehicles would also include a large portion of hybrid electrics beyond 2030, the internal combustion engine was expected to remain relevant for a few more decades. The share of electrification would be high in

developed and densely populated cities, which were characterized by not only strict emission regulations

but also the availability of infrastructure at the ground, such as charging stations. The decline in battery costs from $1,200 per kilowatt hour (kWh) in 2010 to $150 per kWh

3 within a decade, had already set the

stage for cost competitiveness of electric vehicles.

The global demand for cars was forecasted to grow, driven mainly by growth in emerging and frontier

markets. Demand in Canada and most of the industrialized world was expected to be flat, if not declining.

Connected cars were becoming increasingly common across all segments, even at the lower end of the price

range. When shopping for cars, some buyers valued digital power, rather than horsepower. A basic car

already had at least 30 computer processors, which increased to 80 computer processors in high-end vehicles. Some processors were bringing in new functionalities (e.g., voice recognition and assisted

parking), while others had taken over the duties of older analogue technologies (e.g., diagnostics, braking,

and transmission). Rather than visit the dealer for successive vehicle upgrades, buyers wanted software upgrades delivered (as with their smart phones) right to their car. Another significant requirement of buyers

was a smooth digital connectivity transition, when moving from inside the car to its outside, and vice versa.

The new breed of cars had led to an increasing demand for well-trained engineering and technical workforce

specializing in robotics, artificial intelligence, sensors, telecommunications, new materials, and advanced manufacturing processes. Familiarity with sustainable practices was another requirement.

A change had also occurred in the dynamics between OEMs and auto dealers. For example, Genesis Motors

Canada, a subsidiary of Hyundai Motor Company, had been selling cars directly to customers since 2017,

completely bypassing the dealership route and using an e-commerce platform for the purpose. 4 Cadillac, a

General Motors Company subsidiary, was using the subscription route to sell cars, calling it premium

2 “Canadian Automotive Industry,” Innovation, Science and Economic Development Canada, January 10, 2019, accessed October 7, 2020, www.ic.gc.ca/eic/site/auto-auto.nsf/eng/home. 3 Rob Day, “Low-Cost Batteries Are about to Transform Multiple Industries,” Forbes, December 3, 2019, accessed October 7, 2020, www.forbes.com/sites/robday/2019/12/03/low-cost-batteries-are-about-to-transform-multiple-industries#ef2eede10541 4 Perry Lefco, “Selling Cars without Dealerships Is ‘W here the W orld Is Going,’ Says Genesis,” Automotive News Canada, July 26, 2017, accessed June 23, 2020, https://canada.autonews.com/article/20170726/CANADA/170729818/selling-cars-

without-dealerships-is-where-the-world-is-going-says-genesis.

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mobility service. 5 OEMs were generally eager for cars getting out of the doors of dealers, who were more

eager to service cars already sold than selling new cars, because their margins in servicing were higher.

They were also keen on enhancing revenue through sales of replacement parts, which also provided good margins. However, OEMs sold parts to consumers directly, while also shipping them to dealers and garages,

thus cutting into the latter’s revenues. All industry participants needed to learn to deal with such trade

tensions.

AUTO MECHANIC SHOPS IN CANADA

By the end of 2019, Canada had 27,162 auto mechanic shops. Growing at an annualized rate of 2.6 per cent

over a five-year period, they had generated revenues of $10.8 billion in 2019. An estimated 44.6 per cent

were non-employers, defined as sole proprietorships or owner-operated businesses, and 90.4 per cent of establishments employed fewer than five people.

6 The sector was thus highly fragmented.

Contrary to general perception, original car manufacturing and sales represented only a small part of the

life cycle and value creation in the automotive ecosystem (see Exhibit 1). Far greater value was generated

by a whole range of services that preceded and succeeded the core manufacturing and sales.

The automotive aftermarket (which comprised both dealers and auto mechanic shops) was “surprisingly”

inefficient, according to a 2009 study. It contrasted sharply with the automotive manufacturing sector’s

focus on such management concepts as lean manufacturing and just-in-time inventory. The aftermarket was burdened with too much infrastructure and too many idle resources. Inventory turns of just one or two times

a year were common, and the rate of obsolescence of parts was high, at 23 per cent. 7

The auto mechanic sector also had no provision for accreditation through regular learning and renewal, as

was common with other professional services such as therapists and financial advisors. A mechanic’s licence, once secured, was valid throughout the mechanic’s professional life, renewable periodically on

payment of a fee. Licensed mechanics thus had little incentive to train and learn.

