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Auto Sales in Australia Set to Witness Paradigm Shift

There are two ways a manufacturer can sell to the public, either through its own channels or using franchises. As an example, General Motors, which also produces the Holden, is all for the franchise model, while Tesla, which entered the Australian market in late 2014, insists on selling its cars directly. 

How the sales model affects car sales

A direct sales model means that the manufacturer is responsible for both sales and service. There is likely to be a better experience with both, as any actions on the part of the sales/service personnel would reflect directly on the brand. The reason behind GM and a lot of Japanese manufacturers choosing to opt for the franchisee-driven sales model is because it saves them from a making a lot of investment in service centres. Given their sales numbers, this would be considerable. It is the franchisee who sets up the service centre, recruits sales/service personnel, and have them trained by the manufacturer.

However, this also leads to complaints of poor service from buyers. With social media use on the rise, negative publicity has a major effect on sales. In today’s multi-channel world, it is very important that a company focus on the customer experience. How GM, Toyota, Honda, Ford, and Hyundai manage to keep sales intact is by appointing multiple franchisees for the same area. This results in intense competition, and cut-throat discounts that ultimately mean squeezed margins and lower profits.

According to automotive research study undertaken by ACA Research, vehicle cost as well as cost of borrowing or financing and the prospect of carrying debt are among the top factors that influence car sales both new and used. According to the Automotive Finance Insight report 2016published by ACA Research (soon to be released), 37% of respondents said they saved money to avoid borrowing, 24% did not want to pay interest, and 23% simply did not want to incur debt. The report, scheduled to be released before the end of the year, provides a series of insights on the automotive industry and state of vehicle financing in the auto sales in Australian market.

How do dealers make money?

New car sales have an estimated return of only 2.2%, which barely cover the costs of setting up and/or running a service centre. Thus franchises have developed clever ways to make money that include a variety service centred, value-added options and add-ons, and from used car sales (they certify cars from the same manufacturer and sell them as ‘pre-owned’ vehicles, often asking for a premium over what local used car dealers charge for the same model). According to the same ACA Research report in 2016 34% of all car sales in Australia involved used vehicles compared to 2015 where only 28% of sales were for used vehicles.

The Tesla impact 

So far, there has been no ‘market disruption’ as trade analysts like to call it. Tesla sells cars priced around $125,000 or greater and does not compete with the mass-market manufacturers. Both sales models continue to exist side-by-side in the Australian and Asia-Pacific markets, with 91% of car buyers continuing to purchase from dealerships.

However, underneath the surface, there are signs of change. Tesla has outpaced Audi, BMW, and Mercedes to become the top seller in the US luxury car market. In Australia, it has sold roughly 600 cars against industry segment leader Mercedes’s 1,100 (both figures for 2015). In Hong Kong, it sold 1,162 cars in 2014 (the year it entered the market), and this has now more than quadrupled. As it looks to enter more markets in the Asia-Pacific region, it seems likely that high-end car manufacturers, who depend on the franchisee model, will be the most hit, with the effect trickling down to the mass manufacturers.

Yet the market impact of Tesla’s Model 3 release scheduled for 2018 is expected to shake the market up again. Tesla reports that it has taken nearly 373,000 pre-orders for the Model 3 an electric vehicle expected to come to market at a starting price of $35,000 USD (with Australian pricing expected to be announced in early 2017). With Tesla now aiming to straddle the mainstream and luxury auto market, a shift should be expected. What form that will take on the road to 2020 will be the stuff of analyst discussion as we exit 2016 and take the on-ramp into 2017.

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Topics: Financial Services Automotive Research