With the dramatic changes in the structure of China's auto market and the growing challenges in the passenger car distribution sector from original equipment manufacturers (OEMs), consumers and competitors in the same industry, auto dealer groups should use seven magic weapons to explore the road to transformation in a difficult environment.
Author: Xu Daren, Chen Chi, Li Bin, Sun Shiyu, Liu Yuman
Since 2018, the overall growth of the Chinese mainland auto market has slowed down, resulting in changes in the revenue structure of the automotive industry chain and a decline in profit levels, prompting OEMs to seek a way to transform. At the same time, with the rise of electric vehicles (EVs), more and more disruptive players are entering the market, forming a new competitive pattern and increasing the competitive pressure. In addition, due to the popularity of digital technology, consumers' demand for online services has increased, and they have also pursued a more personalized and convenient experience. In the face of the above three major market trends, how to cope with severe challenges, break through obstacles and successfully transform will be the key to victory in the future.
1. The external change is a Group of Chinese auto dealers
Three major challenges
OEM transformation pressure is transmitted to dealers
Under pressure from shrinking market size, traditional passenger car OEMs expect their traditional auto dealer partners to transform into service providers that customers can trust.
Chinese mainland passenger car sales have declined for three consecutive years since 2018 after nearly 20 years of sustained growth. Affected by the downturn in the market, the current revenue structure of the automotive industry chain has been reshaped, and the original considerable after-sales revenue has continued to decline, except for ultra-luxury, high-end and some Japanese mid-end brands that have grown rapidly, the rest of the brands have "fallen in volume and price".
Under market pressure, OEMs are actively exploring the path of transformation. At the same time, the transformation pressure of OEMs is also being transmitted to dealers, and more and more dealer groups are beginning to embrace change and seek to cooperate with OEMs to transform.
For example, Mercedes-Benz China designs and implements a variety of new retail channel models to enhance brand influence and optimize the consumer experience. They partner with dealers to digitize retail stores to create a new customer experience model that interacts seamlessly with advanced facilities and digital experiences. The brand has established multi-format offline experience stores based on self-operation, which no longer focus solely on product sales, but are built into high-quality life experience places frequented by consumers. At the same time, the brand also operates its own online channels to provide consumers with a more diversified car purchase and service experience.
Disruptive players enter the industry
The entry of disruptive players has led to structural changes in the passenger car market, prompting traditional OEMs to explore new distribution cooperation models, and also bringing challenges to dealer groups.
With the rise of the new energy vehicle boom, more and more players into the automotive industry, Weilai, Tesla and other new car-making forces strongly occupy the minds of consumers, reshape the consumer journey contact point, its important brand direct sales model is also subverting the traditional OEMs mainly rely on the retail model of 4S stores.
For example, from cognition to sales, NIO has basically abandoned the traditional 4S store distribution channels, and instead adopted the model of separating online and offline sales and services to create a new retail model centered on customer experience. Niolai's online and offline channels are self-built, online (official website + APP) as the only sales channel, while serving new car sales, but also through the integrated user platform to integrate services, social, media, shopping malls and other attributes with vehicle customization, management, car friends social, user operation and other functions. At the same time, the offline high-end experience store NIO Life and physical service center, as the carrier of user experience and after-sales service, also provide users with leisure and entertainment areas, as well as services such as car pick-up, maintenance, door-to-door pick-up and delivery, valet repair and so on.
Consumer demand is upgraded
The increase in consumer demand for channel experience in the Chinese market has also driven manufacturers and distributors to think about how to upgrade the service experience of online and offline channels.
The development and popularization of digital technologies profoundly affect consumer decisions and journeys. At present, digital channels have become the primary way for Chinese consumers to obtain information. The demand for online services has made offline experience upgrades and multi-channel integration a new standard for reaching consumers. Consumers expect to experience more personalized and convenient content, products and services at every stage of their journey.
Dealers face consumers directly and are at the forefront of transformation and upgrading. Conforming to the trend of new retail and creating an omni-channel digital experience for consumers will be the only way for dealers to transform.
2. Auto dealer groups meet the challenges
Seven winning formulas
Faced with a triple pressure from OEMs, competitors and markets, we have observed that leading auto dealer groups typically leverage the following seven winning formulas to remain invincible in complex market environments.
Optimize your brand matrix
For auto dealer groups, the choice of distribution brands often directly determines their current profitability and future growth space, in the same market environment, if the dealer layout is reasonable, its profit growth rate can often reach 2-3 times the market average. How to ensure sustainable growth in the future by optimizing the brand matrix based on the existing situation is the primary consideration for the transformation of the dealer group.
In other words, the first step of transformation requires the auto dealer group to analyze the profitability and future potential of existing brands from its own situation, screen the development direction of key brands, and optimize or rebuild the brand matrix in combination with this direction.