Auto mechanic shops provided seven types of routine services (see Exhibit 2). Given the lack of

differentiation between providers, price was typically the basis of competition. Repair invoices were billed based on the price of the parts replaced and an hourly labour rate that varied by repair shop.

The sector had undergone a shift in the level of technical knowledge required, largely due to on-board

diagnostics (OBD) that were installed as standard features in most new cars. Mechanics dealing with high- end cars would plug a computer tool into the OBD port (a cracker-sized opening located under the

dashboard) and read the trouble codes displayed on the computer tool’s screen. For example, a trouble code

of P0306 indicated a cylinder 6 misfire, while P2706 indicated a shift solenoid F malfunction. Other trouble

codes required specific software or access from different manufacturers to read and understand. Tens of thousands of codes were possible, and fixing the problems they diagnosed varied with each car model.

Nearly all cars were equipped with some basic form of OBD to monitor such functions as oxygen intake,

5 Sean Szymkowski, “Book By Cadillac Is Getting a Reboot,” GM Authority, January 21, 2019, accessed June 23, 2020, accessed June 23, 2020, https://gmauthority.com/blog/2019/01/book-by-cadillac-is-getting-a-reboot/. 6 IBISW orld, Auto Mechanics in Canada, market research report, April 2019, accessed October 21, 2020, www.ibisworld.com/canada/market-research-reports/auto-mechanics-industry. 7 Shaun Snapp, “How to Understand W hy Auto Parts Distribution Is So Inefficient,” Brightwork Research & Analysis, May 16, 2019, accessed July 24, 2020, www.brightworkresearch.com/servicepartsplanning/2009/05/16/auto-part-networks-are-a- mess/.

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tire pressure, engine temperature, air bag deployment, anti-lock brakes, security systems, climate control,

dashboard displays, entertainment consoles, and cruise control.

The revenues from scheduled repairs were dependent not only on the growth in the number of registered

cars but also their wear and tear, which corresponded to the age of the vehicle. During the five-year period

2014–2019, the average vehicle age in Canada had increased only marginally, from 9.3 years to 9.6 years.

Chung explained:

Auto mechanic shops are facing disruption also because more drivers are switching to electric or

hybrid cars. The reason is that electric cars have been promoted as cleaner and cheaper to run than

petrol or diesel cars. 8 They contain very few moving parts other than the wheels. A Tesla Model

S’s drive train for example, has a mere 18 moving parts. 9 Almost nothing therefore can go wrong

under the bonnet of an electric car. It is good news all right for motorists but spells trouble for auto

mechanic shops who have been making a living by servicing petrol or diesel cars with internal combustion engines including hundreds of moving parts. Another issue for auto mechanic shops is

the lack of information-sharing on the part of OEMs. You can see that specifically with respect to

technology and software tools. They shut us independents out.

OEMs were exploring ways of monetizing the data that was being generated by connected cars and thereby

expanding opportunities for revenue expansion. Tesla, for example, was known to be spotting as much as 90 per cent of service repair issues remotely; it could order parts and have them waiting for customers at its

exclusive repair centres. Similarly, sensors that monitored the happenings inside a car would suggest to the

OEM when a vehicle required, for example, its brake pads to be replaced. The OEM would share the data

with its local dealer but not necessarily with an independent repair shop. The OEM could also exercise the option of delinking the data from the OBD in a connected car to make the data less accessible by

independent repair shops.

A McKinsey report noted that car manufacturers

are investing billions into [data] and they really see this as core intellectual property. Independent

workshops will very likely have a role, but if you look at the types of repair they do today, it’s often simple maintenance, routine inspections. Those mechanic shops would know how to fix a steering

system, but if that steering system is, for example, a drive-by wire system [an electric steering

system controlled by a computer], then they need to access the control module to re-program it. 10

Another technological disruption was the imminent arrival of self-driving systems. Human error was the cause

of 93 per cent of vehicular accidents; 11

however, driverless cars rarely crashed. It meant, at one level, a

decrease in the number of car crashes, leading to an erosion in the volume of what was known as the collision business. But it also meant, at another level, a potential increase in the overall volume of business because

self-driving cars would not be idle due to the lack of an available driver. They would instead be deployed in

