7:20 am, October 29, 2022
Car manufacturers are at a critical crossroads as they enjoy record profits thanks to short supply.
That’s the view of automotive research and consulting organisation ICDP.
In a new executive briefing, it says the sector can either learn from the benefits delivered by the current crises or it can fall back into old habits that will fundamentally undermine the journey towards an omnichannel experience, digitalisation and strategies such as the agency model that aim to get closer to the customer.
ICDP associate director Ben Waller says: ‘Short supply has delivered record profits for carmakers and dealers via long lead times and low inventories, record high levels of customer build-to-order, record low discounts and reduced marketing and promotional costs.
‘This success has, let us be frank, been delivered not by carmaker strategy but by external forces – a bullwhip effect at the global macro-economic level that was caused by the pause and resurgence in the global economy during and post-Covid.’
He said that had been made worse ‘by subsequent global trade tensions and rising materials prices’.
Carmakers made the best of things, Waller points out, but he asks if – with inflation rising and the prospect of a global recession – they can ’embed the recently proven solutions in order management, and dust off other underused but proven solutions for inventory management to sustain healthy profitability as demand weakens and supply chain capacity returns’.
He says rising energy and commodity prices are already hitting bottom lines, with demand expected to lessen as inflation, interest rate rises and recession hit people’s willingness to buy and borrow in Europe and further afield.
Waller points out that carmakers have previously relied on continued growth in China to offset problems elsewhere, but more economic weakness and a growth in China’s domestic capacity will increase the risk of a worldwide recession as well as gaps in volume aspirations.
He says manufacturers have been streamlining their businesses because of the pandemic and microchip shortages – cutting costs, securing new vehicle supplies and stabilising production.
They have also been reducing options for customers, with half the number of body-engine-paint offerings now available on petrol and diesel models since 2014, and a staggering 93 per cent less for battery-electric vehicles in the four main European markets.
Waller cites a Bernstein Research report as well that ‘supports our analysis of the ongoing balance between constrained supply and fragile demand leaning very clearly to ongoing short supply and strong prices’.
He adds: ‘Their analysis also emphasises lengthening lead times, despite slowly recovering inventories in some markets such as the US, and the strength of demand apparent in sustained low discounting in Europe and the US.
‘Russia’s invasion of Ukraine has already added to post-pandemic inflation, and the apparently increasing threat to global security is adding even greater uncertainty to markets in Europe and beyond.
‘The industry is therefore at a critical juncture and potential moment of transformation.
‘The record profitability and low inventory presents an ideal opportunity for carmakers to declare a clean slate, a fresh start and embed known and proven good practices to deliver an omnichannel experience to customers that offers transparent stocks and predictable lead times, alongside a more financially robust and manageable sales supply chain.’
Waller says people are after ‘a seamless online and offline experience, and this means there should be no material difference between the nationally advertised product offering and the offer presented at the local retailer’.
He adds: ‘The need for a transparent and universal offer across online platforms and in person at the dealer subsequently requires that all finished unsold vehicle inventory pipeline, and unbuilt order pipeline, should be available to the customer as one clear picture, rather than hidden in multiple silos, each owned and managed by different parties.’
The logical solution, he argues, is for car manufacturers ‘to adopt central ordering, ownership and management of finished vehicle inventory – which is also a requirement of the agency model being adopted by a number of the brands anyway’.
Waller argues that the combination of an effective build-to-customer-order capability and a centralised inventory management approach can mean a 2.8 per cent net gain in profit.
He warns that if demand softens into 2023, as expected by many, then a supply shortage could quickly become an oversupply problem.
‘Whether carmakers will retain their interest in agency, especially if inflation and demand begin to head in opposite directions, remains an open question.
‘But the opportunity exists to start with today’s efficient and profitable supply chain, make that sustainable and embedded, and derive very real benefits for all stakeholders before potentially making the second stage leap to agency.’
He concludes: ‘Whether carmaker innovations such as subscription and the shift to agency survive a more volatile market remains to be seen, but at the least, they should get core business in shape first, supplying product in a strategically and tactically optimised way before extending their operations into…the new world of retail operations and price management.’
