12/02 2024 499
?Editor's Note
Driven by new technologies and intensified competition, the automotive market is undergoing a profound restructuring of its elements. The contradiction between supply and demand is shifting, with the seller's market transitioning to a buyer's market, and the core ecosystem shifting from the vehicle supply end to the customer end. As the industry transforms and upgrades, brands rise upwards, and user experience demands are unprecedented. The traditional automotive channel ecosystem is changing in response, with channel operations becoming more diversified. Automotive industry enterprises should jointly face the new challenges posed by changes in the channel ecosystem.
Focusing on changes in automotive channels, Auto Review has specially produced this issue's 'Cover Story' feature report. This special report consists of 7 articles, with the 7th article published today. Please stay tuned.
The rise of electric vehicles will drive changes in automotive distribution channels and models. This is true for both the Chinese automotive market and the distinctly different US and European markets.
Currently, automotive distribution channels in the Chinese market face significant challenges. The status quo of "declining sales and fierce competition" has left a deep impression on many in the industry. While continuously monitoring domestic developments, we should also pay attention to trends in automotive distribution and retail channel systems on the global market. Although the situations in the Chinese market and regional markets in the US and Europe differ, their experiences and issues faced may have certain reference value for the future development of China's automotive distribution industry.
Franchising: The Current State of the Traditional Distribution Ecosystem in the US
On October 15, the National Automobile Dealers Association (NADA) released its mid-year report, reviewing significant progress in the automotive retail industry in the first half of the year. The report noted that 16,936 franchised light vehicle dealers in the US sold 7.8 million vehicles, with total sales exceeding $613 billion. Dealers issued over 133 million repair orders, with after-sales service and parts sales exceeding $76 billion. With the steady increase in new vehicle inventory levels, consumers no longer have to wait long periods for new vehicles. Additionally, incentives from automakers are increasing, with average incentives per vehicle growing by 55% year-on-year.
The report shows that while new and used vehicle sales still dominate, after-sales service business sales continue to grow. In the first half of 2024, after-sales service business revenue totaled $76.31 billion, marking the fourth consecutive year of growth. At the same time, advertising expenditures and employment in US franchised dealerships have increased, reflecting the overall recovery of the automotive retail industry. In terms of after-sales business, revenue from maintenance services and spare parts has also grown, with an increase in maintenance orders and technicians, further demonstrating the vitality and potential of the after-sales market.
Clearly, this mid-year report reveals the overall recovery and steady growth of the US automotive retail industry. Whether it's new or used vehicles or after-sales service business, they all show a thriving trend. At the same time, the automotive finance market and after-sales market also exhibit strong development momentum.
Relatively stable and less competitive, this describes the current state of the US automotive dealer industry. This is inseparable from the repeatedly mentioned "franchise," referring to the unique franchising system in this industry in the country. As early as the early 20th century, the US automotive dealer industry emerged alongside the mass production of automobiles in the country, once presenting a variety of distribution channels such as dealerships, direct sales, department stores, and mail-order sales, with fierce competition. Moreover, due to the lack of networks and construction funds for sales channels among early automakers, automotive dealers, who had strong financing capabilities and better understanding of customer information and local markets, once made manufacturers dependent on dealers. However, as the market rapidly transformed into a buyer's market, manufacturers gradually gained dominance in cooperative relationships, contributing to the formation of the US franchised dealership network (Franchise).
In 1917, to prevent large automakers from abusing their market dominance and harming dealer interests, 30 automotive dealers jointly founded NADA, aiming to safeguard dealers' rights and interests in the franchised dealership network and gradually developing into an important industry association and lobbying group in the US. NADA later facilitated a series of federal and local laws beneficial to automotive dealers.
For example, the Automobile Dealers' Day in Court Act enacted in 1976 aimed to address the imbalance of economic power between large automakers and dealers, specifically protecting dealers from unjustified termination of their dealership or other retaliatory actions by manufacturers.
