How Should Audi Sell Its Cars?

In my opinion, SAIC should be smart enough to adopt a whole new sales model in their cooperation with Audi. This must be something innovative, efficient, low-cost and continuously profitable and totally different from the traditional network, dominated by 4S stores.

At this point, what is needed most is a rational and constructive attitude.

How exactly should Audi sell its cars? In the company’s 30 years in China, this question never aroused such heated discussion among the auto industry and the media until SAIC and Audi announced that they are going to establish a joint venture. No matter how people interpret and comment on this move, in the end, the stakeholders have to figure out a way to move forward. This needs negotiation and compromise; otherwise it will be a lose-lose game. At this point, what is needed most is a rational and constructive attitude.

Q: Some propose this solution to Audi’s sales network – FAW, SAIC and Audi establish a joint FAW-SAIC-Audi sales company, and all Audi cars are sold through the current FAW-VW-Audi dealer network, which can be renamed. In this way the products and customers of the current FAW-VW-Audi dealers will not be decentralized, so their interests will not be affected, and SAIC-Audi will be spared the expense of building another network, which will help them save costs and achieve efficient allocation of resources. What do you think?

A: This sounds like a beautiful mistake. FAW and SAIC have different requirements for themselves and for Audi. For example, with the same power performance and configuration, the four-door Audi A5 should be priced more than RMB 20,000 Yuan higher than the A4 (in Germany, the A5 is priced Euro 3200 higher than the A4). If FAW-Audi focuses on increasing sales while SAIC-Audi focuses on increasing the brand[1] premium, the result is very likely to be that in one dealership the FAW-Audi A4L with an MSRP of RMB 300,000 Yuan is sold at RMB 250,000 Yuan, while the SAIC-Audi A5 with the same configuration is sold at its MSRP 320,000 Yuan. In this way, the price difference expands from a nominal RMB 20,000 Yuan to an actual RMB 70,000 Yuan, and as a result, customers who plan to buy the A5 will very likely change their minds and buy the A4. In the end, FAW-Audi and SAIC Audi will be caught in a price war, and dealers will again become the fall-guys who have to pay out of their own pockets to sell cars.

Different products under one brand are part of the same pricing structure, and thus there should be reasonable price differentials between them. However, if FAW-Audi and SAIC-Audi have different interests, it will be very difficult for them to align on product pricing, not to mention on price reductions and market promotions. In addition to price, the two companies will also find it hard to align on commercial policies, such as the extent of dealer rebates and the conditions that apply, whether to give dealers subsidies, how much the subsidies should be, and who should provide these subsidies. Therefore, this proposal is not workable.

Q: I remember you said years ago that in order to end the conflict between FAW and GAC over the local production of Lexus, a FAW-GAC-Toyota company could be established, with Toyota holding 50% of the shares and FAW and GAC holding 25% each (see the articles “Is It Unnecessary for Lexus to Start Production in China?” and “The Dilemma of Lexus in Local Production”). Why won’t this kind of solution work for Audi?

A: I was talking about the Lexus production joint venture. Of course, even in terms of production, there will still be a lot of elements requiring alignment between the two Chinese partners, but in this case, it will be much easier as there is only one sales company and it shares the same equity structure as the production joint venture. Among all foreign brands, Lexus is the one that attaches the greatest importance to sales. It pursues zero inventory and targets build-to-order, and on various matters ranging from sales targets and prices to products and their specifications, the sales company has the final say. So the Lexus manufacturer in Japan is in fact the OEM of Lexus sales company in China (see the articles “Is It Feasible to Sell Cars with ‘Zero Inventory’”and “Zero Inventory! Tetsuya Ezumi’s Lexus Marketing Reform”).

However, the proposed FAW-SAIC-Audi sales company is different. It is one brand against two manufacturers, who are both tough to handle. So it will be too difficult to achieve alignment on everything unless Audi has absolute say in the sales company (the authority has no written restriction on the shareholding of auto sales companies) and builds a marketing-led production and sales system, just as Lexus did. But in that case, FAW-Audi and SAIC-Audi will be pure OEMs, which is something they will never agree to.

Q: Some say that if SAIC-Audi and FAW-Audi use two separate dealer networks, it will only lead to a lose-lose situation. Any thoughts on that?

A: Who said anything about SAIC-Audi building a dealer network exactly the same as FAW-VW-Audi’s? In the current climate, auto dealers are finding it much harder to do business. Everybody knows that Audi dealers, who used to make money with barely the slightest effort, are now suffering serious losses. In the auto industry, there has long been a discussion about the last days of the 4S store model. In this situation, SAIC-Audi would be crazy to build a standard dealer network and try to reap some profit from FAW-VW-Audi dealers, who are already losing money.

