Car Wars

The Ford/CarPoint deal reflects a trend that some dealership franchise owners find disturbing: Big Auto ""gets"" the Internet, and that could cut dealers out of the loop.

eBusiness Journal
November 1, 1999

Car Wars
Big Auto claims it 'gets' the Internet. But in the online battle between car manufacturers, dealerships worry that they could be the real casualties
Dave Webb

On a September day in San Francisco, two of the world's largest companies and most-recognized brands announced a marriage of sorts. Representatives of Microsoft Corp., the No.1 producer of computer software, and Ford Motor Co., the second-largest automobile manufacturer, told a news conference car buyers would be able to shop for built-to-order Ford vehicles through Microsoft's CarPoint Web site, beginning early in 2000.

CarPoint was launched on the Microsoft Network in 1995, but despite the software giant's deep marketing pockets, the service hasn't been able to take the lead in the tightly competitive online auto shopping market. CarPoint generates 140,000 referrals to a network of 3,500 dealerships linked to the network every month, for sales of US$600 million. Autobytel.com of Corona del Mar, Calif., boasts 200,000 referrals and US$1.7 billion in sales a month. Others in the competitive landscape include Autoweb.com, Carbiz.com, CarsDirect.com, AutoResponse.Net and hundreds of smaller, regional operations.

The Ford/CarPoint deal reflects a trend that some dealership franchise owners find disturbing: Big Auto "gets" the Internet, and that could cut dealers out of the loop.

In August, General Motors announced it was reinventing itself as an online company. The company created a new division under Mark Hogan, the executive who streamlined the GM's manufacturing process. E-GM pulls together the company's many online operations - BuyPower (online sales), OnStar (vehicle services), GMAC's e-commerce services and its service parts operations — under one umbrella. The company hopes to cut manufacturing costs by 10 per cent and eventually shorten the build-to-order delivery time — now anywhere up to 16 weeks for most domestic factories — to two weeks.

GM might have held the e-auto limelight for the summer — at least until the CarPoint announcement — but analysts put Ford in the pole position in terms of online strategy, about a year ahead of GM. Other manufacturers trail by even more, though DaimlerChrysler announced a development deal with San
Francisco-based Internet services company Organic Online Inc. in August.

Online access to Ford's manufacturing system database through the Microsoft Network's most popular service will fundamentally change the automobile business, Ford president Jacques Nasser told the San Francisco press conference. But he and Microsoft president Steve Ballmer were quick to point out the online build-to-order strategy won't displace the auto dealership.

They've got good reason to be reassuring. Dealer associations are viewing the developments through a suspicious lens.

"Ford's online strategy has always been a two-to-one partnership, in which the company works hand-in-hand with its dealers to address the needs of our customers," says Thor Ibsen, Ford's manager of Internet and new media. "This commitment will not change."

Dave McCall, manager of product public relations for GM Canada, outlines the impracticalities of selling direct to the customer. "Someone has to deliver that vehicle, someone has to inspect that vehicle, somebody has to be prepared to honour warranty at the customer's convenience," he says. Aside from that, direct sales savings would only apply to new vehicles, "and quite frankly, the margins in that area are not that wide."

Edwin Mullane doesn't buy it. A 40-year Ford dealer in Bergenfield, N.J., and president of the Ford Dealers Alliance, Mullane's FDA newsletter tracks what he sees as a continuing effort by Ford to take over the retail market. He points to Ford investments in dealerships as evidence of "a movement to take over the dealer body."

Ford wants to control the relationship with the customer, Mullane says, but the factory's track record of dealing with customer problems is "abysmal."

"Even if the dealer can't help them, they refer them back to the dealer. They don't want to touch anything retail, but they still want to be in the retail business."

He isn't opposed to the Internet. "That's probably the modern way of going. But there's got to be some arrangement that the consumer is protected and the dealer is also protected."

That protection exists in 35 U.S. states, whose franchise laws forbid the factories to influence the selling price of a vehicle. The state of Texas, for example, forced GM to sell an Internet-based used car outlet by denying the company a licence to operate it.

That's not the case in Canada, where the Canadian Automobile Dealers Association is monitoring the factories' online efforts.

"It is not a major factor in Canada as of today," says Rick Gauthier, CADA president.

If the manufacturers' online efforts increase traffic and profitability for dealerships, that's great, Gauthier says. "However, if the intent of the manufacturer is to bypass the dealer network and go directly to the consumer, and as a secondary effect to cut out the dealer, we view that as a threat and we will not stand by idly."

The bottom line: "Factories build cars and dealers sell cars."

Gauthier points to the example of a manufacturer in California that launched a direct-to-consumer pilot project last year. The manufacturer — a recent arrival in North America — claimed that since the only California dealerships were owned by the factory, the company wasn't in breach of any agreements.

And the interest factories that are buying into Canadian dealerships has Gauthier's antennae twitching.

"We're not saying that's what they were trying to do, but we are saying if that's the excuse the factory uses to go direct to the consumer, maybe this could be setting up the play," Gauthier says.

(Gauthier wouldn't name the manufacturer that launched the pilot project, since the company recently jumped into the Canadian market and "it's not my purpose in life to go to war against factories." However, Daewoo Motor Co. of Korea opened a number of factory sales stores in the U.S. in 1998 and recently announced its entry into the Canadian market.) Gauthier says the online shopping activity being routed through dealers is exaggerated. Some dealerships are taking the wired world more to heart than others and will get the lion's share of the online business, "but it is a lion's share of a relatively small market," he says.