For example, a car dealership group scanned the Chinese passenger car market in the five years from 2016 to 2020 and found that China's passenger car sales showed an overall downward trend, but this was mainly affected by the decline of non-high-end car brands, which maintained strong double-digit growth every year. The reason behind this comes from the rise of the middle class and consumption upgrade on the demand side on the one hand; on the other hand, it also comes from the expansion of the original mid-range car price segment products by the luxury car brands on the supply side. In addition, high-end car brands compared to non-high-end brands not only have a faster market growth rate, but also have a higher comprehensive gross profit of bicycles, for dealer groups that have accumulated certain experience, increasing investment in the field of high-end cars will be the key development direction in the future.
Establish regional advantage
In addition to the brand layout, the main advantage of the dealer group that distinguishes it from the OEM is its rich store network layout and its closer to the end consumer. How to rationally plan the layout of stores and give full play to the advantages of regional combination is an indispensable part of the transformation of dealers.
The second step of the transformation requires the auto dealer group to start from its own situation, analyze the existing store concentration area and the corresponding market share, select the key development area and form a synergy.
When dividing the regional market, we believe that the mainland market can be divided into a large region composed of several neighboring provinces, such as East China, South China, Southwest China, etc. In addition, we believe that the specific definition of "regional advantage" that has been formed by evaluating a supplier group should be at least in the top three of the key brand distributors in the region. After the formation of regional advantages, externally, it is not only conducive to the dealer group to enhance the bargaining power with the brand side and ensure stable cooperation, but also conducive to the dealer to optimize the overall channel layout in the region and expand consumer contacts; internally, it is conducive to the formation of scale effects, convenient for resource concentration and coordination, and reduce operating costs.
Process automation reduces costs and increases efficiency
Affected by the overall slowdown in growth and the intensification of market competition, the profitability of Chinese auto dealers continued to decline, with a cumulative decline of 1.5% from 2014 to 2018, which highlighted the urgency of cost reduction and efficiency increase, especially the optimization of traditional major cost items (human efficiency, AnP expenses, etc.). Auto dealership groups need to identify existing organizational effectiveness bottlenecks, optimize cost structures, and further improve operational health.
Starting from the cost reduction dimension, we believe that we should start from combing the existing process, combining industry best practices, adjusting and optimizing on the basis of the existing process, and introducing automation tools to assist in the links that require a lot of manpower, so as to achieve the ultimate human efficiency under the existing process framework.
From the perspective of efficiency, we usually recommend that dealer groups set up a large brand division system. Internally, the brand division can coordinate the resources of the same brand store, for example, the dealer brand division can take the lead in establishing a regional membership system, sharing services with the brand store members, enhancing customer stickiness and establishing the brand effect of the dealer group. Externally, the brand division can serve as a window for centralized communication between dealer stores and manufacturers, and play an important role in annual business policy negotiations.
Lean store operations
Affected by the overall decline in the market and the changes in the profit structure of the industrial chain, OEMs and the market have put forward higher requirements for the lean operation capabilities of dealer groups.
Since 2018, the size of China's passenger car market has gradually declined, while the profit margin of OEMs has declined year by year since 2014, which has directly led to the increasing participation of OEMs in the downstream dealer business, especially the continuous improvement of support for strategic key dealers (mainly in marketing). On the other hand, OEMs typically only work with head operating distributors (e.g. regional top three), which places higher demands on the lean operation level of the dealer group.
In order to conform to the market trend and stand out in the fierce competition, the automobile dealer group needs to further optimize the profit structure, strengthen customer stickiness, build a scientific management system, and jointly improve the lean operation level of dealer stores in a three-pronged manner.
Regarding the specific methods and approaches to lean operation of stores, we will expand in detail in the subsequent articles in this series.
Partner Circle
As consumer demand in the Chinese market escalates, it is difficult for dealers to meet the diverse experience needs of customers on their own, and leading dealer groups have been actively seeking cross-border cooperation.
From the perspective of market trends, the new auto retail model is gaining more consumer recognition around the world, and new retail has become the new normal. In the process of OEM exploration of business model transformation, dealers can only differentiate themselves from other dealers and become the best partner for OEMs if they help them in the field of automotive new retail.
From the perspective of consumer journey, in the way car sales reach consumers, offline channels still dominate, and the status of 4S stores is difficult to shake in a short period of time. However, the traditional service model can no longer meet the needs of consumers in the new era, and it is imperative for 4S stores to enhance the consumer experience through innovative service models.
This requires auto dealer groups to strive to establish a cross-industry ecological cooperation network, increase customer contact points, and provide customers with a richer offline experience.
The 4 Mercedes Me experience stores in Japan are successful cases of OEMs working with dealers to create and expand offline experiences, as detailed in the figure below.
Digital transformation
In the new market environment, whether it is due to market transformation pressure or out of its own business needs, dealer groups must embark on the road of digital transformation.
