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January 27, 2014

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In a digital world, car sellers forced to drive with the trend

A buzzword that China’s car market cannot escape in 2014 is O2O, shorthand for the “online-to-offline” business model. It’s a strategy designed to help companies approach customers on the Internet and then coax them into real-world stores.

The model is catching on in many traditional industries in China, fueled by the world’s largest number of online users — netizens who are not only well informed but also heavily influenced by information-sharing platforms.

Big-ticket items such as cars were once considered beyond the scope of Internet marketing. But that perception is rapidly changing.

During the Singles’ Day promotional sale on November 11, China’s three biggest online car retailers — Tmall.com, Autohome.com.cn and Yiche.com — received orders for a jaw-dropping 170,000 cars valued at 23.5 billion yuan (US$3.88 billion). Though the figures may be inflated a bit because deposits were not always required for order placements, there’s no doubt that 2013 was the dawn of e-commerce for the auto industry.

Buying a car is not a simple click of the mouse. After paying deposits online, consumers still need to visit car dealerships to test-drive the cars of their choice and then close a deal. But the fact that the Internet can serve as an effective front desk for selling vehicles has come as a surprise to many.

However, sophisticated consumers don’t view things that way, said Ye Sheng, auto research director at market research firm Ipsos. He said more than 30 percent of online car buyers in China are existing car owners looking to upgrade their vehicles, which means they have the experience and confidence to evaluate a car model online before actually climbing behind the wheel. 

Carmakers facing pressure to sell more vehicles and keep up with the tech-savvy younger generation are scrambling to familiarize themselves with this new sales channel, Ye said.

Selling cars online is one way to transcend geographic boundaries and convince consumers of brand qualities and uniqueness. A case in point is Tesla, which just launched its official Chinese website last month to allow consumers to pre-order its futurist-looking electric cars, made in California.

The Internet realm is a huge one for gathering potential customers. And consumers, finding strength in numbers, are exercising that bargaining power, which is why cars advertised online often come at a discount price.

In fact, price transparency and comparison give consumers an impetus to shop online, Ye said. Bricks-and-mortar dealerships are sometimes coy about quoting a price over the phone, and their offers on the ground may differ as widely as 10 percent from the recommended retail price set by carmakers.

“Online car shopping is a typical example of letting consumers feel in charge and empowered by the information age,” Ye said.

Attracting potential customers is the biggest draw card of automotive e-commerce, said Luo Lei, deputy secretary-general of the China Automobile Dealers Association. But for the moment, he said, it is more of a marketing gimmick than a new retail format.

Who will keep making special offers to consumers, an automotive e-commerce website or a dealership? Regardless of the answer, the whole scheme is not sustainable, as was shown by the decline of discounts and sales after the Singles’ Day extravaganza, Luo said.

Luo remains a bit of a pessimist about the future of automotive e-commerce in China.

“It cannot sustain itself without the support of brick-and-mortar dealerships,” Luo explained. The dealership is where customers can experience first-hand what they are buying and then make final decisions, he said. They need professional advice and then after-sales services to maintain complicated vehicle systems.

One area where automotive e-commerce might make inroads is in the realm of new energy vehicles, whose mechanical structures are much simpler, Luo said.

BMW, for example, has added the Internet to its traditional sales channels for the new BMW i3 electric car. It has even assembled a mobile sales team to make house calls in Germany as part of a grand retail plan to sell cars directly to customers.

Naturally, the idea has met with strong opposition from BMW dealerships. They think direct sales to customers will undermine their business and influence.

Though online sales channels are not likely to replace existing dealership networks, they may indeed change consumer behavior and the traditional retail format, Ye said.

Because consumers can receive pre-sales services online, their offline purchase journey will be focused on experience. That requires dealerships, especially in more remote locations, to come up with more flexible ways of displaying their products, such as staging ”exhibitions on wheels” in downtown shopping malls, Ye said.

