Back to the uphill struggle!
As we come into September it marks the end of the holiday season and the return to work. I hope that everyone reading this blog has found time to get some rest and relaxation and to recharge your batteries. Batteries of a different sort are clearly having an effect on many in the industry as electrification is forced onto a still sceptical customer base. With targets coming into effect across the EU in four months’ time and the day of reckoning for the first year of the ZEV mandate in the UK approaching, distribution is on the front line.
Electrification and the related impact on product cost and margins was one of the triggers for many manufacturers seeking to change their distribution model. Many commentators have referred to this as a move to agency, and equally have reported that recent changes to their plans by some manufacturers demonstrate the superiority of the franchise model over agency. Whilst there is clearly a degree of truth in both statements, it does not reflect in my view the reality of the situation.
During the summer ICDP published our Omni-channel Cookbook of which more details and member downloads are available here. This is not a 5 minute read, but the challenges of improving the distribution model are never going to be solved in a way that can be summarised into either a short article or a single word description like agency. The essence of what we describe in the cookbook is that automotive retail requires an omni-channel approach to meet customer demands and realistically this will depend on contributions from, and cooperation between, manufacturers and retailers. If the new car buyer is going to be given the flexibility of channel choice that they have consistently told us they would ideally like, then delivering that requires a joint endeavour rather than an imposition of a flawed concept by manufacturers on their dealer network.
The issues that we have seen with a number of the change projects in the distribution sector is not in my view related to whether agency is included in the scope or not, but to the fact that they all include a significant change in roles and responsibilities which have been established for decades. The implications of this for manufacturers in particular, but also for their dealers, are significant at a people level. In most cases, this has not been adequately prepared for and supported by a proper change management process.
The global changes in the industry mean that nobody has an easy ride. Whilst it is easy to look at the Chinese manufacturers as being on the attack whilst the traditional manufacturers are on the defence, all have their own challenges. The intensity of the competition in China means that all brands present in that market are facing much reduced profits and in some cases losses. Not all will survive. For Chinese brands, export offers the potential for more volume at higher profits, but their volume ambitions were already a stretch before tariffs were applied to their BEV products. For established brands, much reduced profits or losses in China affect their ability to deliver what they need to do at a global level, particularly for the brands who enjoyed huge success there a decade ago.
Distribution is literally where the rubber hits the road. No manufacturer can take it for read that their customer base will remain loyal and keep coming back for more. Porsche which as a manufacturer had some of the highest margins in the industry a few years ago and a dealer network where a 10% PBT was a reasonable expectation, is now facing real pain as a brand and in the dealer network despite continuing rave reviews for the product itself. In the normal premium and volume sectors, good product still needs to be sold, rather than having a queue of customers lining up to pay list price.
As an industry, we can carry on as we have done for decades with a model that we know is inefficient, with that uphill struggle each month, each quarter and year end in order to hit sales objectives. Transforming the model will not eliminate that struggle completely. However, it might allow that effort to be redirected to the real challenge of generating the highest potential profit from the products that we have to offer, rather than being busy fools pushing product through conflicting channels and expending effort on resolving internal dissent with the networks. Working together for a more balanced and mutually beneficial solution as we describe in the Cookbook will make getting to the top of the hill a bit easier, and allow resources to be redirected to the many other challenges we face at this time.