Under the trend of new retail, the decision-making journey of Chinese passenger car consumers has changed, and they pay more attention to personalized and convenient content, products and services. At the same time, online has become the main channel for Chinese consumers to actively obtain information. On the other hand, OEMs are also trying to explore digital transformation paths to meet profitability challenges and changing consumer preferences. As an important part of connecting consumers, the pressure on auto dealers to cooperate with OEM digitalization initiatives will increase. Since 2018, China's passenger car market has gradually shifted from an incremental market to a stock market, and the profitability of automobile dealers has deteriorated, and it is also facing greater pressure to increase efficiency and reduce costs.
In general, China's auto dealer groups are facing challenges such as consumer car purchases, changes in car preferences, and digital upgrading of automakers, and internal pressures such as profit downturn and business model impact, making their digital transformation imminent.
In this context, the automobile dealer group needs to transform from system management to digital operation, and use digital means to help its dealers do a good job in digital penetration in marketing and management.
Different from the digital transformation road of automakers, we believe that the digital transformation of dealers should focus more on improving customer experience and promoting value realization, and their planning should be carried out around the digitization of customer journeys and business processes, and gradually promote enterprises from the stage of informatization and integration to digitalization, and iteratively achieve intelligence.
The specific methods and approaches to digital transformation of dealers will also be detailed in this series of subsequent articles.
Incubation of new businesses
Judging from the current market trend, the traditional fuel vehicle distribution business is facing a situation of double reduction in scale and profit, which can be said to be the approaching winter, and the dealer group needs to start from the short, medium and long-term layout and incubate new business to cope with future challenges.
In the short term, dealer groups should combine their own endowments and focus on derivative service expansion, such as expanding auto finance, boutique products, additive services, used car retail, etc. on the basis of existing distribution business, or expanding their own resources and exploring niche business agents other than passenger cars, such as caravan leasing, commercial vehicle distribution, etc.
In the medium term, with the trend of carbon neutrality, the shrinkage of traditional fuel vehicle distribution business has become an inevitable trend, and it is expected that by 2025, the traditional fuel vehicle distribution business will decline by 23%, and the future growth of the passenger car market will be led by new energy vehicles. In order to comply with the trend, dealer groups should enter the new energy market as soon as possible, on the one hand, seek cooperation with new car-making forces, and on the other hand, lay out the distribution of traditional OEM new energy brands.
In the long run, affected by the new forces of car manufacturing and the traditional OEM direct operation model, dealers should actively explore new business models and transform into travel experience providers. For example, in line with the trend of electrification in the passenger car market, gifted dealers can try to enter the field of energy replenishment and explore the development of charging, power exchange, battery recycling and other businesses.
3. The overall transformation of large group companies still faces challenges
Although distributors are eager to seek transformation, they still face many difficulties and challenges in the process of actual business transformation, like other large group companies.
From the perspective of leadership, it is often difficult for the senior management of large group companies to unify their thinking, and the heads of various businesses have different opinions on the direction of transformation, and in most cases, the business leaders will directly become the biggest obstacle to transformation. In terms of process and organization, large group companies usually have a long management chain, lack of a solid mid-level business backbone, coupled with lack of incentives and talent gaps, making it difficult for transformation strategies to reach the front line. From the perspective of coverage, auto dealer groups usually face objective problems such as large differences in agent brands and wide geographical coverage of stores, and how to find a suitable strategic transformation and promotion model is also a major problem facing the group.
At this time, seeking the help of a professional consulting agency may be able to solve the urgent need. For example, with mcKinsey's help, an auto dealer group has completed the implementation of key transformation initiatives, and successfully achieved double-digit growth in net profit of distribution business in 2021, and the gross profit of key businesses increased by about 30%.
Regarding the implementation model of the transformation initiatives of large groups, we will expand in detail in the subsequent articles in this series.
epilogue
Challenges from the inside and outside are pushing more and more companies to embark on the road of transformation, and if the auto dealer group makes good use of the seven magic weapons, it is possible to overcome obstacles and break through. This article is the beginning of a series of articles on the transformation of automobile dealers, and then we will take the lean operation of stores as an example to introduce McKinsey's exploration and practice on this transformation road.
About the Author:
Xu Daren
Global Managing Partner of McKinsey & Company, based in Hong Kong
Chen Chi
McKinsey & Company Is a Global Associate Managing Partner based in Beijing
Li Bin
Senior Project Manager, McKinsey, based in Shanghai
Sun Shiyu
Project Manager of McKinsey & Company Blue Leap, based in Beijing
Liu Yuman
McKinsey & Company Blue Leap Consultant, based in Shanghai
Thank you Ye Hai, Guan Mingyu, Huang Xin, Wu Ting, Peng Bo, Xie Xiaozhou, Zhang Naixin, etc. for their contributions to this article.
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