That isn't the case in the U.S., where J. D. Power and Associates says 350,000 new vehicles — 2.7 per cent of the 13 million new cars sold — will be bought through online referral services. Forrester Research Inc. in Cambridge, Mass., estimates 1.2 million new and used vehicles will be sold through the services, and senior research analyst James McQuivey has had to revise his original 1999 estimate of direct online sales from "next to none" to between 40,000 and 50,000. "I'm sure the manufacturers would love to go direct — cut out more cost, actually have a relationship with the consumer that's driving their cars," McQuivey says. "There are some specific benefits they can get from that."

Aside from the shortened order-to-delivery cycle, auto makers would have more accurate feedback about what customers actually want. "Right now, they make fairly uneducated guesses about what they should produce. They overproduce certain colours and certain models, and they push them on dealers and encourage them to get rid of them, and the dealers get rid of them. So next year, they say, 'Oh, wow, those green cars sold really well. Let's make a whole bunch more.'"

More accurate information would help factories determine what the standard build configurations that make up 80 per cent of car sales are. If that 80 per cent can be delivered in two weeks — at a substantial savings to both the factory and the customer — "Everybody's happy. Except the dealers."

There's a "very great chance" that dealerships could become little more than delivery depots, McQuivey says - and Mullane insists dealers "don't want to be office boys for the factory."

"I didn't invest my money - and I didn't borrow anything from Ford - so I just deliver the car and somebody else sets the price for me," Mullane says.

McQuivey says a dealer can turn that into an advantage by reorganizing the business around the two things that make the most money: used cars and service.

While new cars were the profit centre in the 1970s, "in the last 20 or 30 years, that has reversed completely," McQuivey says. "They lose money on the new cars they sell, generally. But they sell them for two reasons: One, because they want the trade-in, because they make a ton of money on the resale. And second, they're hoping they can sell you a new car so they can service it down the road."

With the Net putting further pressure on margins, dealers have to make up the difference through increased volume, accessory sales and financing, says Herbert Tay of A.T. Kearney Inc.

"People tend to take financing from the dealer where they got the car at this fantastic price," Tay says. "It's a matter of convenience. As long as their rates are competitive, they don't tend to shop around."

Tay says the Web can affect the entire vehicle ownership life cycle, Tay says, from developing awareness of a vehicle, through research, shopping, purchase, ownership and maintenance, disposal and repurchase. In the past, most of the activity would be done physically — at the dealership — and some would be done through distributed channels, like TV and print advertising. "You can do all these things virtually on the Web," Tay says.

"People are going to choose their paths through different domains. They'll go and test-drive and kick tires at the dealership. They can waste the time of the salesman and essentially do their shopping and purchasing online. All the steps have become decoupled."

The successful U.S. auto sites are the ones that break down those functional aspects of the buying process, says Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont. Canadian sites aren't following suit.

"I haven't personally been able to find a decent dealer Web site," DesRosiers says.

Canada is behind in the online auto revolution in many respects. While referral sites like Autobytel and Autonet are available, and the factory sites quite well-developed, there are no direct sales sites and no auction or bidding services.

(Editor's note: At press time, Bid.Com announced it had purchased a minority stake in Megawheels.com, a Calgary-based online automobile database. Bid.Com will license its auction technology to Megawheels.) And the factory sites don't list the dreaded dealer invoice amount.

"They're just terrified of it appearing in Canada, though it's been in the U.S. since Day 1 and nothing fundamentally negative has happened," DesRosiers says.

The No. 1 rule of negotiating a car price is to start at the dealer invoice price and work up. In the U.S., this information is widely available. It's listed in the Kelly Blue Book, the online version of which is the most popular automotive site in the U.S.

Canadian buyers, with only suggested list price to work from, guess the dealer invoice — wrongly. Most figure a dealer makes about $3,000 on a new vehicle sale. The number is closer to $1,200, DesRosiers says.

"The first Web site in Canada that says, 'Come to our Web site and see what the dealer prices are,' is going to very quickly become the No. 1 Web site in Canada," he says. A dealer who could transform those hits into sales would see volume that would make up for the margin lost as customers negotiate a better deal.

In Canada, though, factories aren't required to release dealer invoice prices, while antitrust laws in the U.S. force third-party access. And only a handful of dealers have the $1 to $2 million needed to create and market an e-com site. Possibly, a publicly traded dealer group could afford it, DesRosiers says.

Carriage Automotive Group Inc. of Toronto would seem a likely candidate. The conglomerate of two dealerships and a wholesaler started trading on the Canadian Dealing Network in January, has a market capitalization of $19 million according to Wall Street City, and even drew its president from the Internet ranks.

Barry Shafran came to Carriage from CryptoLogic Inc., a secure transaction software developer. He wouldn't discuss a specific Internet strategy for Carriage, which doesn't have a Web site at this point.

"We believe that the Internet not only has already had some impact, but is going to have much more impact," Shafran says. "I hate to use buzzwords, but there's paradigm shift taking place in automobile retailing."

One thing is clear: The Internet is forcing a change in the relationship among factory, dealer and buyer.

"It has to go from predatory to co-operative," says McQuivey. And customer management skills need some refining, he says.

"Manufacturers don't have those skills and the dealers are working with skills that were very effective in the late '70s. We've changed and they haven't. At this point, somebody has to learn to be customer-focused.

"If you're a smart dealer, you'll do it first. If you're not a smart dealer, you'll wait until the manufacturer eventually figures out how to have a customer service relationship themselves. And at that point, what use are you?"


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Risks: Big Auto, Internet, Franchisee association, independent, Encroachment (too many outlets in area), Canada, 19991101 Car wars

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