Furthermore, the Automobile Franchise Acts in various US states stipulate that manufacturers cannot sell vehicles directly and that large commercial chain enterprises cannot enter the automotive sales industry. Additionally, there are usually restrictions on the location of newly established dealers, specifying that the adjacent distance between new vehicles within the same franchised dealership system should be at least 10 miles. Laws in most US states prohibit manufacturers from unjustifiably terminating or refusing to extend dealers' dealership rights. The Federal Trade Commission prohibits manufacturers from setting sales quotas for dealers. Federal and state laws also prohibit coercive and threatening behavior by manufacturers towards dealers. As a result, automotive retail in the US has ultimately confirmed dealerships as the mainstay of automotive sales, with dealer qualifications subject to the regulation and control of state governments.
The Rise of Electric Vehicles Will Drive Changes in Models
However, with the gradual rise of new electric vehicle brands today, some OEMs are taking this opportunity to redefine the business model of their dealer networks, causing the traditionally oriented US automotive dealer industry to face changes in marketing channels.
Boston Consulting Group points out that US automotive dealers currently face three major transformation trends: the rise of electric vehicles, the evolution of the franchised dealer model, and the transition to a true omnichannel customer experience service.
For example, on October 24, Scout Motors, a subsidiary of the Volkswagen Group in North America, announced plans to adopt a Tesla-like sales model, including direct sales and vehicle maintenance, with a commitment to full price transparency. This move aims to gradually transform automotive marketing and sales methods in the US and align with the trend of direct-to-consumer sales. This immediately provoked fierce opposition from NADA and its state chapters, who planned to combat Scout Motors' direct sales strategy of bypassing the traditional dealer network to sell vehicles directly to consumers through nationwide legal and legislative actions the next day.
NADA believes that Scout Motors' approach will challenge the existing and future structure of automotive retail in the US. This change also reflects the most sensitive topic for US automotive dealers at present: with changes in sales strategies, some manufacturers choose to deal directly with customers rather than through independent retailers, intensifying competition among OEMs. In the past, traditional OEMs were accustomed to developing franchised distribution models, but emerging electric vehicle brands prefer to change the market landscape through direct-to-consumer (DTC) or agency retail models. Compared with traditional franchised dealer networks, the DTC model has lower operating costs in sales (not considering after-sales and service), putting more pressure on the cooperation model between traditional OEMs and their dealers.
Moreover, the rise of electric vehicles has had other impacts on US dealers, such as the need for necessary investments in charging infrastructure and employee training. However, the current share of electric vehicle sales in the US is still relatively low, making it difficult for dealers to see a return on investment.
In September this year, over 5,000 struggling automotive dealers due to sluggish electric vehicle sales appealed to their state and federal regulators to relax regulations on emission levels and electric vehicle mandates. The group signed an open letter urging both parties to reconsider clean vehicle strategies and calling for a moratorium on electrification.
These automotive dealers believe that despite subsidies from automakers and the federal government and an increasing number of available vehicle models in the market, electric vehicle sales still only account for 8% to 9% of total new vehicle registrations in the US. The letter mentions that customers have concerns about charging time and location, battery replacement costs, low-temperature performance, high insurance costs, depreciation rates, and purchase prices. Dealers stated, "The government may be able to force automakers to manufacture electric vehicles and force dealers to sell them, but it cannot force American consumers to buy electric vehicles. These mandatory regulations are out of sync with electric vehicle technology, the layout of charging infrastructure, and the actual needs of American consumers."
Regarding online services and digital channel development, Boston Consulting Group's research shows that more and more US consumers now hope to obtain information about potential vehicle purchases through online services and digital channels, such as loans, sales outlets, and service support. They want the purchase process to be simpler and more convenient, even if the final purchase is still completed at a traditional dealership.
Europe is Enthusiastic About Adjusting the Dealer Agency System
In Europe, the automotive dealer industry presents a distinctly different picture. In recent years, Volkswagen Group, Mercedes-Benz, and BMW Group are gradually transitioning their contracts with dealers from the authorization system to the agency system.
Volkswagen Group was the first OEM in Europe to clearly announce the implementation of a dealer agency model.
