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Internet sales is like “killing the goose that lays the golden egg”

Internet companies selling cars online at low prices is like “killing the goose that lays the golden egg,” according to the senior executive of a well-known dealer group with many years of experience selling cars in China.

He is also against “traditional e-commerce.” Not only did he explain why, but also shed light on how related conducts are unsustainable.

If manufacturers’ only goal is to sell cars, and internet companies can do it, why aren’t traditional dealers being replaced by internet companies?

This is because first, only dealers can provide aftersales services. For most products selling online, service ends once the product is delivered. But for cars, service starts on delivery. All repair and maintenance need to be done in bricks and mortar. Even before sealing the deal, dealers usually spend lots of money on test-drive and other services enriching the experience of the customer.

Secondly, dealers play a big part in building manufacturers’ brand image. The senior executive who declined to identify himself said that in his Porsche 4S store, the furniture alone costs nearly ¥3 million ($469,500), not to mention millions invested in maintenance equipment.

The third reason, which is easily neglected, is that dealers function as a buffer for manufacturers. They share manufacturers’ risks, which internet companies do not.

The perfect fiscal status for an automaker is sustaining “zero inventory” on both vehicles and parts. This makes it necessary for there to be a middleman, the dealer.

Manufacturers give up some of their profit to dealers that take inventory and become part of the manufacturers’ sales and distribution network. The existence of dealers, for example, allows manufacturers to react positively when the global economy faces a downturn.

Internet companies do not have the above functions but can attract potential customers for automakers. Internet companies usually offer lower prices through online price comparisons to lure customers.

Such low price offerings, however, damages the relation between manufacturers and dealers. It costs a luxury car dealer, for example, ¥250 million in operation cost (¥100 million for building and ¥150 million for cash flow). With lower price competition, the dealer is hurt in profit margins while at the same time it is still obligated to fulfil OEMs’ sales targets and service functions to customers. Dealers’ plight becomes even worse when the economy experiences a downturn.

AutoNation in the U.S. is now questioning the contribution of TrueCar to the market. Likewise, China’s dealers are also questioning the function of internet sales portals. The customer’s decision to purchase a car is not triggered by the vehicle specifications on their pages. Most of them already knew what they wanted before going to such portals to search one with a lower price.

According to the senior executive, the dealer groups’ luxury car dealer in Beijing sells 6,000 new and 2,000 used cars every year. The dealer sees little incentive in partnering with an internet company.

Moreover, disputes of internet transactions almost always involve dealers, leading to unbearable increased cost and shrinking profit.

The executive also argues that manufacturers cannot benefit from a price that is too low.

Cooperation between dealer group Yongda Auto and internet giant Ali Auto is like suicide for dealers, according to the executive.

Through the online cooperation, Yongda was selling SAIC-GM’s discontinued model at a deep discount. But the deal creates a crisis in the pricing of the new mid-level Chevrolet model, which may hurt the sales of the company’s B- and A-class cars. “Chevrolet already has a bad image. If it sells its old model at the price of a cabbage, the brand may be dead soon,” he said.

It is unquestionable that dealers are the most important link in automobile sales and distribution. A healthy and sustainable ecosystem in automobile sales is one where manufacturers, internet portals, dealers and customers can all benefit.

In the words of Shen Jinjun, president of China Automobile Dealers Association (CADA), internet companies may be forced to change in its competition with traditional dealers.

(Rewritten by Alex Bai based on author’s article published in Qiche Shangye Pinglun or Auto Business Review)

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