On the interactive front, some special test drive zones are being set up in China, said Jia Xinguang, chief analyst for China Automotive Industry Consulting and Development. He suggested that China should follow Europe’s example in opening car brand culture centers, where consumers can have fun besides taking a look at cars for sale.

Carmakers may adopt a “ship-to-order” system by using online sales channels to free dealerships from inventory management, said Jia.

That could help dealerships concentrate on their role as a services provider.

The nuts and bolts of auto e-commerce

Online car sales channels in China are mostly based on partnerships between carmakers and e-commerce platforms. Ye said carmakers don’t want to see big dealer groups launch separate online outlets because that may complicate price management and lead to unnecessary rivalry within their sales networks.

But in the long run, carmakers need to develop their own e-commerce platforms, Jia said, to gain independence for their online businesses and more control over the pace of sales.

It is too early, Jia said, for carmakers to embark on fancy O2O businesses, be it “tailor-make to order”, “doorstep delivery” or “big data management.”

The Internet can easily be summoned to help imaginations soar, but at the end of the day, a good idea needs down-to-earth execution.

On some automobile e-commerce platforms, deposits are not required for placing orders. Order cancellations are easy if the cost of changing one’s mind is negligible.

A car sold at a discount online is not necessarily a better deal.

One needs to evaluate the whole price package for an online offer, including insurance costs, fees for pre-delivery inspection, vehicle registration and other services. Doing homework is required to avoid getting ripped off.

Online car forums on the rise

Autohome Inc, whose auto sales and news portal Autohome.com.cn claimed a record of selling three cars every second online during the Singles’ Day sale, has been enjoying a heyday on the US stock market since its initial public offering last month.

It raised US$133 million by selling shares for a higher-than-expected US$17 each and saw its price-to-earnings ratio once hit 60. In a mature stock market that values long-term investment, the high valuation given cannot simply be based on extraneous sales spurts.

“If the Autohome website is compared with a human, then forums on the site are its veins and car owners and fans are its lifeblood,” said Yu Xuan, the moderator of Autohome’s Ford Mondeo iVCT forum since 2007.

Autohome could never have come this far without forums known as online car owner and fan clubs. There was a time when the whole website was kept active largely by discussions initiated by forum moderators, who kept posting and sometimes even did original news reports about auto shows and gave free auto show tickets to forum users. 

Jason Shen was one of the lucky recipients back in 2008. At that time, he was already a regular visitor to the Autohome website, where owners and would-be buyers of each car model could set up virtual communities of their own.

“I don’t want to hear sales pitches from carmakers or dealerships,” Shen said. “I want to hear the feedback from car owners. On the forum, you can find the pros as well as the cons about a car and get quick responses to almost any inquiry.”

Soon after the Beijing auto show in 2008, he bought a Ford Mondeo iVCT, just like Yu, based on what he learned about the car’s merits on the forum.

“Despite the car’s reputation as a gas-guzzler, its actual fuel consumption level is quite acceptable,” Shen said.

Trustworthiness is the cornerstone of a forum. Autohome forbids advertisements being posted to protect the site’s neutrality and better manage its own advertising revenues, Yu said.

Still, as a commercial website that has profitability to consider, Autohome sometimes might have difficulties making both clients and users happy.

“There can be shadows even under the sun,” Yu said. “But we moderators are car owners ourselves, so we will always look out for consumers’ interests.”

“The forum enables us car owners to gather in large numbers, which makes our voices more likely to be heard,” Shen said.

To prove they are not shills, forum users need to register and do provide “homework” to earn the title of “certified car owner.” The “homework” mostly involves sharing car-driving experience.

“I told everyone from the very beginning that we are like classmates in school, building relationships,” Yu said. “I want to make this online community feel like our home.”

The forum managed by Yu is probably one of the most active on Autohome. Its “classmates” directory includes over 1,000 user IDs, their real names and contact information. Of course, regular posters come and go as people change cars or find the excitement of new car ownership waning over time. But the forum has indeed become a center of social life in the virtual realm for die-hard car lovers.

