In the past decade, automotive retailing has faced significant hurdles around the world, yet the basic model for “going to market” remains largely intact. The challenges have varied by region, but for the most part, the traditional franchised dealer model has prevailed. This summary has been taken from a new report published by ABOUT Automotive, sponsored by PricewaterhouseCoopers and Autofacts.
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While the fierce defence of the status quo by dealers has been successful so far, the industry will nonetheless witness an accelerating pace of change.
This is perhaps best exemplified by the changes that European retailers will undergo due to the recasting of the automotive block exemption back in September 2002.
Even Japan, perhaps least affected by the forces driving change elsewhere, will likely see increased levels of restructuring activity in the years ahead as OEMs struggle to reduce costs and increase retail level productivity.
In reviewing the global automotive retailing industry in general, it is striking to see that so many of the bold initiatives launched in the past decade have either failed outright or have struggled to gain anything near the footholds that were originally envisioned for them:
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- With the exception of some interesting experiments taking place in Europe, the OEMs’ attempts to buy and run dealerships have largely failed. In North America, General Motors and Ford have backed away from plans to own and operate dealerships, which were pursued both to learn more about their customers and to capture downstream value.
- Beyond the significant roadblocks placed in the OEMs’ way by a legally protected dealer body, it turns out that running a dealer group, with all of its entrepreneurial demands, is probably not a skill that comes readily to a large bureaucratic organisation like a vehicle manufacturer.
- The “disintermediation” of the dealer by other players such as Internet portals has also not occurred as planned in markets such as the US. This is due to an apparent combination of structural impediments (i.e., an inability to sell effectively around the dealer), and consumer hesitancy to buy cars sight unseen.
- So-called build-to-order production, whereby a customer could order a vehicle that would be custom built and delivered within three to ten business days, has also faced significant roadblocks. While the potential payoff is often expressed in terms of billions of dollars, actually attaining it would require the wholesale re-invention of the automotive value chain – an ominous challenge at the best of times.
- Telematics, once touted by many as the new profit engine of the industry, is already being commoditised in those instances where it is used. Furthermore, the wholesale collapse of significant parts of the telecommunications industry has slowed the rollout of newer “3G” broadband wireless systems that could energise demand for telematics.
- And wireless technology itself may cause in-vehicle communications to bypass the automotive platform entirely, given the huge “clock speed” differences between the consumer electronics and automotive industries.
Finally, the automotive industry is in the middle of one of the largest transfers of value to consumers in its history. This, in combination with continuously tightening vehicle safety and emissions regulations, is hampering the abilities of many automakers to earn attractive returns.
In some markets, carmakers have not been able to raise car prices beyond the inflation rate for much of the past decade. Yet it is obvious that the standard vehicle now comes with much higher levels of content compared to cars of 15 or 20 years ago. Furthermore, the extension of vehicle warranty and in some cases routine maintenance coverage by OEMs in some markets has forced them to take on a greater part of the cost of operating a vehicle. One astounding fact: compared to the three year/36,000 mile cover typically offered today in the US, domestic car warranty coverage in the 1950s lasted a mere 90 days or 4,000 miles.
The intense incentives wars currently taking place in the US also represent a hefty transfer of value to consumers. And in addition to this, the increased durability of cars – while a counterweight to the cost of the longer warranties – reduces the often lucrative aftermarket parts and service revenues the industry captures.
In total, the industry probably surrenders billions of dollars of value to customers each year. Finding out how to recapture some of this value is probably the greatest challenge facing the industry as it enters the 21st century.
Incentives case study: how to avoid the weakest player’s gambit
The US phenomenon known as direct-to-consumer incentives is an unfortunate example of the weakest player leading the market, and it should serve as a cautionary tale to OEMs in Europe and Asia of what not to do in the face of a weak competitor’s value-destroying tactics. In 2001 the average automaker incentive on new light vehicles in the US was estimated to have been about $2,500, which if true, would have exceeded $40 billion for the entire industry. Incentives have become a consumer-expected part of the US light vehicle-buying experience, and the stakes have become so high that even formerly above-the-fray companies like Honda and Toyota are greasing their deals with ever greater amounts of upfront cash. How did we get here?
On SuperBowl Sunday, January 12, 1975, Chrysler announced its latest Hail Mary marketing pass: $200 to $400 direct-to-consumer rebate cheques. Joe Garagiola probably had no idea what his now famous “buy a car, get a check [sic]” come-on would start. Chrysler undoubtedly had no idea what it was starting, either, though the company had a long history of coming up with innovative marketing ideas. It had, for example, instituted five-year/50,000-mile powertrain warranty coverage in 1963, no doubt galling the rest of a domestic industry that had offered little more than 90 day/4,000 mile basic coverage on new cars throughout the 1950s.
