In this post; we shall be highlighting the relationship of the OEMs with the Channel Partners (Dealerships). For over 100 years, Automobile Manufacturers have established dealerships as their channel partner to sell their product to the end consumers. Dealerships were able to take advantage of their local know-how and connections to sell, service and supply parts for their vehicles. Even though the dealership model has matured and operations have become more sophisticated, but the basic business model has remained remarkably unchanged.
In Part 3; we have highlighted in detail on how the automobile retail is a challenging, low-margin business that requires the consistent leverage of all available revenue opportunities (New Car sales, After Sales, Used Cars, Finance, Insurance, etc.). We shall now showcase how the OEMs can be frugal in terms of handholding dealerships to identify and capture these revenue opportunities. But; as usual lets start with the basics –
- Selection of dealerships –
As highlighted earlier; OEMs select channel partners at the respective territories by a screening program by the dealer development team. The OEMs present a business case to the dealership owners highlighting the business plan in terms of volumes and profitability. On assessment of the same; the dealership owners can decide if they want to associate with the particular OEM or not and put forward the interest proposal. On receiving proposals from different parties; OEMs shortlist a partner/dealer for the respective territory. An agreement is thus signed between the OEM and the dealership highlighting the clauses in which both the parties shall operate.
- Mutual Dependence between OEMs and Dealerships –
Do note here that the Dealership is the ‘first customer‘ of the OEM. Basis the promise of the OEM brand; Dealer Owners invest a hefty amount to provide the infrastructure as per the standards laid down by the manufacturer. Accounting the business proposition; the dealership then moves forward to recruit the slew of manpower as recommended by the OEM. Finally once the operation starts; the dealership also purchases the required levels of inventory as mandated by the OEM.
Though OEM and Dealerships are independent business entities; we shall now how dependent the dealers can be on the OEM:
– OEMs control a very significant portion of what the dealership does and how they do it. OEMs first release the Corporate Identity guidelines basis which the infrastructure (external & internal) needs to be built.
– OEMs then define the manpower across the channel that the dealership needs to employ. Dealership being a manpower intensive business; the requirement can go to a crazy higher levels. Do read Part 2 for details.
– OEMs share a set of guidelines / Process Manuals highlighting the Standard Operating Procedures that the dealership needs to operate in. The same is being implemented at the dealerships by the support of OEM representatives (the respective Area Incharges).
– Vehicle Stock, Service Compliance, Parts/Accessories Supply is completely dependent on the OEMs. OEMs designated Territory / Area Sales Manager, Parts and Service Manager, Customer Satisfaction Manager and higher ups control completely these operations under the OEMs command.
– OEMs review the dealerships time-to-time and consult them on identifying/improving the revenue streams (New Car sales, After Sales, Used Cars, Finance, Insurance, etc.). The OEMs having stronger association with dealerships on their operations convert to higher viability and business efficiency.
Now let’s lay down how OEMs are rather dependent on the dealer partners –
> Dealerships are the face of the respective OEMs. The entire customer experience is at the dealership end. Any slight glitch in the customer experience ends up as a deterrent to the overall brand itself.
> Dealerships operational efficiency results in a lot of benefits – right from faster/higher inventory movement to ensuring the right market share for the model in the territory.
- Financial Relationship between the OEMs and Dealerships –
A dealership borrows money from either a bank or from the manufacturer’s financing arm, to pay the manufacturer / OEM for the vehicles they order. Basically, ‘Inventory Funding’ / ‘Working Capital’ is the term used for the money dealership primarily borrows from the financial institution. The extent of the Working Capital borrowed by the dealership is also majorly as advised by the OEM. The Dealership borrows money at an average interest cost of roughly upto 9% from the financial institution. Hence if a vehicle dealership carries an inventory of 100 vehicles for a month and the average value of the vehicle is Rs.10 Lakh – Dealership shall end up paying Rs.7 Lakhs as interest cost itself! That’s the reason you can also see that the longer a vehicle sits on the dealer’s stock, the more that dealer is anxious to move it.
The OEMs also provide incentives (and sometimes dis-incentives) to the dealerships to move certain models / variants, certain options, certain add-ons like extended warranties and in certain time periods. The OEMs many a times need to act as a parent and levy financial support to aid dealer to run business. Even in the recent times; we have seen that many OEMs are offering financial assistance to their dealer partners to survive the impact of the Covid outbreak.
- Distress between the OEM and Dealerships –
This is commonly seen in all forms of businesses. Difference in opinions can be devastating to business. Even in automobile industry the scenario erupts primarily due to – 1. OEMs excessive pressure on increasing volumes / gaining market share 2. Dealerships sole motive of profitability / reducing relevant investments and compromising customer experience. Unless a common goal / objective is established between the OEMs and Dealerships; distress can hamper the overall business operations.
Ethics in business is of paramount importance and all parties need to embrace it. Brands where the OEMs and dealerships have synced to a common goal; simply perform the best!
OEMs and Dealerships now need to thrive by putting the customer at the center and pursuing dynamic, new ways of working. Owing to the Covid outbreak, the automobile sector is now in a brink of disruption and requires both OEMs & dealerships to review their own operating model, improve operational efficiencies and finally discover new ways to operate in a digital, omni-channel environment. There is a famous quote ‘Retail is all about Detail’ which stands true for automobile sector as well. Delighted Consumers, prosperous dealerships and Profitable OEMs can only exist when the right role holders focus relentlessly on optimizing their co-operation by ensuring network, wholesale and retail process optimization. We also recommend that Automobile Dealerships must find a balance between protecting their existing business while finding growth in what is becoming a disruptive space. Dealerships should focus on growing through better insights, capturing new revenue streams in adjacent markets while implementing operational improvements and digitizing traditional segments.