Radical change: How e-commerce affects the automotive industry
As industries migrate to online retail channels, the automotive sector has been stuck in the slow lane. Now some players are powering ahead.
Of all the technology-driven disruptions of the 21st century, few can rival the impact of e-commerce. Online sales channels have powered the growth of some of today’s largest companies. They have transformed the way consumers and businesses select products and engage with brands. In the automotive industry, however, the e-commerce revolution has struggled to get out of first gear. In 2017, overall e-commerce penetration in the sector’s major markets was a meager 1.5 percent. That’s 10 times smaller than the equivalent rate in the technology sector, for example.
Things are going to change. Automotive companies understand that their customers, both end consumers and other players in the value chain, want to buy via online channels. They also recognize the advantages that e-commerce can bring to them, including improved understanding of customer preferences and buying habits, greater control over their brand and the opportunity to increase profits by cutting costs, boosting market share and removing intermediaries.
Part and parcel
The first key battleground is the aftermarket. The sale of parts, tires, accessories and associated services is a vital part of today’s automotive business model, responsible for around 65 percent of the earnings generated by each vehicle. Parts sales, which account for 55 percent of the $7 billion global automotive aftermarket, are an obvious candidate for e-commerce. They exhibit many of the characteristics that e-commerce systems handle so well: complex portfolios, variable demand and, in some cases, a small, lightweight format that makes them easy to ship.
At just over 4 percent, e-commerce penetration in aftermarket parts sales already outstrips the overall e-commerce penetration in the sector by a factor of three. Market research consultancy Frost & Sullivan expects online parts sales to grow by more than 15 percent a year until at least 2022, becoming a $50 billion industry. The fastest growth will come from emerging markets such as China, Mexico, Brazil and India, where vehicle ownership is increasing most rapidly and penetration is currently low.
The automotive aftermarket isn’t exactly like other big e-commerce sectors, however. To succeed, the industry will have to recognize and overcome those differences. For a start, only a minority of vehicle end users have the skills or enthusiasm to conduct anything more than the most basic maintenance and repair tasks themselves. It’s no coincidence that the largest-selling online car parts are the ones that are easiest to fit, such as light bulbs or windscreen wiper blades.
For other parts, customers are more likely to leave the fitting (and sometimes the choice) of parts up to a specialist. That adds complexity to the development of e-commerce offerings. Providers have to sell via business-to-business (B2B) platforms as well as business-to-consumer (B2C) ones, for example. In addition, new consumer-facing offerings are evolving, which bundle products and associated services into an accessible package. In tire sales, for example, the single largest aftermarket category, this trend has helped the development of mobile tire delivery and fitting businesses that replace tires at the customer’s home or workplace.
E-commerce technologies are also enabling new approaches to parts supply. Workshop, dealer and distributor networks can participate in peer-to-peer marketplaces, for example, in which they make details of their own inventories accessible to others on an online platform, allowing other participants to order components from them as required. That approach can dramatically improve the availability of components, helping participants to offer faster repairs to their customers while keeping inventory costs under control.
It isn’t just the need to reach different customer groups that presents a challenge for aftermarket players. They also have to make decisions about the types of online platform they use. Owning and operating your own e-commerce platform provides a direct connection to customers, helping to keep them loyal, but participating in an open marketplace can aid access to new customers. As in other areas of retail, it is likely that many players will need to adopt multichannel strategies, with different on- and offline sales platforms for different product and customer segments.
Then there are logistics complexities. Service and repair logistics are often time-critical: A repairer won’t know precisely which parts are required for a job until they start it, and the customer will often expect their vehicle to be back on the road the same day. That creates a need for fast, flexible logistics processes and careful disposition inventory to support same-day delivery.