8 FT Reporters, “Five Industries under Threat from Technology,” Financial Times, December 26, 2016, accessed October 7,

2020, www.ft.com/content/b25e0e62-c6ca-11e6-9043-7e34c07b46ef. 9 Paul Nunes and Larry Downes, “Big Bang Disruptions Ar e Transforming the Automotive Industry,” Forbes, June 3, 2013, accessed July 20, 2020, www.forbes.com/sites/bigbangdisruption/2013/06/03/big-bang-disruptions-are-transforming-the- automotive-industry/#2bcc8e901ea6. 10 McKinsey & Company, From Buzz to Bucks: Automotive Players on the Highway to Car Data Monetization, March 2018, accessed August 26, 2020, https://eu-smartcities.eu/sites/default/files/2018-04/From-buzz-to-bucks-automotive-players-on- the-highway-to-car-data-monetization-web-final.pdf. 11 Treat, J. R et al, “Tri-level study of the causes of traffic accidents: final report,” Transportation Research Institute, May 1979

UMTRI-43120.

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services such as ride-sharing networks. A self-driving car would thus amass many more kilometres than a

traditional car, and due to above-normal usage, would require a higher level of repairs and maintenance,

which, in turn, was good for auto services businesses. Each driverless car would have dozens of high-tech sensors, thereby increasing the likelihood of sensor failures and the need for sensor replacements.

12

AUTONICHE’S COMPANY BACKGROUND

Chung founded AutoNiche in 2009. Having graduated with a degree in psychology and business from the

University of Waterloo, she had, for a few years, conducted psychometric testing for employees submitting their

claims to the Government of Ontario’s Workplace Safety and Insurance Board. These individuals had sustained motor vehicle accidents and were claimants of the Ontario Disability Support Program. This job required Chung

to report on her findings to a designated psychologist for further recommendations. Chung also worked briefly

as a human resources associate at a pharmaceutical company before joining her father’s national auto parts wholesale business as its project manager. There, she became interested in cars. Keen on learning more, she

enrolled in the Automotive Service apprenticeship program at the Centennial College in Toronto. Around that

time, Chung became a Christian and, following a spiritual calling, she started AutoNiche.

Her vision was to provide fair, affordable, and truthful services in an industry that was seemingly populated

by operators who were known for shady trade practices. She also returned to the trade school to complete her studies and earn her licence as an automotive service technician.

With a licence on hand, Chung had a clear sense of her business priorities at AutoNiche. Its mission

statement stated:

In faith and grace, AutoNiche strives to provide our clients with auto repair services in Markham

that meet the highest standards of quality, honesty, and integrity.

These three values are integral to our business and fundamentals to the success of our goal of

building enduring relationships with clients, vendors, partners, and team members who are committed to the same standards.

13

Chung was of the view that her whole life had been a statistical improbability. As a member of a visible

minority, as a female pursuing a male-dominated skilled trade well after high school, and as someone not

having been mechanically inclined in her younger years, the odds were not in her favour. Also, technicians traditionally worked for a few years before opening a repair shop of their own. Chung had obtained her

technician experience on the job, while building her business. At the time, she had also juggled the role of

being a mother to two young children. She had developed a positive mindset for figuring out a way out of any disruption, whether personal or business, as she did not necessarily look at disruption as impacting

negatively, either on herself personally or on her business. She saw disruption only as something she needed

to figure a way out of, sooner or later.

AutoNiche was originally geared toward “making women car drivers feel comfortable with car repairs.” It

was an attempt to differentiate itself in the Markham suburb where a cluster of automotive workshops were located on the same street as AutoNiche. But, as it happened, within only a year, 80–90 per cent of

12 Lance Eliot, “Rack ‘Em Up, Driverless Cars Surprisingly W ill Be a Boon for Auto Repair Market,” Forbes, April 29, 2019, accessed October 7, 2020, www.forbes.com/sites/lanceeliot/2019/04/29/rack-em-up-driverless-cars-surprisingly-will-be-a- boon-for-auto-repair-market/#38fc821e207b. 13 “About AutoNiche,” AutoNiche, accessed July 23, 2020, https://autoniche.ca/about-autoniche-2.

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customers were men. Chung discovered that men were coming into what was being portrayed as a women’s

garage because they felt “they didn’t have to pretend to know anything about their car.” In a demonstration

of what she considered as “reverse bias,” male drivers were finding AutoNiche a “safe” place to get their cars serviced. Chung changed AutoNiche’s marketing messaging toward being “family-friendly.” In a bid

to reinforce that narrative, AutoNiche offered free child seat inspections for parents who were unsure

whether they had installed theirs properly. She also introduced a designated children’s area and a clean

washroom with baby changing tables on the workshop premises.