Shen said 80 percent of his friends on China’s popular social-networking platform WeChat came from contact made in the forum. Such bonds often extend into the real world, even across different cities.

“Once a ‘classmate’ from Xiamen in Fujian Province came for a visit to Shanghai,” Shen said. “He was made to feel at home by us local ‘classmates.’ We took turns accompanying him around.”

Shen and Yu both live in Shanghai and belong to a local group of “classmates” totaling about 300 people. Classmates living in the same city have regular monthly get-togethers, dining out or taking out-of-town motoring excursions. The Shanghai group recently organized a two-day trip to Shanghai’s Chongming Island involving 20 Mondeos.

Good forum atmosphere and inter-user relationships can be real deal sealers in some cases, said Yu.

“As far as I know, there are many ‘classmates’ who decided to buy a certain car because of the things they experienced together with other ‘classmates’ offline,” she said. “Not all of them are purely rational or highly knowledgeable about cars. Men are emotional, after all.”

Shen, who has been driving for 10 years, once taught a novice in the class how to improve his parking skills.

There is always something new to learn about cars, Shen said. Trying to improve the travelling comfort of his Mondeo, he finally replaced the car’s original Goodyear tires with much softer ones made by Michelin, as suggested by a study program arranged by the class.

Shen said he believes there are car functions he has not got a grasp of even after a long-time usage. But like many other car owners, he rarely has the chance to talk with carmakers, who generally remain aloof from car clubs. It is dealerships that sometimes act as their event sponsors.

Even then, dealerships rarely get the chance to keep in touch with car buyers, except when they show up for maintenance checks or serving. Events organized by car owners are ideal opportunities for dealerships to do some customer nurturing, Yu said.  

“But when carmakers themselves try to put on events for car owners and fans, they usually don’t have a clue what we really want,” she said. “They are pre-occupied with their own self interests.”

Tesla plans to introduce online format to China

Though being one of the forerunners of online car retailing, Tesla has been relatively slow to register its name in China, where its name in Chinese and Tesla.com.cn are both already taken by others. At the Detroit auto show, Shanghai Daily had a quick chat with Esben Pedersen, marketing and sales director of Tesla, about the company’s direct sales model and its trademark problem in China, where its official website has just been launched last month as Tuosule.cn.

How does Tesla plan to solve its trademark dispute in China?

We don't have a solution by now. Basically we will not pay what the guy that takes our name demands. We will either go to court and find a settlement, or win without going to court, or find a new name. We haven’t decided yet.

Which scenario you think is most likely to happen?

Tesla is Tesla. We love our brand. The best situation is that we keep our name. I think it’s very unlikely that we pay the full price or win the case without having to pay something.

Does the company view the trademark problem as a pressing issue?

Right now, it is not pressing because we are not delivering cars in China. We are not too worried about it. We have plenty of time to find the best solution.

What is so special about Tesla’s car retailing format?

The current way to sell cars is very expensive. There are a lot of people, the producer, importer, sales franchise, that need to make money along the value chain. We have total vertical integration and we own the entire customer experience. When you come to a Tesla shop, no one tries to sell you a car. The most aggressive approach the shop takes is to ask if you want a test drive while in traditional dealerships, some people feel almost “attacked” by those pushy salesmen.

How do you see the strong opposition from car dealerships toward the direct sales model?

The opposition is not an issue. When you have conflict of interest, you always have disagreement. So far, it seems we are winning the case in the US.

Do you think the Internet will take on a bigger role in vehicle retailing, like a mainstream distribution channel, in the future?

Yes. I think you will see it make a big difference, in 10 years rather than in one year though. Most people would like to try a car before buying it, so the local car shop will not disappear. We do “pop-up” stores in Europe, where we sell cars in very limited time at shopping malls, hoping to make the location a permanent one with enough sales.

 




 

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