Not all aftermarket parts are small, lightweight and easy to transport. Items such as major engine components or body panels are heavy and fragile, requiring specialist care in transportation and storage. And the automotive aftermarket is a two-way supply chain. End-of-life regulations in many markets are increasingly requiring manufacturers to assume responsibility for the safe recycling or disposal of used products. Worn parts taken from vehicles can be reconditioned or remanufactured and resold. Those aspects of the market require efficient reverse logistics processes, above and beyond the need to handle customer returns in a fuss-free manner – a key requirement in the eyes of most e-commerce customers.
The missing link
When it comes to the purchase of complete vehicles, the disconnect between today’s reality and the online future is even more pronounced than it is for parts. 44 percent of customers say they would be happy to buy a vehicle, whether new or used, online. 97 percent of customers begin their purchasing journey that way, by researching vehicles on manufacturer websites, social media and independent review sites. Ultimately, however, only 2 percent of new cars are sold online.
There are many reasons for that gulf. Many manufacturers don’t offer a seamless end-to-end process for online vehicle sales. To undertake key steps in the purchase process, such as test-driving a vehicle, signing paperwork or the final handover, the customer still needs to visit a physical dealership. In some markets, notably the U.S., regulations set up to support dealers make direct-to-consumer sales difficult for carmakers. And established carmakers don’t want to compromise the role of their dealer networks.
There’s growing evidence that customers will force a change in approach, however. In one survey of millennial car buyers, less than one percent of respondents said that current purchasing processes provided their ideal experience, and more than half claimed that negotiating face-to-face with a car salesperson was more painful than going to the dentist.
The industry is listening. Tesla, the arch automotive disruptor, has chosen not to develop a conventional network of dealerships. Instead, customers can view, touch and test the product in a network of galleries, concessions and concept stores around the world before making their purchase online direct from the manufacturer. Lynk & Co is a new brand established by Chinese carmaker Geely, which bought Volvo in 2010. When the Chinese-Swedish joint venture launches its first models in Europe in 2020, all sales will be conducted online.
Meanwhile, a host of new players has sprung up to meet the growing appetite for online car retail. Companies operating in the sector adopt a range of different business models, with some acting as brokers between the carmaker (or previous owner) and the end customer, while others provide an online marketplace open to private sellers, independent dealerships or the manufacturers themselves.
That growth is helping to fill the gap for consumers, but carmakers worry that reliance on these new intermediaries risks disconnecting them from their end customers. And that relationship is something they want to strengthen, especially with the emergence of new vehicle ownership and use models, from car-sharing schemes to flexible hire contracts.
As a result, mainstream carmakers are hurrying to develop their own digital retail offerings. Speaking to an industry conference earlier this year, Britta Seeger, a board member at Daimler who is responsible for Mercedes Benz sales, said that her company expects a quarter of the brand’s new and used car sales to happen online by 2022. The shift, she claimed, will be “a huge effort that we have to undertake together with our dealers.” Carmakers are eying potentially lucrative future business opportunities too, with connected vehicles used as e-commerce portals or destinations for the delivery of customers’ online shopping, for example.
Fathi Tlatli, President, Global Auto-mobility Sector, DHL, says that automotive players should not be frightened of that effort. “Across the value chain, companies in the sector have already invested significantly to improve the level of service they give their customers. Those investments mean that they already have much of the infrastructure they need to develop robust e-commerce offerings.
“The automotive industry is gearing itself up for a period of radical change,” says Tlatli. “Senior figures in the industry have already said that they expect more change in the next 10 years than in the previous 100.” While much of that change is around the design of the vehicles themselves, he notes, a similar revolution is underway in the way cars are bought, sold and supported. “Customers want end-to-end convenience and increasingly that means a seamless digital experience, with the real-world logistics and service expertise to back it up. The companies that can deliver that combination will see the benefits in terms of higher market share and improved customer loyalty.” — Jonathan Ward
Published: November 2018
Images: Rawpixel/Adobe Stock; VCG/Getty Images; Daimler AG; Peugeot/Ferrari Press/action press; vectorfusionart/Adobe Stock; Klaus Pollkläsener/Funke Foto Services