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SpirE-Journal 2005 Q2

Auto Industry – A Changed World

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Auto Industry - A Changed World

In this second edition of Spire E-quarterly, we take a look at how the automotive industry is on the verge of a dramatic change as the Internet plays a key role in the marketing of automobiles.

Automotive manufacturing is now one of the world’s most challenged industries. Its leaders have so far used the Internet mainly as an advertising medium. Going beyond this to use the internet as a CRM tool, an aid to supply chain management and a platform for new revenue streams will be critical in separating the winners from the losers in this troubled market.

The World’s Greatest Industry in transition 

Automotive production is the world’s oldest mass production industry, having pioneered the assembly line. More than 100,000 new cars and trucks are manufactured around the world each day, 365 days a year. A similar number each day are wrecked beyond repair or scrapped. The auto industry consumes 15 per cent of global steel, 40 per cent of rubber and 25 per cent of glass. Collectively, automotives consume as much as 40 per cent of the world’s oil output. It is no wonder that this industry is the single largest manufacturing activity in the world.

In the emerging economies of Asia, sales of cars and motorcycles are growing robustly, sometimes explosively – as in China in 2003 and 2004, Indonesia in 2004 as well as India in recent years.

Globally, however, the industry is widely seen as suffering from sclerosis. Most auto companies command shares of stock market capitalization, which are far below their shares of total market revenues. Many are struggling with chronically weak profits – including two of the largest American makers, General Motors and Ford.

Leaving the Glory Days behind

The halcyon decades of the 1950s to the 1970s, when automotive sales and profits were booming, are long gone. While the industry had initially flourished in North America, Europe & Japan, these regions are now seeing the weakest growth. Only eight of the top 17 carmakers in the world are currently getting a positive return on new investment. None of them are American. Only three are European.

Why the sclerosis? The main reason is over-capacity. As demand slowed down in the developed countries, auto makers found that fixed asset investment could not be easily shifted. Union contracts created even more exit barriers. The consequent profitability crisis and destructive price competition has become an endemic feature of many auto markets – including the biggest one, the USA.

On top of dealing with these fundamental problems, auto makers now have to grapple with changes in the demand and supply environment. The biggest of these challenges are –

the rise of emerging markets
 
the continuing challenge of supply chain management

‰the need for customization

As auto makers increasingly compete in these three arenas, they will find the Internet to be an indispensable ally.

The Rise Of Emerging Markets: With the OECD markets currently slowing, focus is shifting towards the emerging markets particularly those in the Asia Pacific, home to over 50% of the human population.

Car sales in Southeast Asia grew roughly 19 per cent in 2004. Despite the slow down in the past few months, car sales in China continue to increase at 18 per cent year on year .In Europe, by contrast, new car registrations dropped by 3.1 per cent in 2004.

Much of the new investments made by the global auto majors in the last five years have been in emerging markets – in particular, China, Korea, Thailand and India.

However competing in emerging markets brings its own set of challenges. Many of these markets are dominated by local manufacturers like Proton and Perodua that hold 55 per cent of the Malaysian market, or Maruti Udyog and Tata Motors, which hold 62 per cent of market share in India.

The Supply Chain Management challenge: In the past two decades, auto manufacturers have taken huge strides in making their supply chains more efficient. Most of the majors now organize their plants according to the discipline of just in time production, pioneered by Toyota. Automotive producers have come to deploy the most advanced supply chain management tools of any industry in the world, embracing practices ranging from vendor managed inventory and radio frequency identification devices (RFID) to the most sophisticated supply chain software applications.

However the key challenge in SCM remains sales forecasting. Lean production is useless if finished product inventory is allowed to build up – or, in the reverse scenario, if factories cannot meet orders. In recent years, some manufactures have been caught off guard by the surge in demand in Asian countries like Thailand and Indonesia, creating potentially damaging supply bottlenecks.

Is the future “Built To Order”? Henry Ford famously said: “You can have any colour as long as it’s black” and customers heeded his call. In the past, each brand had a limited range of models serving a particular market segment. There were the big luxury cars like the Mercedes and the Cadillacs. There were also the basic smaller cars like the Beetles, the Fiats and the little Ford Escorts.

But in the current environment, auto manufacturers are aggressively customizing their models to target various a wider range of more narrowly defined segments. This everfiner segmentation has led to crossover models like luxury Sports Utility Vehicles (SUVs), family Minivans and motorcycle/scooter hybrids (Yamaha’s Nuovo). Technology has been a great enabler in this process – improvements in the design and manufacturing process have made it possible to launch new models every three years.

Building cars and motorbikes to order would be the logical outcome of this evolution, where models are targeted at the “segment of one.” The build to order vision has traditionally been seen as out of reach for all but the smallest custom car manufacturers. But there are clear signs that the industry is moving in this direction. Six out of ten cars sold by BMW in Germany are made to order – a clear sign of things to come, given BMW’s reputation as pioneer.

Going forward, the industry will move towards building cars to order. But the phenomenon will only take off when delivery lead times are shortened far beyond what is now possible. Manufacturers are building more inter-changeable parts into their models, a global trend that will facilitate this.

The Internet Enters The Equation 

First to the Internet…then to the car dealership 

The transactional features on almost all auto manufacturer sites are few and underdeveloped. Automotive customers still insist on test-driving their car of choice before buying. The Internet will make not make an impact on auto transactions – which will remain in the off-line world – but as a sales and CRM tool.