Chrysler also pioneered discounts on leases to fleet customers, and in 1986 would introduce zero percent financing – free money – an idea whose time has unfortunately come again today. The consumer rebate idea was borrowed in part from a mid-western auto supplier’s internal plan to offer employees $100 cheques for purchasing new US-built cars. Chrysler decided to make consumer rebates the centrepiece of its somewhat desperate “Chrysler Car Clearance Carnival” campaign, designed to sell the huge inventory of vehicles it had been building but not selling in the preceding months. Unfortunately Chrysler’s ploy worked all too well. Car sales shot up, and Chrysler continued the rebates in one form or other throughout the year, and on into legend.
In 1975 Chrysler was the most vulnerable member of the weakened hegemony known as the Big Three Automakers (the other two of course being General Motors and Ford Motor Company – perennial tagalong American Motors was typically good for little more than rounding error in production and sales tallies). Chrysler’s product line, consisting largely of uninspiring gas guzzlers and overpriced smaller cars, was floundering in the face of a troubled economy, inflation-driven consumer sticker shock, tough new government regulations and rising fuel prices. What market there was for new cars was embracing the cheap, fuel efficient subcompacts built by Toyota, Nissan, Volkswagen and other importers.
From a strategic perspective, it was the me-too reactions of GM and Ford that legitimised Chrysler’s rebates. Within days of Chrysler’s January announcement Ford began offering its own rebates, followed by General Motors and American Motors. The obvious question one feels compelled to ask is why did GM and Ford so quickly take the bait? In fact, why not expose Chrysler’s ploy for what it was: an attempt by what at the time had to be considered an inferior competitor to buy sales?
Had GM and Ford been able to resist the temptation of rebates, they might have been able to turn the tables on Chrysler entirely. Why didn’t they use their tremendous marketing prowess to persuasively communicate to the car-buying public that Chrysler’s rebates were the kind of come-on only a company with damaged brands, poor products and worse-than-average quality would offer? Had they done so, Chrysler’s gambit might have remained the last resort of a desperate company, and a small part of automotive history.
One answer is that GM and Ford were in dire straits as well at the time, saddled with suddenly out-of-favour gas guzzling product lines of their own in a changing market. Ford’s position was so bad that its sales and service manager “retired” in July 1975, just over two years after being appointed to the position. GM, the strongest of the domestic makers, was forced later that year to go to the capital markets for operating funds for the first time since 1953. Still, their market positions remained stronger than that of Chrysler, if judged by the effect those initial rebates had on their sales.
While Chrysler’s rebated cars saw sales increases of about 27% for the month of January, Ford’s rebates boosted covered car sales by almost 76%, while GM’s lifted sales almost 85%. One could argue that consumers valued rebates more highly when the products they were attached to were made by GM or Ford as opposed to Chrysler. Furthermore, the importers largely eschewed rebates, which perhaps best illustrates the special situation the Big Three found themselves in at the time. The importers were building cars the public wanted at the time and some imports, primarily Japanese, were offering something more: functional quality levels better than the quality offered on US luxury cars of the time.
By matching Chrysler’s rebate offer, GM and Ford reacted rationally given their short-term competitive positions, which were relatively tenuous. They also attempted other ploys to lure customers, which included attempts to reduce the rate of price increases by reducing dealer discount percentages and de-contenting vehicles. But none of these stratagems worked as well as the rebates.
Prior to Chrysler’s consumer rebates, the traditional approach to stimulating short-term demand had been dealer incentives. From the OEM’s perspective, these were and remain preferable for a number of reasons, but perhaps most of all because they are controllable. OEMs could set business terms, volumes and limits for dealer incentives, while consumer rebates tend to be applied across the board. Furthermore, the actual discount offered at the dealer level is often less transparent, with the consumer being led to believe perhaps his or her own negotiating prowess resulted in the lower final price, not a handout to all buyers. Now however, OEMs routinely offer both consumer and dealer incentives, and they have begun to offer them almost constantly, not just for special short-term reasons.
Incentives took root in the United States at a time of almost uniform weakness among the dominant Big Three compared to other competitors. Such events are not typical, but now that both the idea and power of direct-to-consumer incentives are well accepted, the temptation to fall in line behind the rebate leader can be overwhelming. Europe stands at the threshold of major changes in its automotive retailing industry in 2002.
From the recent revisions in the block exemption, to the growth of Internet-generated sales, to the tentative entrance of non-traditional players in new car retailing, the coming years promise to be exciting, to say the least. Car companies in Europe would do well to study how and why the consumer incentive floodgates opened in the United States, and take steps to ensure a similar fate does not await them in the near future.
This summary has been taken from a new report published by ABOUT Automotive, sponsored by PricewaterhouseCoopers and Autofacts. Further details about this report can be found here.
