#DigitalSkeptic: It's Dealers vs. Car Makers in Smart Car Smackdown

NEW YORK (TheStreet) -- Sure, drivers may soon find themselves behind the wheel of smarter Chevys, Fords, Nissans and Audis. But Colin Ehrhardt is pretty darn sure those car companies won't be the only ones making smarter cars.

"Five years ago, I never thought we'd be building smartphones, tablet adaptors and sophisticated electronics into single-unit faceplates that fit over the entire center console of a vehicle," said the director of research and technical services for Metra Electronics, the Holly Hill, Fla., aftermarket automotive electronics and audio company. "But now we are so dialed into what the customer wants that we make a good living doing work like that every day."

Ehrhardt was kindly giving me a tour of the latest aftermarket smart car products he's helped design: Entire replacement consoles for the clumsy control units on late-model Camaros. Or smaller retro kits that upgrade, say, my '89 Honda Civic for touch-screen control and new-age, smartphone-like features.

Metra and companies like it, such as Oxnard, Calif.-based Scosche Industries, are part of a growing group of surprisingly robust car electronics and systems makers that are not actually car makers. Rather, these aftermarket smart part producers, with roots in car electronics and security systems, have become global experts in retrofitting not only radios and GPS systems into vehicles; but also designing and manufacturing end-to-end integrated intelligent vehicle technologies such as collision avoidance systems, complex in-vehicle computers and even apps and software.

Ehrhardt declined to tell me his sales, but I believe him when his says his firm employs more than 400 in several U.S. production facilities. Even a brief browse through the smart aftermarket parts market shows the beefiness of Metra's market. Take Scosche's brand-new replacement console for later model F-150 pickups. This easy-to-install upgrade costs only $450, yet replaces many of the functions of the $2,300(!) premium option package offered directly from Ford. Scosche would not comment on sales, but go look at its website and you should see the basically new part out of stock.

"The line between the new car and the aftermarket car is blurring," is how Ehrhardt explained it.

All of which implies that investors better find their seat belts. The exact same smart vehicle technologies that mainline automakers and technology giants such as Google, Microsoft, Pandora and others have been hyping relentlessly as the future of cars now face a brutal, low-cost competitor: the decentralized, outsourced, digitally enabled automotive supply chain.

In other words, the business of smart cars competes with itself.

The automotive supply chain eats itself
Make no mistake, there's a reason the car biz is in a race for the smart aftermarket parts biz: It's the last place there is any money. San Francisco's AddOnAuto, which provides interactive, in-store option upgrade assistance to car dealers, estimates that of the $31 million in accessories sold by 150 dealerships it tracked in the first six months of 2013, gross profits on those sales ran a crazy 54% -- or 20 times the 2.5% AddOnAuto says is found in most vehicle sales.

"My sense is that margin actually grew over 2012," Sidney Haider, president at AddOnAuto, told me by phone. As Haider explained it, there's been constant tension between the car makers and aftermarket providers: The car industry relies on the aftermarket for research and innovation, yet hopes to upcharge over those products at some point.

"What is changing is the speed of change and the fact that the car industry is opening itself up to a new generation of partners with mobile apps and software," he said. "The clock used to run in decades. Now it runs in months, and that's uncharted territory for this industry."

To see just how uncharted, take a look at the so-called "expeditor sales" channel hidden in the smart aftermarket parts business. Here, third parties such as Auburn, Mass.-based Micorp Dealer Services and Kenilworth, N.J.'s Auto Action Group not only install everything from remote starters to moonroofs for paying customers, they do the work at wholesale prices directly for car dealers. Dealers then mark up the smart part packages, resell the vehicle at a fat profit and essentially cuts out the car manufacturer from some the most lucrative parts of the automotive transaction.

"This is not to say the aftermarket makers are doing anything substandard," said Jim Buczkowski, director of electrical and electronic systems at Ford, who confirmed that the aftermarket niche will always be a factor for big car makers. "But the experience and level of support Ford is offering in its cars in terms of ease of use, safety and integration," he said, "is much tougher to recreate than it looks."

Smart car smoke and mirrors
What makes it worse for investors is that the dogs of digital hucksterism have been loosed in the car business on a scale nobody has seen. These tired eyes practically rolled out of my head when Audi's chairman of the board, Rupert Stadler, told a room stuffed with 1,200 journalists and industry watchers that his products now combine the "best of German engineering with Silicon Valley." Meaning the smoke and mirror machine will be running at redline levels in the smart car sector, and piloting the investor bus through this rapidly deteriorating sector will require every ounce of skill and concentration.

Buckle up.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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