Experts say that 60 per cent of all car purchases in the US begin with an Internet search. The indicators in Asia are no less exciting. In a survey involving prospective car buyers in India, 31 per cent of respondents cited the Internet as the most important and reliable source of information. This is not far from television (the leading response), at 36 per cent. The survey went on to show that 45 per cent of those who did not own cars, but intended to buy one, trusted the Internet as a credible source of information. By comparison, print media scored only 27 per cent.Such behavior should not be surprising, even setting aside the phenomenal growth in IT literacy and e-commerce that the world has seen. Cars and motorcycles are high involvement purchases. Customers would seek technical or “hard” information just as much as they seek the “Touch and Feel” experience.

Customer Outreach in Cyberspace

These developments have not been lost on the auto industry – the sector is one of the biggest global advertisers on the Internet.

Major auto companies have already set up country websites tailored to each market’s characteristics. For example, Ford launched website features in Vietnamese, Korean and Chinese in February 2004.These sites strive to convey brand values while also providing technical and commercial information to potential customers.

A critical feature of such sites is “how to contact the nearest dealership”, which adds sales lead generation to the site’s agenda.

Many auto makers have discovered that the Internet offers a cost effective means of outreach compared to radio, press and television advertising. Hyundai found a cost effective strategy to market its entire range in July 2002 using a rich-media advertisement campaign at third-party car portals – registering a healthy number of brochure requests from site visitors.

Auto websites now offer a whole range of interactive features. Using technologies like “Flash and MS Media players”, visitors are increasingly able to mix and match colors, wheel caps, seats and headlights, as well as view the car from various angles. The websites of Lexus and BMW in Australia and Hyundai in Singapore provide responses to online queries, schedule test-drives, send out brochures on request, schedule servicing appointments and email regular updates to subscribers.

The ideal flow of information would involve the manufacturer’s website communicating brand values, providing technical information and adding value to existing customers, while providing a linkage to the dealership for closing a sale. In some rare cases, dealers have their own websites – ideally consistent with the brand values of the manufacturer, as is the case with BMW’s dealer sites in Australia. These would handle functions requiring physical touch-points, like the scheduling of services and test-drives.

The next frontier in all of this is third party portals and sites. The auto industry will have to reach out to these sites with their messages, just as advertisers are increasing turning to “blog-sites” and “wiki” sites over traditional Internet media.

Locking In the Repeat Purchaser

While stimulating new sales, manufacturers have not forgotten the need to defend existing customers. According to Michael Lai, Oracle Malaysia’s marketing director, customers change their cars every three to five years. In that window period, auto makers need to use the Internet to encourage the customer to buy again.

This is usually done by creating an exclusive “members” section, only accessible to existing cars owners. These provide online services, information, loyalty program rewards, freebies, news and tools to dialogue with other users.

An example of this is the “Encore Privileges” section at the Lexus Australia website that offers concierge services, cinema & theatre ticket and discount shopping coupons via the online “Lexus club”. This enhances the purchase, from a product to an entire lifestyle – building loyalty for that all-important repeat purchase.

The Problem With Auto Websites

Auto websites now offer an array of information and services to the buyer or owner. However what is equally crucial is for websites to channel data from potential customers back up to manufacturers, to influence supply chain, marketing and product development decisions. Many auto makers still fall short on the second dimension.

Backward flow of information from the browser to the manufacturer remains scanty. This is due to a lack of integration between virtual databases and the IT systems governing other automotive functions like sales forecasting and product development.

 

Auto makers need to apply the same advanced processes used in production and supply chain management in a forward direction – using the internet to better document customer behaviour so as to benefit marketing, sales forecasting and product development. The ability to harvest and process data from online enquiries and “car configurators” would be a huge step in this direction.

A more basic problem, and one that is easier to resolve, may lie in the fulfillment of “e-promises” made by sites. If dealers and manufacturers are not well integrated online, virtual requests made by site visitors would not be processed quickly – for example, requests for test-drive appointments. Most sites are still grappling with an underdeveloped delivery system and a disjointed dealer network.

And finally…Automotive Services over the Internet

As is well known, General Motors makes most of its profit from financial services. Manufacturer’s sites provide good access points for services like financing, insurance, repairs and emergency breakdown services. Most auto-websites already offer these services under their own brand name (usually by using an offline partner) or provide a link to a service provider. Revenue is typically generated through referral fees or commissions. The“installment Calculators” on auto sites are often managed by finance companies using such a model.

Repair services may offer yet another revenue stream. Many auto sites already enable users to schedule service appointments. BMW is currently testing a technology where a computer in the vehicle would monitor essential information and relay this to a central maintenance center. This information would be used by technicians to decide when the car should be brought in for servicing.

Used cars exchanges may be another arena. Portals and e-markets have sprouted all over Asia, aiming to connect buyers and sellers of used cars. In January 2002, the Indian government started a website in Delhi that gives the history and current status of all used cars15.Car makers should consider offering such services to motorists in future – opening up yet another tool for collecting data on customers.

In the more distant future, motorists may access a range of services via on-board computers with broadband, wireless Internet access. The technology for integrating Global Positioning Systems (GPS) and Geographic Information Systems (GIS) to provide navigation guidance to motorists is an example. The streaming of advertisements about restaurants and shops that vehicles come in close proximity to may be another.

The Future of Auto-Cyberspace

Virtually all auto companies already use the Internet as an advertising medium. More progressive companies like Lexus use it as a platform for retaining customers, not only winning new ones.

Now would be the time for the industry’s leaders to push the envelope on using the Internet as:

‰

A tool for customer research and sales forecasting, integrating customer data harvested on-line with already sophisticated production and SCM systems
 
‰A tool to develop the emerging Built-to-Order car
 
‰
An access point for the increasing important domain of automotive-related services such as financing, repairs, used car transactions and internet content services.
 



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