Automotive customer relations: manufacturers are taking ownership

The future of automotive Original Equipment Manufacturers (OEMs) looks exciting – and a bit of a challenge at the same time.

Sure, there is all the excitement about IoT making remote maintenance, optimization, even service a reality. It is likely to strengthen the OEMs relationship with their customers.

Then, on the flip side, the OEMs have to cope with ever-stiffening competition, exacerbated by changing customer behavior.

All this is encouraging the OEMs to take a bigger role in servicing their customers directly. Enter agency distribution model (ADM) for direct sales.

More competition, less servicing

Before moving on to discussing what the ADM model is and what it means, let us first look at the whys – the drivers for it.

There is the competition. For the traditionally dominant EU, Japan and US manufacturers, the competition from Asia is already causing headaches. Indeed, Deloitte expects China to be the only country with any growth to speak about for automotive sales by 2035. EU and Japan are forecasted to lose ground.

The Chinese OEMs are serious with their business and gaining credibility. In the UK, the China-manufactured MG4 was selected the car of the year by dealers. Meanwhile, a shiny new Chinese Byd car showroom was recently opened in the shopping mall nearest to me in the Finland capital area (Tesla was quick to follow suit, opening a showroom just across the corridor soon after).

Figure 1. While vehicle sales revenue will grow modestly by 2035, aftersales revenue will decline. (Source: Deloitte)

Also, income from the lucrative after-sales services is predicted to shrink, as pointed out by Deloitte, for example. Vehicles with “alternative drivetrains” (ones replacing combustion engines) need less service in general. They are so much simpler. In electric vehicles (EVs) for instance, powertrains have 80% fewer parts, oil is hardly needed and even brakes can have a thrice as long lifespan.

No wonder, then, that auto OEMs are looking for alternative revenue sources from new business models, software updates, remote maintenance – and the better customer service these are expected to enable.

Changing customers, changing market, changing business

Speaking about the customer service, there seems to be a lot that can be done to improve it. The customers’ expectations have changed.

As McKinsey experts have pointed out: “For many consumers, visiting a car showroom has lost its appeal. They prefer the convenience of digital interactions. Google search trends suggest some 60 percent of car buyers under the age of 45 are likely to purchase their next car online and are interested in contactless sales and services.”

Figure 2. Many consumers prefer the convenience of digital interactions over visiting a car showroom.

This is completely in line with what the majority of online shoppers in other industries expect, so there is no reason, why the automotive industry would make an exception.

On an interesting note, vehicle ownership as such is seen in a new way by many drivers. It is becoming more of a community thing with car sharing and mobility-as-a-service (MaaS) services on the rise. Subscription contracts are also expected to become gradually more common and one would assume they would be better taken care of by the OEMs, not the dealers.

Enter the agency distribution model

To keep track of these changes, OEMs are seen moving to the agency distribution model (ADM), or “direct-sales model”. “Going direct” has become a buzzword. Of German auto manufacturers, VW and Mercedes are doing it at least in some product categories. Tesla has done it right from the start. It operates a global retail network that brings together physical outlets with a comprehensive digital offering.

So, what is this model about?

According to Dr Christof Engelskirchen, chief economist of Autovista Group, under the agency model,

• the carmaker takes over full ownership of the information sharing, pricing and contracting in the value chain. Expect these to take place primarily in an online environment.
• The “agent” (previously dealer) consults the buyer in the process, offers test drives, deals with handover logistics and maintains the premises for these.

Figure 3. Roles of the OEM and agent in the new business model (source: Autovista Group).

Why the ADM model?

The ADM model is driven at large by the OEMs, due to the potential advantages it offers to them.

First and foremost, they can avoid price erosion due to competition between dealers of the same brand. In the conventional business model, this is a problem for both the OEM and the dealer. If same-brand dealerships are underpricing each other to win the customer, they are likely to destroy each other’s profit margins – and possibly the OEM’s too.

They also gain better control over the profit margins of the dealer-come-agents. And they can manage the end-customer pricing themselves, in this way ensuring price consistency for the users.

They can optimize costs through centralization by transferring responsibilities from individual dealerships to a global or at least national sales company. If an agency model is adopted in full, savings of around 10% are possible, resulting in a boost to profitability of between 1.5% and 3%, according to PwC.

Figure 4. With the direct-sales model, vehicle manufacturers can control the end-customer pricing and avoid price erosion.

Crucially, the OEMs have a chance to radically improve the user experience. The motivation for doing this is twofold.

