Is the current distribution model broken?

One of the topics within the ICDP research programme in the last year or so has been looking at the distribution model adopted by new entrants to the European market.  We have considered a range of brand launches, some still in progress where the success or otherwise cannot yet be determined, others that have already failed such as Qoros, others that you would already consider a success such as MG or Tesla.  These new entrants have adopted a wide range of distribution strategies, and some that failed did so for reasons unrelated to how they chose to enter the market, but more to do with wrong product or issues with the parent company back home.

One brand that we looked at was Aiways, the Chinese electric car start-up, led by very seasoned executives from SAIC, who launched their well-regarded U5 model at competitive prices in Europe in 2020.  With international sales led by a German executive who previously held senior positions with Volvo and other brands, and who I have known for many years, there was certainly no suggestion that they did not understand the European market.  They chose to adopt an innovative ‘no dealer’ strategy with direct sales and aftersales support provided by independents such as ATU in Germany.  Part of the argument to say they did not need dealers was that the service recommendations are much lighter than traditional brands, so there was less need for a sales/service connection.  However, in the last couple days, they announced that they were abandoning their direct sales model and would instead move to a more traditional national distributor/dealer model in Europe.

The reason given was that “the world changed since the pandemic, and…we had to switch in most markets to a traditional distribution model.”  We will never know what would have happened without the pandemic, but a number of sources told us that sales had been slow, and I believe that other factors in the decision were certainly that creating awareness for a new brand on a broad enough scale, and building trust to a level that enables direct sales, are both hugely challenging under any circumstances.  This has become increasingly difficult as traditional players have started to launch a huge number of BEVs across a wide range of price points and performance levels.  That creates a lot of background noise that the new entrant has to break through.

We have also looked at the recent developments in the Tesla distribution model.  Most people will be familiar with the shopping mall outlets that they initially adopted in high footfall retail centres and city centre locations, but in the last two or three years, they have quietly changed their strategy as well.  Across Europe, they have added what are effectively traditional dealer sites – often in premises that were previously dealers for other brands such as Ford and Honda – and as a result the proportion of non-traditional outlets has fallen from over half the total network in 2016 to just over a quarter at the start of this year.  As they have closed some of the city centre stores, a German Tesla executive said that they “…have become obsolete and no longer meet today's requirements.”  Some of the changes in requirements will relate to Tesla’s expansion and the growth of the competitor offer, but we believe that an additional factor will have been the need to provide the functionality of a normal dealership, albeit in a smaller network than competitor brands, and in Tesla’s case fully under their ownership.

These examples raise the question as to why new entrants with little or no legacy would migrate towards something that looks and feels pretty much like the current distribution model used by most other brands, even using existing dealer assets for the representation points, if the current distribution model was broken?  I believe that the answer is that it is not the fundamental building blocks of the model that are broken or unfit for purpose, it is the scale of the networks, and the way in which the manufacturer/dealer relationship operates that are broken.  Both our ‘Dealer of Tomorrow’ and ‘Clean Slate’ reports, available from the ICDP website, describe different scenarios for future distribution, but both have at their core a dealer network to provide the face-to-face customer interface that over 90% of new car buyers still ideally want as part of their new car buying journey – even post-pandemic.

The actions of Aiways and Tesla (and the more traditional strategies adopted by MG and other new entrants) are a vote of confidence in the dealer model.  We just need to ensure that the way in which the model operates has been adapted to meet the needs of an omni-channel age, and that wasteful investment and distribution cost are addressed.