By 2019, AutoNiche was regularly generating and retaining surplus earnings (see Exhibit 3), and achieved

an annual revenue of $555,000 for the year ending October 2019 (see Exhibit 4). Located on leased premises

of 4,000 square feet (372 square metres), AutoNiche had a staff of four technicians, including Chung herself, which was typical of an independent auto mechanic shop in Canada. Chung had taken several years

to find the right people, and it was only during the past four years, since 2016, that she had been able to put

together a stable team with wide skill sets. She had been sending her lead tech, as she called her senior- most employee, to several training courses.

AutoNiche was servicing approximately 400 regular clients. Half of its clients had been with AutoNiche

from the beginning. The company measured its customer loyalty rate in terms of two visits per annum and an average annual spend of $1,000 per customer.

AutoNiche provided three categories of services: maintenance, diagnostic, and repair services. It sought its

identity as a maintenance shop for repeat customers, rather than as a breakdown shop attending to problems only as and when they arose. Such an identity was key to attracting and retaining customers.

Chung’s customized approach to service was evident in two ways. First, she applied her knowledge in

psychology to code the 400 clients into four broad categories based on their style of communication: (1) controller, (2) analyzer, (3) supporter, and (4) promoter. A controller was decisive, results-oriented and

valued getting the job done. An analyzer was detail-oriented, logical, and valued accuracy. A supporter was

easy-going, a good listener, friendly, and valued relationships. A promoter was full of ideas, impulsive, spontaneous, and valued brainstorming. The staff at AutoNiche was trained to communicate with each

client in the same style as the client would communicate with them on matters pertaining to vehicle

inspections, diagnostic reports, or vehicle pickup.

Second, AutoNiche had an initiative called the Monthly Value Program, which targeted customers who

would be keen on eliminating surprises in the maintenance of their cars. This prepaid maintenance plan offered options customized to both the car and the lifestyle needs of its owner. It was aimed at retaining

customers and helping them budget consistently for vehicle maintenance.

AutoNiche was also in regular touch with its customers through digital and social media, where it provided

updates by posting videos on everything from road trip safety to reviews on the latest models from automakers such as Honda Motor Company and Mazda Motor Corporation.

The workshop’s processes were adapting to digitization in several ways. Chung had eliminated paperwork related to the inspection of car parts by introducing digital vehicle inspections (DVIs). AutoNiche was an

early adopter of DVIs in the province of Ontario. Customers were still expected to bring the vehicle to its

premises, but they received digital reports with pictures and videos. The initiative achieved two key goals: for customers, it ensured transparency on the overall condition of the vehicle at the time of inspection; for

AutoNiche, it generated a record of evidence that would be useful in case of liability issues. Although a

DVI gave car owners a sense of ownership and auto mechanics a better control over what was happening

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inside the car, the technology had a low, 10 per cent penetration rate in the North American auto mechanic

trade. 14

The low acceptance level was largely due to a general lack of awareness of the benefits of DVIs,

by both car owners and auto mechanics.

THE ISSUES BEFORE CHUNG

As Chung reviewed AutoNiche’s five-year growth plan in light of disruptive changes happening in the

industry, she needed to deal with three dilemmas: changing the value proposition, staying competitive, and

talent management.

Changing the Value Proposition

The basic value proposition of an auto mechanic shop was its tools and expertise to maintain and fix a car.

From a car owner’s perspective, an auto mechanic was the domain expert and was therefore worthy of trust. Trust and expertise were thus the two key factors at play in the relationship between a car owner and an

auto mechanic shop. As Chung saw it, the relationship was similar to a patient going to a doctor for

treatment. Unless evidence pointed to the contrary, the element of trust was implicit in the relationship.

When servicing a car that came to its doorstep, AutoNiche aimed to reinforce this trust.

It was in that context that Chung had originally seen merit in the core value of AutoNiche’s proposition

that it would “deliver peace of mind to a car owner.” But her dilemma over the need for a fresh look at the value proposition had surfaced because of the way that the general public perceived auto mechanic shops.

Among auto mechanic shops, a clear demarcation separated general shops, which provided services such

as oil changes, from mechanic shops, which provided auto repair services. The provincial governments that regulated such shops also viewed them as two different trades that required different skill sets and licences.

But consumers generally perceived them differently. Seeing the two trades as part of the same industry and

doing similar work, consumers perceived technicians as jacks of all trades who could address any issue

with their car. The confusion had often led to friction between service providers and customers.

