OEM's & Dealers - Hand in Hand or Face to Face?
Global changes in the car sector are set to seriously alter the current dealership paradigm.
Original Equipment Manufacturers (OEMs) and dealers have typically had a mutually beneficial partnership. OEMs have relied on their dealer networks to sell and maintain their vehicles, while dealerships have relied on OEMs to supply the vehicles and parts they sell and to finance servicing while vehicles are still covered by warranties.
ACES trends are here to stay, and OEMs are progressively assuming control of aspects of the customer connection that used to belong to dealerships as they build capabilities like remote software upgrades and establish direct partnerships with their consumers through continuous subscription models. In contrast to operations like new car sales, which often generate minimal profit margins (less than 8%) and may even be loss leaders, dealerships typically receive a significant amount (over 40%) of their income from services and after-sales. The strong margins of the servicing revenue stream for dealerships, however, may potentially be reduced in this connected, direct-to-consumer environment, and OEMs and dealerships alike will need to review their partnerships and their business models in order to survive.
A shifting environment provides more revenue prospects for OEMs but fewer for dealerships using conventional methods.
Consumer expectations for the automotive sector are evolving. In addition to a move toward electric drivetrains, models of automobile ownership are starting to evolve as well. The car is now considered a component of shared mobility services. Customers also increasingly regard their automobiles as products, similar to their smartphones, that they expect to be current and are prepared to pay more for or subscribe to a service that offers more benefits in the future.
As a result, OEMs are expanding their capabilities, which has several advantages:
Reduced costs as a result of linked diagnostics, OTA software upgrades, and predictive maintenance
As they avoid recalling vehicles and are able to stop mechanical deterioration through enhanced performance of software-controlled components, software upgrades have the potential to save OEMs up to $35 billion annually.
OTA updates allow additional revenue streams from value-added subscription services.
Owners may now get live traffic visualisation, video streaming, an internet browser, and OTA software updates via cellular data for $10 per month through Tesla's Premium Connectivity programme.
For more than $200 per year, BMW's top-tier Linked Package Excellence includes all of their connected services, including voice control, remote map updates, and real-time news, traffic, and parking updates3
Maximising the chances for developing direct relationships with customers, including innovation in the car-selling process and a more flexible method of providing the vehicle as a connected device.
Customers can purchase or lease a new car through Hyundai's Click to Buy programme from the convenience of their own home.
OEMs are testing with cutting-edge showroom designs; one such example is Ford's collaboration with Alibaba to provide a car vending machine in Guangzhou, China.
When a problem can be resolved with software, like a flaw in its Dog Mode, Tesla is able to quickly correct it.
This is encouraging for the OEM, but less so for the dealership. These similar services represent talents that were formerly the retailer's purview:
When a vehicle is serviced under warranty, the OEM pays the dealership to complete the work. The dealership decides which components and services (including labour) are necessary and, as a result, sets the price that the OEM must pay.
Customers who want to enable an upgrade (made possible by software rather than upgrades to mechanical components) must go to a dealership that receives payment from the OEM to provide this service.
For a while now, dealers have served as the public face of OEMs and have been in charge of building strong customer relationships throughout the sales and service lifecycle. Collectively, these elements cause revenue to shift from the dealership network to the OEM. There will probably be less opportunity for dealers to contact customers and make a profit. The financial survival of dealerships is in jeopardy since such a large amount of valuable revenue has been lost.
Collectively, these elements cause revenue to shift from the dealership network to the OEM. There will probably be less opportunity for dealers to contact customers and make a profit. The financial survival of dealerships is in jeopardy since such a large amount of valuable revenue has been lost.
Therefore, the conventional dealership must change, but why should OEMs care? Are dealerships still relevant in the car industry of the future? If so, how can OEMs guarantee that their dealerships are functional and profitable?
Dealerships won't be obligated to maintain mechanical parts, right?
There is still a long way to go before we can travel anywhere using only software. Mechanical component service will always be necessary because cars are made of physical parts, which will eventually break down. The dealership will very definitely still play a part in this scenario, even though this servicing may be carried out by independent dealerships and garages.
OEMs will have a vested interest in preventing dealerships from failing because these businesses still serve as the face of their brands and can offer a variety of services.
The following important questions will consequently need to be addressed by OEMs:
What part does the network of our dealerships play in our continuing business operations?
Is the distribution of our dealership network appropriate? Do we service the correct locations with the right dealerships? Should we, for instance, consider consolidating dealerships in remote areas?
Are the experiences being provided by our dealerships appropriate? Is our floor space utilised to provide the experiences that customers most want to have there?
In the realm of internet sales, how can we link certain dealerships to specific online sales? Should we pay dealers more for generating engagements than for generating sales? Should we penalise dealers for providing expensive but low-profit services like software updates?
Numerous of these difficulties are not exclusive to the auto industry. Retailers have recently been looking for creative ways to maintain the profitability of brick-and-mortar businesses due to declining foot traffic and a widespread shift towards internet shopping habits. Retailers are increasingly relying on in-store experiences to increase foot traffic and sales in their physical locations, including pop-up events and AR-enabled changing rooms. According to Westfield's How We Shop: The Next Decade report, by 2027, 75% of consumers anticipate that most retail space will be devoted to providing experiences, and 81% of them are willing to pay more for them. But it's still unclear whether "retailtainment" can be counted on to generate significant amounts of profit.
Dealerships will also evolve to become more experiential in character, focusing on offering services like test drives, VR experiences, and human touchpoints to both individual customers and users of shared services, albeit these pursuits may not be a direct source of income in and of themselves.
What part will the OEM play in assisting the modern dealership?
Therefore, OEMs must think about the value they place on tomorrow's dealerships and how they will be compensated for this. OEMs will undoubtedly take more responsibility for customer connections (just look at Tesla), but they might need to provide their dealerships more help to keep them from going out of business.
Increased brand engagement and customer loyalty will help the OEM without necessarily having an adverse effect on the dealership's bottom line. Therefore, OEMs should consider:
What they can do to encourage dealers to send customers to their online showrooms
How well revenue sharing for online sales attributable to certain dealerships might operate
How dealerships could receive financial compensation for promoting high brand engagement through test drives and OEM service subscriptions
How they can offer consulting services to guarantee that their network of dealerships has the necessary experience and training
The OEM-dealer connection's implicit KPIs will probably need to put more emphasis on experiences than on transactions, and OEMs should aim to be flexible with how this relationship changes over time.
OEMs must be ready to part with their hard-earned money in ways they have never had to in order for the dealership to thrive.