Image credit: Philip Jeffrey, CC BY-SA 2.0, Wikimedia.
On his recent earnings call, Lithia Motors CEO Bryan DeBoer explained why the company is holding off on bringing Chinese auto brands to US showrooms.
He made it clear that the problem is not the political backlash or the tariffs. Instead, the concern is the cost of the infrastructure, the return on investment and the implications for Lithia’s business model.
According to the report, about 50% to 60% of Lithia’s profits come from service and parts operations, not new car sales. This emphasis reveals the fundamental force that shapes the dealer’s strategy: profitability comes from what happens after the sale.
Understanding Lithia’s position requires a hard look at how traditional franchise dealers make money.
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New car sales make up the majority of revenue in a typical dealership. Industry data shows that new car sales can account for 53% of total revenue, but often generate modest gross margins in the 5% to 10% range.
Used vehicles help, with slightly better margins, but the real profit center is found in AFTER SALES thing.
Several industry analyzes show that service and parts departments are the most profitable part of dealership operations.
According to independent management consultant Umbrex, services and parts typically account for about 10%-15% of total revenue, but contribute about 50% of gross profit on average.
A recent NADA profile shows that service and parts gross profits continue to contribute a large portion of total dealer profits, with healthy labor and parts margins on in-warranty and out-of-warranty work.
Some industry commentary estimates that at certain dealerships, service and parts can account for as much as 65% of total profit, even though they represent only about 15% of revenue.
This split occurs because routine service, warranty work, maintenance and parts replacement have higher gross margins than selling a new car. Dealer labor rates, for example, often exceed $150 an hour, while the cost of technicians is much lower, creating lucrative profit margins for labor alone.
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Now consider this: Dealer service revenue only flows when the vehicles need work. This means that dealer profitability, particularly for large multi-location groups like Lithia, is inherently dependent on a vehicle base that generates recurring maintenance and repair work.
By default, if the cars are extraordinarily reliable and rarely require service, a traditional dealer’s fixed operating income could drop significantly.
Improving vehicle reliability has been a long-term trend in the auto industry, with the average age of vehicles in the U.S. now over 12 years, according to industry data. An older fleet typically endures more repair work as vehicles age beyond their warranty periods.
As machines require less routine maintenance, the volume of service visits could decrease or become more focused around complex electronic issues that are harder to monetize in a traditional parts and labor model.
Data from service revenue studies show increases in total service dollars, even when the number of service visits is constant, driven by higher costs per repair rather than higher visit frequency.
Electric vehicles particularly highlight this trend. They have fewer moving parts, no oil changes and less routine maintenance than internal combustion vehicles. McKinsey’s analysis shows that owning an electric vehicle can reduce a dealer’s service opportunities because electric vehicles generate fewer routine service visits. This means dealers need different strategies to monetize service work in the future.
In other words, dealers like Lithia make a living off vehicles that need service. When cars are most reliable—requiring little routine maintenance—the dealer’s high-margin service engine turns around more slowly, unless replacement parts or major repairs fill the gap.
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When DeBoer points out that building infrastructure is expensive, he’s signaling more than “we don’t like Chinese brands right now.” New brands entering the US must support service networks and parts inventories. For a dealer that relies heavily on repeat service revenue, this matters a lot.
Without a robust parts and service infrastructure, dealers risk selling vehicles without any guaranteed profit stream for future fixed operations.
Chinese automakers such as BYD Auto, Nio Inc. and Li Auto have rapidly grown their global footprint. In some cases, their vehicles are technologically complex EVs that may require different service models than traditional dealerships currently operate.
US franchise laws add another level of complexity. Dealers would have to invest heavily in facilities and technician training with an uncertain return on service, which could reduce the fixed operating income expected from these cars.
It goes without saying that this is not a rejection of Chinese brands forever. Rather, it’s a caution that short-term ROI for dealers is tied to predictable, profitable service revenue—and without stable, high-volume service work, a new brand becomes a riskier proposition.
The tension in the pattern of the pieces is unmistakable.
With most large dealer groups making 50-60% of their profits from service and parts, this means their business depends on vehicles that need regular maintenance, repairs and parts. If cars became so reliable that they required little or no service, the dealership model as we know it would be undercut.
If cars really achieved near-maintenance-free reliability, dealers would have to reinvent themselves – moving to financing, subscriptions, software updates or mobility services. Otherwise, yes, their current profit model would collapse.
Dealer groups will look for opportunities that maintain or expand demand for service rather than shrink it, which helps explain why a company that makes most of its profit from service is reluctant to adopt brands whose service economics are unclear or potentially weaker in the U.S. market.