However, it is noteworthy that Volkswagen has signed two contracts with dealers: one for authorized dealers and one for agents. The agency contract only covers Volkswagen ID. series electric vehicle models. Therefore, this model is strictly a hybrid dual-track distribution model, differing from the traditional agency model. However, from the perspective of its contracted dealers, Volkswagen's agency business model has issues such as low commissions, a lack of cost savings from contractual commitments, and the inability to amortize large investments. Mercedes-Benz, on the other hand, promotes a "true" agency model, planning to sell 50% of new passenger and commercial vehicles through this model by the end of 2023.
Mercedes-Benz believes that the opportunity to improve customer interaction is the main reason for adopting the new model. The agency model allows customers the freedom to choose between face-to-face communication with product experts at dealerships, signing purchase contracts online through the manufacturer's website, or communicating with sales partners through both online and offline channels simultaneously.
The group believes that the core task of agents will be to ensure a seamless customer journey experience, from considering a vehicle purchase to vehicle delivery, with customer satisfaction becoming an important indicator for evaluating agents. The model it promotes is called a "true" agency system because Mercedes-Benz bears a significant portion of the liquidity risk in this model. According to the Mercedes-Benz Dealer Association, the group also pays rental fees for vehicle showrooms and other marketing expenses to partners through complex calculation formulas. The group hopes that the agency model will reduce its sales outlets in Europe by 15% to 20% by 2028. According to its dealer association, the commission rate for new agency contracts is 6%.
By transitioning to an agency system, Mercedes-Benz's role in sales will shift from wholesaler to retailer. Ola Källenius, CEO of Mercedes-Benz Group, and Harald Wilhelm, CFO, both pointed out that the transition to an agency model helps reduce distribution costs and increase average selling prices, thereby better achieving profit targets. Källenius believes that the new agency model can stabilize vehicle prices and build trust among consumers.
Under the traditional authorized dealership model, dealers purchase vehicles wholesale from automakers, bearing promotional and inventory costs, with earnings dependent on consumers' bargaining power. In contrast, under the agency model, new vehicles are no longer distributed wholesale through dealers but are priced uniformly by automakers and sold directly to end-users. Dealers' roles transform into agents responsible for displaying, inviting, test driving, delivering, and providing after-sales services for new vehicles. Automakers are responsible for pricing, invoicing, and inventory adjustments, paying commissions to agents based on service quality and quantity.
However, for traditional dealers, the biggest change from authorized dealerships to the agency system may be reduced income. Not only are new vehicle sales revenues affected, but profits from finance and insurance also decline. A PricewaterhouseCoopers Germany report notes that the direct sales model is expected to reduce automakers' sales costs by 2.5% to 7.5% and increase their contribution margin by approximately 2%. This means that sales products contribute more to the company, but dealers' profits are not fully guaranteed under the new model. High-end European automakers typically provide dealers with a profit margin of 12% to 16%, while under the agency model, agents may only receive half the profit they previously earned as dealers. Taking the model change between Mercedes-Benz and its dealer partner Kreuter Medele Schäfer Group in Bavaria, Germany, as an example. Peter Schäfer, Managing Director of the group, stated that the so-called agency system means that automakers set prices, and agents always receive the same commission. Manufacturers also provide display vehicles to agents free of charge. However, under the agency model, dealers' profit margins are much lower than before.
Note: This article was originally published in the 'Cover Story' section of the November 2024 issue of Auto Review magazine. Please stay tuned.
Related Reports: Cover Story (I): The Transformation of Automotive Channels in the Restructuring of Ecological Elements
Cover Story (II): Industry Transformation and Baptism, Automakers Explore "New" Paths in Sales Channels
Cover Story (III): Automotive Dealers: Where to Go Amidst Tremendous Changes?
Cover Story (IV): Exclusive Interview with Ren Yukai: The Window Period for Branding Used Cars Has Arrived
Cover Story (V): Channel Integration: The Rise of Diversified Sales Channel Models
Cover Story (VI): How "New" Policies Affect Changes in Automotive Channels
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