(De)Centralization in Automotive Retail

The (de)centralization of markets has always been an important topic in politics and business. Among our customers, we perceive different approaches in both directions in recent years.

We asked ourselves the following questions:  Why is this the case? Why are different approaches being taken in the automotive industry? What does this mean for dealers? And how are new competitors in the market organized? Read more about it in our latest impulse. We look forward to your feedback.

“How much power and authority should I give to our manufacturer’s local markets and which processes should be controlled centrally from the headquarters?” – a question that many executives in our industry ask themselves.

To approach the questions raised in this impulse, we want to illuminate the aspect from a processual & systemic, financial, and legal perspective.

Concerning processes and systems, classic arguments from business management quickly come to mind. Managing processes and systems centrally enables exploiting a variety of synergies. Decision-making processes can therefore be driven forward faster. On the other hand, the individual demand of the individual markets may not be considered thoroughly because responsibilities and knowledge are not present where the challenges arise.

If we look at the issue from a financial perspective, it becomes clear that decentralized approaches enable success to be localized in the manufacturers’ markets, thus ensuring greater transparency about the performance of individual business units. This increases identification with the job and motivation of the people involved. On the other hand, there is the problem of transfer prices within a company, which, viewed at the macro level, leads to efficiency losses.

From a legal point of view, decentralization in the international automotive industry entails the risk of being confronted with different interpretations of the law. Moreover, distinct legal organization entities can create additional challenges and administration. Unfortunately, even centrally organized automotive manufacturers must contend with difficulties from a legal perspective. For example, when it comes to rights of system use for individual markets or data protection issues.

Theory besides – what does that mean in practice? Anyone who reads our Impulse regularly knows that, in our view, the most significant development in the industry is the trend toward online business – mainly for sales, but also for aftersales. Many manufacturers are counting on their vehicles being sold increasingly via the Internet in the future and no longer exclusively through dealers. If we follow this assumption, there are some conclusions for this analysis from our point of view:

In terms of processes and systems, it may be understandable that different stores use, for example, different salesperson workstations and different dealer management systems – in other words, decentralized approaches are taken. However, if an online business is to increase in the coming years, we believe it is advisable to no longer develop processes and systems locally but to provide them centrally and adapt them locally. Here, one can also look at learnings from other industries: Understandably, every travel agency needs its software to sell travel – but when Lufthansa sells flights via its homepage, this is worldwide implemented via a uniform system.

From a financial point of view, a certain degree of autonomy in the markets is advisable in traditional retailing. In controlling, for example, are many activities such as premiums and bonuses involved in the settlement. In our perception, this construct is greatly simplified in the agency business. Vehicles are offered at certain fixed prices with much less room for negotiation for the customer and thus for the market itself. The hypothesis is supported when looking at relatively young competitors such as Tesla or Aiways: they implemented quite rigid pricing models.  In our expert opinion, centralized approaches will prevail in the future.

The agency model will have a low degree of impact on the above-mentioned legal perspectives. Therefore, no significant derivations to the question of (de)centralization result from a legal perspective. In the first step, the business only shifts from the geographical regions of a market to the market itself, which does not entail any change in legal terms for the time being. To conclude, the current development in the business towards online sales and away from the retail business certainly presents manufacturers with new challenges in organizational structure. It is at least questionable whether the effort for decentralized sales organizations will still be worthwhile in the future. New competitors are already going down centralized paths, and it remains to be seen whether the “classic” automotive world will follow them.

Tobias Bald

Partner

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