For example, if a car owner took a vehicle to a general shop to have the tires replaced and the technician damaged

a wheel stud during the service, the general shop would not be qualified to repair the damage on the premises. The car owner would have to tow the vehicle to an auto mechanic shop (e.g., AutoNiche) because the damage

had turned it into a safety issue, which was a different matter. The general tire shop had no licence for fixing the

problem. Safety was thus a differentiating factor for companies such as AutoNiche.

In its own way, AutoNiche was different from both general shops and mechanic shops. It called itself a full-

service shop, covering the gamut of auto repairs—mechanical and electrical. But it would not provide certain services. For example, AutoNiche would not do collision repairs, which was a separate trade that

required separate certification; nor would it do bodywork, tune up the car, make it perform faster, provide

hitches, or install backup cameras. It would not alter the basic function of a vehicle or its engine performance. It performed only mechanical and electrical work in compliance with the original vehicle

specifications. This stance gave AutoNiche its focus.

14 Cam Capriotto, “RR 376: The Undeniable Rise of Digital Vehicle Inspection,” Remarkable Results Radio, November 2,

2018, accessed July 25, 2020, https://remarkableresults.biz/remarkable-results-radio-podcast/e376/.

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In an industry characterized by the homogeneity of services it provided, a low-cost approach was the

dominant strategy in attracting customers. But Chung did not want to follow that route. A low-cost strategy

required access to capital for investments in technology to achieve economies of scale, which, in turn, would reduce unit costs. Chung believed that the reason why most customers looked for low prices was

because they did not understand what they were paying for—that is, they lacked an understanding of the

technical details of vehicle parts, and the quality and methods of the proposed repair. However, they did

understand what a dollar was, so the simplest way for most consumers to compare repair shops was by price. It was the customers’ way of attempting to “compare apples to oranges.” It was unfair, but it was a

matter of fact in the market, according to Chung.

Chung believed that if customers were focused on price because of a lack of understanding, AutoNiche’s

opportunity was to use excellent communication skills to educate customers about auto repair. Chung had chosen a differentiation strategy that would help her charge a premium by providing superior service and

delivering an outstanding customer experience that would lead to the customer’s peace of mind. As

evidence that the strategy had worked, AutoNiche had a 50 per cent customer retention rate in more than a

decade of operations.

The arrival of electric cars had complicated AutoNiche’s relationship with the car dealers from which it

bought replacement parts. Dealers were already motivated to focus on auto repair services because margins in servicing were higher than the margins in car sales. Many car owners also had their car serviced at the

dealer where they bought the car (despite the higher costs) because they believed that doing so was a

precondition to maintaining the manufacturer’s warranty; however, it was a misconception that taking their car anywhere other than the dealer would void the manufacturer’s warranty. Electric cars had strengthened

that misconception, particularly because of their proprietary software.

Staying Competitive

After more than 10 years in business, Chung reflected on where she would like the enterprise to be heading.

She was not keen on expanding to more locations; however, she was keen on taking herself out of the

equation as the founder and allowing AutoNiche run on its own. As Chung saw it, brand building was one of the ways AutoNiche could stay competitive in future.

AutoNiche was located in a Markham neighbourhood, on the same street as a cluster of other auto service

shops. Chung did not consider them to be competitors; instead, she viewed them as partners in the same

journey. She was focused, however, on two sets of players as competitors—automotive dealerships that had built original relationships with customers while selling a car, and retail chains (e.g., Canadian Tire

Corporation Limited) that provided auto services only as a small part of their overall portfolio of product

offerings. Both were taking away potential AutoNiche customers. Both were also highly competitive on their own. Dealers competed with each other to seize a share of the service business. For example, if the owner of

a Honda Motor Company vehicle were to drive into a Ford Motor Company dealership for servicing, the

dealer might offer a discount (e.g., 10 per cent lower price) for bringing in an off-make car, rather than turning away the customer. Dealerships may also sublet their premises to collision shops for a fee. The auto repair

ecosystem was like circles within circles, with layers of both co-operation and competition.

Further, in light of the arrival of self-driving cars that currently required a human passenger to be present,

Chung thought it was feasible that someday cars might drive themselves to an automotive service facility without a driver or human interaction at the shop. Therefore, customer service skills, which had long been

a source of competitive advantage in the industry, would need to adapt to different expectations. It would

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also mean that auto repair shops would need a different way to educate customers on the value of

maintenance and repairs.

