Agency model can help solve automotive industry woes

Lately, Indian business community is abuzz with the Jio-Facebook deal, expecting it to help digitise millions of small businesses in India and create a retail channel with an unprecedented reach and delivery agility.

Such channel innovations have been propelling consumer-oriented sectors forward by increasing efficiency and helping them gain crucial competitive advantage. 

However, the automotive industry is a unique consumer-facing industry which has hardly evolved its distribution channel over the last 100+ years of existence. The cost of retail of this inefficient, century-old exclusive dealership led sales model can be as high as 10%-30%.

Now that the industry is staring at a significant disruption with connected, autonomous, shared and electrified (CASE) vehicles, designing the channel which best meets the aspirations of the modern consumer is crucial. One such model being experimented is the agency model where the dealers assume the role of agents for selling cars to end customers. Volkswagen recently announced that it has onboarded all its European dealerships for sales of the new ID electric vehicles through this novel approach. From the Indian perspective, the agency model has the potential to offer a solution to the unique problems faced by the industry, discussed below in detail.

Dealer Viability

An estimated 60% of India auto dealerships have been loss-making in recent times. One of the main structural reasons for this is the inventory-push led sales model that OEMs in India have adopted. The high focus on wholesales leads to unsustainable levels of inventory and interest costs for dealerships. The agency model lets the dealers own no stock except for the test drive and display vehicles, thus limiting their CapEx, OpEx and business risk. While this increases the CapEx of the OEMs, it also brings efficiencies to the system by closely matching inventory to the consumer demand.

Moreover, since the customers’ sales contract is with the OEM, the problem of competitive discounting between the dealers is eradicated.

Customer experience

The customer buying journey in the automotive industry is replete with inefficiencies. Most OEMs find it daunting to have a 360-degree view of the customer profile due to the fragmented data collection at dealerships. Also, inconsistency in the service levels remains a concern since the OEMs’ control over the dealers is limited. Another problem is price-opacity - 14% of Indian car customer find it difficult to get a straight answer from dealers on the pricing of cars while 11% experience dealers were attempting to change promised price, as per JD Power.

In the agency model, with sales not being the primary responsibility of the agents, OEMs can create innovative compensation methods to encourage customer service and data capture. Customer-centric activities like test drives, walk-in engagement can be well compensated and bonus paid on qualitative outcomes like customer satisfaction and data quality. Finally, our research indicates that 36% of Indian car buyers would be accelerating their purchase journey if they could complete it digitally. Agency model, through the unification of data and the control of online and offline channels, allows OEMs to unlock a vast revenue potential by building an authentic omnichannel experience with a seamless customer journey.

New revenue models

A recent study by Capgemini estimates that in 2030 the global vehicle data market will be worth up to $800 billion! In this data-driven future, OEMs need to prepare for more control and visibility into the vehicle and customer data in a data privacy-compliant manner. The current distribution channels, where dealers are the gateways, custodians and owners of customer relationships are not suited for such new-age revenue models to evolve. By controlling and defragmenting the customer relationship through the agency model, OEMs can invest in being future-ready.

While the benefits of agency model are immense, there also exist considerable execution challenges. For one, the high CapEx required, and the shifting of the business risk from dealers would require an entrepreneurial mindset from the OEMs. Moreover, laws related to direct OEM sales are still grey in India and the world. Tesla, which famously sells directly to its customers, has faced tremendous resistance in multiple states in the USA.

Thirdly, most OEMs and dealerships today work with legacy IT systems and technologies which are ill-suited for such new-age business models. The agency model will require a robust and agile technology backbone to harness its full potential. Lastly, the success of the agency model would depend upon the automotive OEMs’ ability to evolve from channel management organisations to customer-centric ones, and this will require a tectonic cultural shift in how OEMs think and operate.

(The writer is an automobile consultant based in Bengaluru)