1. With ADM, they can collect more and better data of customers, as they can basically take ownership of all data-related customer touchpoints. They can move them online and achieve even that 360° customer view. We have heard the upside this carries: better understanding of customers, better service, better product offering, higher level of personalization – and better tools for their own product and business development.
2. While the conventional model may equip the dealers with customer and market knowledge that is hard for the OEMs to acquire, it also has its drawbacks for the dealers. Hard competition may have reduced the dealers’ margins to razor-thin. Cost reductions may have become their key focus: less staff, move away from the best trading location… a shoestring budget can erode the customer experience in many ways.

All in all, there may be a lot of room for improvement with the new model.

…  But it is also a challenging job!

However, Dr. Andreas Gissler and Dr. Marcus Hoffmann of PwC think that the ADM model may not be ideal for every market for OEMs: “They ought to embark on a structured approach, based on a detailed profitability, legal and tax assessment, which can first identify and then validate the most suitable ADM for a given market and region.”

Why does he say so?

There are serious risks to be assessed by the OEM, too. To start with, the actual vehicles themselves now become the sole responsibility of the OEM before the direct sale to customers. When the sales fall below what was budgeted, the remaining cars are left lingering on the OEM’s balance sheet. Its financial health is perceived to be weaker. And what if the agency requests reimbursement for the costs of trying to sell more units than was actualized, as predicted in the previously agreed contract with the OEM?

Then, what about the sales skills of the OEM? What about its knowledge of its customers? If it is slow to develop these and lacks experience, the OEM may lose cross-sales opportunities. Or it might lose out to a competing brand that sticks to a traditional sales model and offers flexibly personalized discounts.

And, are the OEM’s customer and pricing intelligence as good as the agents’, anyway?

Says Christof Engelskirchen: “At times of low supply and high demand (seller’s market), it is easy to control and dictate prices for new cars; once supply pressures ease and we possibly transition towards a buyer’s market, the agency model might lack agility and flexibility.

Figure 5. Direct-sales model poses also serious risks to vehicle manufacturers.

How to win in the ADM game?

The key to overcoming these challenges and making the most of the benefits of the ADM lies in adopting a structured approach to its deployment. For one thing, the feasibility of the model has to be assessed market by market, as said before.

OEMs have the chance to also take a step-by-step approach. For example, ADM can be applied to electric vehicles, whereas the conventional dealership distribution model is kept alive for combustion engine vehicles until being eventually phased out. Or ADM could be applied to all new car sales but used cars would still be sold through dealerships.

Especially for incumbent OEMs, such a phased or hybrid approach seems to make sense. It allows to gradually build the technological and human capabilities, and also implement the organizational change, which adopting ADM requires.

And that is exactly what is happening. For example, in some markets like Sweden and Austria, Mercedes-Benz adopted a genuine ADM across its full vehicle range, while in others it sticks to the dealer distribution model. Then, Volkswagen implemented a lighter approach to ADM in Germany and Austria for just the electric vehicle range, leaving the combustion engine vehicles business alone.

What about the newcomers? Applying the ADM model can be much more feasible than building relationships with dealers. And that is just what Tesla did right from the start with all of its products.

Either way, this points to the necessity of a well-planned and executed organizational change: “At the very minimum, it requires a build-up of staff, pricing intelligence, and powerful workflow solutions at OEM level”, says Christof Engelskirchen.

And what are those “powerful workflow solutions”? While AI is an obvious buzzword here, rule-based automation is also essential in making this happen. Documents needed for customer transactions make one obvious workflow automation target as document automation and management apps are clearly the darlings of the Salesforce CRM users, for instance.

One CRM platform for all touchpoints

Speaking about CRMs and Salesforce, ADM allows the OEM to take full ownership of all the customer data, as discussed before. But the full benefits of this can only be achieved when the data is brought together for deep analysis and insights in a CRM platform that covers all customer touchpoints, as pointed out also by McKinsey & Company:

“At the same time, automotive original equipment manufacturers (OEMs) will have to better integrate their various customer touchpoints, and manage them holistically. The goal of this integration is to ensure that the OEM’s set of touch points follows potential buyers throughout their day-to-day lives in ways that are convenient and informative from a customer perspective.”

Salesforce with its numerous clouds is a good example of such a platform with its Einstein GPT AI that works across all of its clouds. The best document generation, collaboration and workflow solutions can do the same.

But what about the dealers and agents?

But finally, what do the dealer-come-agents think of the new model? After all, they are losing some of their control and revenue sources with the transition of responsibilities it brings.

Many of the dealers are worried about this – some even angry – but not all are against it. Interestingly, a study by Boston Consulting Group found that dealers who already have adopted the agency model regard it more positively than negatively.

Indeed, while customer satisfaction is the top priority for the OEMs, agency satisfaction is a key prerequisite for achieving it. Therefore, a collaborative approach between the OEM and agency pays.