Another concern was the transition of autonomous vehicles into shared mobility platforms, leading to the

individual car ownership being replaced by ownership shares in car fleets. A rise in fleet business would be

good for auto mechanic shops because it would ensure a steady revenue stream; however, it would also be bad for auto mechanic shops because fleet managements were prone to drive down prices and, often, only

big shops could satisfy the owners of large fleets.

Chung was also concerned about how to capture a share of the market for servicing electric cars. Customers

would have a comfort level with the dealers from whom they purchased their electric car. For any repairs,

they would prefer to visit the dealer, rather than an auto mechanic shop. The cost of repairs would be secondary, given the premium price they would have paid for an electric car.

While AutoNiche could build the necessary expertise to manage these imminent disruptions, Chung would

need to invest in a multitude of new and costly electronic diagnostic tools that were specific to each OEM. For example, Honda Motor Company, Volkswagen AG, and Ford Motor Company would each have their

own scan tools, which was their way of both limiting auto mechanic shops from cornering the servicing

business and dealing with the potentially increased labilities associated with these new vehicles. Each scan tool cost between $6,000 and $10,000, which was a major investment for AutoNiche. Small suppliers in

the automotive aftermarket sold a common scanner for multiple vehicles, but those scanners were unreliable

and seldom updatable. Making the investment in electronic diagnostic tools was one more way of staying

competitive—or was it?

Talent Management

Chung felt that finding and training new hires was an industry-wide problem. It seemed that automotive

service businesses, both large and small, were finding it difficult to attract, hire, and promote mechanics.

Hiring a reliable and promising entry-level technician was as difficult as hiring a licensed automotive service technician. In the past, someone who worked at a gas station, changed oil, and worked with cars

could make an ideal candidate for a job with an auto mechanic shop; however, with gas stations having

evolved over time, gas station workers tended to have more experience on sales of gas and general retail products (e.g., candy, snacks, beverages). The skill sets required of an auto mechanic had also undergone

changes (see Exhibit 5). According to Chung, the largest pool of candidates for auto mechanic shops

currently comprised high school graduates, recent immigrants, and workers who frequently switched jobs. She felt that qualified mechanics were getting older as fewer young people were entering the auto repair

industry to replace them. To keep up with customer demand, Chung felt that recruiting candidates from

among millennials was important.

However, Chung felt that attracting millennials was a challenge due to their apparent lack of interest in the

auto mechanics industry. Millennials were the first generation to be immersed in digital technology and digital culture, and auto mechanics was becoming highly technical, with technicians using tools such as

iPads and laptops, rather than the antiquated stereotype of a mechanic performing “dirty work.” Auto

technicians had evolved to gain a broad knowledge base of a vehicle’s plumbing, heating, electrical, and mechanical functions. Recent specialization in the industry went even further to include diagnostics and an

understanding of computer coding.

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According to federal government sources, new job openings (arising from expansion demand and

replacement demand) for automotive service technicians, truck and bus mechanics, and mechanical

repairers were expected to total 39,100 over the period 2019–2028, while potentially 41,600 new job seekers from the above categories were expected to be available to fill them.

15 “As job openings and job

seekers were projected to be at relatively similar levels between 2019 and 2028, the balance between labour

supply and demand seen in recent years was expected to continue over the projection period.” 16

But those

numbers did not consider the growing gap in the skillsets required for being “job-ready.”

As Chung contemplated these changes, she wondered whether her growth plan for AutoNiche was realistic

or whether she needed to change focus completely to maintain its future.

15 “Automotive Service Technician in Canada,” Government of Canada, accessed July 20, 2020, www.jobbank.gc.ca/marketreport/outlook-occupation/14799/ca. 16 Ibid.

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EXHIBIT 1: AUTOMOBILE LIFE CYCLE

Note: Pb = lead, Zn = zinc, Cu = copper, Fe = iron, non-Fe = non-ferrous; Processes listed at bottom of chart refer to the respective number of life cycle steps in the diagram. Source: Reprinted with permission by professor John Jackson, Automotive Business School of Canada, Georgian College, accessed October 20, 2020, www.georgiancollege.ca/automotive-business-blog/john-jackson.

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EXHIBIT 2: ROUTINE SERVICES IN THE AUTO MECHANIC SHOPS SECTOR, (2018)

Source: Created by the case authors using data from IBISW orld, Auto Mechanics in Canada, market research report, April 2019, accessed October 21, 2020, www.ibisworld.com/canada/market-research-reports/auto-mechanics-industry.

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EXHIBIT 3: AUTONICHE’S FINANCIALS, 2015–2019 (IN CA$)

Year ending October 31 2015 2016 2017 2018 2019

Assets

Cash Assets 14,244.86 4,033.42 12,058.39 9,546.48 4,683.22

Common Shares (100.00) (100.00) (100.00) (100.00) (100.00)

Computer 792.72 0.00 0.00 0.00 0.00

Computer Class 50 4,189.13 8,094.85 8,665.84 8,665.84 11,431.78

Computer Class 50 Accumulated Amort (4,118.43) (5,449.43) (7,061.43) (7,943.43) (9,101.43)

Total - Computer 863.42 2,645.42 1,604.41 722.41 2,330.35

Inventory 6,322.54 5,491.19 8,477.17 8,996.75 12,278.97

Leasehold Improvements 2,642.37 0.00 24,776.64 19,270.64 13,764.64

Office Furniture 6,136.62 1,709.62 2,222.62 1,777.62 1,421.62

Prepaid Rent/Deposit 3,624.26 21,052.42 17,428.16 17,428.16 17,428.16

Receivable Accounts 1,620.09 4,537.16 1,555.61 4,109.37 2,632.33

Security Equipment 2,996.22 565.82 452.82 361.82 1,594.82

Shop Equipment 51,189.69 45,193.05 66,278.06 67,278.06 68,377.06

Shop Equip Accumulated Amort (21,770.14) (24,055.14) (30,391.14) (37,668.14) (43,700.14)

Total - Shop Equipment 29,419.55 21,137.91 35,886.92 29,609.92 24,676.92

Shop Vehicle 31,837.85 31,837.85 31,837.85

Shop Vehicle - Accumulated Amort (4,776.00) (12,895.00) (18,578.00)

Total - Shop Vehicle 27,061.85 18,942.85 13,259.85

Total Assets 67,769.93 61,072.96 131,424.59 110,666.02 93,970.88

Liabilities & Equity

Liabilities

Accounts Payable

Payable Accounts 11,949.61 5,274.86 3,613.84 3,211.26 3,589.67

Supplier Invoices Received Not Posted 500.00 601.24 822.50 790.66 2,789.57

Total - Accounts Payable 12,449.61 5,876.10 4,436.34 4,001.92 6,379.24

Canada Revenue Agency - HST Payable 6,158.85 11,661.34 3,536.61 11,062.16 6,474.33

Credit Card Account 15,107.32 14,552.82 4,775.02 493.82 8,498.02

Deposits (1,155.00) (2,092.77) (7,937.77) (7,937.77) (7,937.77)

Equipment Loan 19,874.70 20,081.00 40,568.75 36,948.90 33,416.29

Payroll Liability 2,045.05 2,408.92 3,755.91 1,964.85 4,428.70

Total Liabilities 54,480.53 52,487.41 49,134.86 46,533.88 51,258.81

Equity

Net Income 1,660.48 12,536.44 7,995.90 20,463.02 29,636.85

Retained Earnings 9,782.89 (5,796.92) 72,447.80 41,823.09 11,229.19

Opening Balances 1,846.03 1,846.03 1,846.03 1,846.03 1,846.03

Total Equity 13,289.40 8,585.55 82,289.73 64,132.14 42,712.07

Total Liabilities & Equity 67,769.93 61,072.96 131,424.59 110,666.02 93,970.88

Note: HST = harmonized sales tax, which in the province of Ontario was 13%. Source: Company files.

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EXHIBIT 4: AUTONICHE’S INCOME STATEMENT, 2015–2019 (IN CA$)

2015 2016 2017 2018 2019

Income

Gain/(Loss) on Disposal of Asset ($1,735.06)

Labour Sales $189,893.72 $207,730.04 $256,801.76 $256,569.32 $266,762.06

Material Sales $205,675.96 $228,646.34 $266,441.83 $266,033.87 $276,028.10

Other Charge Income $11,237.15 $11,836.41 $13,407.34 $13,607.66 $0.00

Receivable Service Charges $0.00 $0.00 $0.00 $0.00 $0.00

Sublet Sales $5,477.39 $10,913.15 $14,321.44 $7,427.76 $12,170.84

Total Income $412,284.22 $459,125.94 $549,237.31 $543,638.61 $554,961.00

Expense

Accounting & Legal $2,215.00 $4,815.00 $6,136.00 $6,360.00 $9,525.00

Travel $0.00 $1,500.00 $1,500.00 $5,480.76 $4,998.70

Payroll $125,286.05 $124,166.24 $191,026.14 $107,473.06 $160,128.38

Reconciliation Discrepancies $0.00 $0.00 ($0.02) ($3.55) $0.00

Advertising & Promotion $16,887.82 $17,861.61 $33,435.44 $37,001.77 $25,671.47

Bad Debts $161.28 $0.00 $198.46 $0.00 $0.00

Cash Drawer Outages (Overage & Shortage) $117.96 $0.00 ($6.33) $0.01 $0.01

Consulting $4,415.00 $8,507.34 $10,936.34 $7,817.86 $4,050.00

Cost of Goods Sold

Material Cost $97,758.86 $117,807.11 $96,865.00 $141,840.75 $109,465.47

Other Charges Expense $1,453.42 $627.73 $651.44 $855.33 $652.00

Sublet Cost $4,690.17 $9,014.10 $13,188.23 $7,919.57 $10,430.68

Total – Cost of Goods Sold $103,902.45 $127,448.94 $110,704.67 $150,615.65 $120,548.15

General Office $13,369.41 $6,639.23 $12,023.95 $9,652.12 $11,516.51

Insurance $8,080.93 $5,415.21 $6,741.84 $8,321.00 $9,195.00

Inventory Adjustments (Recounts) $555.87 ($495.32) ($119.66) ($15.96) ($1,086.01)

Licences, Dues, & Subscriptions $11,639.59 $13,337.11 $15,350.83 $12,426.00 $4,079.84

Maintenance & Repair $531.25 $0.00 $1,066.47 $415.68 $0.00

Meals & Entertainment $7,212.18 $12,569.49 $10,197.64 $4,814.69 $7,994.61

Amortization - fixed assets $5,289.72 $7,214.00 $16,051.00 $22,339.00 $18,967.00

Medical Expense $1,786.42 $3,575.27 $4,781.71 $0.00 $0.00

Payroll Expense $7,733.96 $10,191.99 $12,616.81 $9,227.52 $10,073.33

Professional Development $13,002.84 $9,366.18 $11,126.70 $7,591.68 $6,249.11

Rent $48,483.39 $49,108.53 $47,600.44 $85,578.19 $88,568.73

Service Charges & Fees $17,903.05 $20,487.11 $21,285.25 $25,850.08 $25,763.52

Shipping, Freight & Delivery Charges $93.03 $26.00 $0.00 $20.25 $184.00

Shop Expense $1,255.23 $6,617.36 $6,188.86 $2,720.73 $957.43

Shop Supplies $981.88 $101.94 $420.33 $349.21 $796.94

Shop Tools $266.27 $130.00 $0.00 $934.13 $1,390.20

Supplier Credit Slip Adjustments ($666.89) ($1,222.11) ($2,369.98) ($1,484.93) ($3,028.05)

Supplier Invoice Adjustments ($215.49) ($224.84) ($102.81) ($2.29) ($3.90)

Telephone & Internet $2,561.34 $3,315.58 $3,184.20 $3,171.60 $3,194.81

Tools & Equipment $35.29 $0.00 $0.00 $0.00 $0.00

Uniforms $2,032.09 $3,173.56 $3,087.48 $2,965.06 $3,129.81

Utilities $5,451.10 $4,507.45 $8,954.12 $7,006.87 $6,708.44

Vehicle Expense $10,255.72 $8,456.63 $9,225.53 $6,549.40 $5,751.12

Total Expense $410,623.74 $446,589.50 $541,241.41 $523,175.59 $525,324.15

Net Income $1,660.48 $12,536.44 $7,995.90 $20,463.02 $29,636.85

Source: Company files.

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EXHIBIT 5: IN-DEMAND SKILLS FOR AUTOMOTIVE SERVICE TECHNICIANS

Foundational Skills Specialized Skills Software Skills

Communication Skills Teamwork / Collaboration Detail-Oriented Organizational Skills Customer Service Writing Troubleshooting Preventive Maintenance Computer Literacy Time Management

Repair Auto Repair Auto Services Industry Knowledge Welding Manual Dexterity Engine Repair Electrical Systems Machine Operation Cleaning Inspection Records

Microsoft Excel Microsoft Word Microsoft PowerPoint Microsoft Outlook Microsoft Windows Database Software Microsoft Access AutoCAD Confluence Design Software

Source: Ontario Ministry of Labour, Training and Skills Development, “Automotive Service Technicians, Truck, and Bus Mechanics and Mechanical Repairers,” accessed July 20, 2020, www.iaccess.gov.on.ca/labourmarket/jobProfile/jobProfileFullView.xhtml?nocCode=7321#quickFactsSection.