In my opinion, SAIC should be smart enough to adopt a whole new sales model in cooperation with Audi. This must be something innovative, efficient, low-cost and continuously profitable, and totally different from the traditional network, dominated by 4S stores. The FAW-VW-Audi dealer system is too set in its ways to be able to accept such innovation, but SAIC-Audi does not carry any such burden and can adopt some advanced marketing model, including new top-level design, planning and deployment. This is perhaps one of the important reasons why Audi chose to work with SAIC.

Q: What will that model be like?

A: Simply speaking, it should be like this: SAIC-Audi will only have to set up a very small number of high-cost 4S stores; it will sell most of its cars through low-cost showrooms or brand experience centers established in the main commercial districts, as well as through interaction with its own e-commerce platform. This will greatly reduce selling costs. SAIC-Audi will direct after-sales repair and maintenance services through the e-commerce platform to FAW-VW-Audi’s current 4S stores. If conditions permit, these maintenance services might even include home pickup and delivery. Customers can rate and choose dealers’ services on SAIC-Audi’s e-commerce platform so that dealers will be managed and promoted or eliminated by customers rather than the manufacturer, and the manufacturer will no longer have to spend a lot of money in conducting unannounced inspections on dealers and hiring investigators to appraise them. This e-commerce management will not only save substantial network construction and management costs, it will also lower the manufacturer’s risks of violating the antitrust law in dealer management. For FAW-VW-Audi dealers, if SAIC-Audi can provide customers with maintenance services including home pickup and delivery, these dealers will be able to utilize their idle maintenance capacity on weekdays (from Monday to Friday) so that they can make money through repair and maintenance services even if they are suffering losses from their car sales.

This model is similar to the one adopted by Tesla and Borgward, and very different from the traditional dealer network for luxury brands which is dominated by 4S stores (see the article “Does Tesla Know Better How to Sell Cars Than Traditional Car Makers?”). The only difference is that Tesla and Borgward uses reliable third-party maintenance service providers, while SAIC-Audi cars will be maintained in the dealer network under their own brand. This is actually a win-win choice for the integration of SAIC-Audi and FAW-Audi sales service channels.

Unfortunately, many people don’t see this and still envisage SAIC-Audi’s future sales service network following traditional lines.

Q: The thing is, FAW-VW-Audi has invested so much in building and managing the dealer network - will it be willing to let SAIC-Audi use its own network?

A: It seems really unfair. But let’s face the facts – can they really make their dealers profitable? If not, when someone offers to help them, can you really say “No, I’d rather let them starve to death than give you what you want”?

On the other hand, FAW-VW-Audi can also consider asking SAIC-Audi to share some of the huge costs of its dealer network - especially dealer training and management costs - in proportion to SAIC-Audi’s future sales. Both sides can negotiate on how to address such specific issues.

Q: If SAIC-Audi is established, can this sales service model you have just described really bring about changes to Audi’s business in China?

A: I believe it can, but it will take time. I guess SAIC-Audi won’t be up and running for another 2 years, but the most difficult time for FAW-VW-Audi has already begun – this October, Audi sales saw almost zero growth and wholesale even dropped by 8.6% on a year-on-year basis. The Audi A4L, a new vehicle model, sold only 6,229 units at the wholesale level, down by 41.1% on a year-on-year basis. And that was at a time when retail prices were significantly reduced and dealers were taking a substantial hit.

A month ago, I ran across an Audi dealership investor in Capital Airport. We hadn’t been talking long before he started to complain about how much he was losing by selling Audi cars, and that the shareholders of FAW-VW-Audi did not care about the their dealers at all as long as they were making money. I have also heard complaints from other friends who work for FAW-VW-Audi. In fact, there are also other rumors about what is going on in this joint venture (see the article “Stories behind the Tie-up of SAIC and Audi”)l. Taking all this into account, I’m afraid FAW-VW-Audi has already found itself in the overstocking trap (see the article “End of the Era When Car Sales Relied on Overstocking”). Mercedes Benz and BMW have already been there and now it is Audi’s turn. As for how serious this problem is, I’m afraid it won’t be any better than what happened to Mercedes Benz around 2012 – a sharp fall and later minimal growth in sales (see the article “Has Mercedes-Benz Changed? ”)

The cooperation between Audi and SAIC is nothing more than a trigger to this long brewing crisis. In other words, even if SAIC and Audi give up on the idea of cooperation, it will not save FAW-VW-Audi. Now the only escape route for FAW-VW-Audi is that the three shareholders should clearly understand the market situation, give up unrealistic sales and profit targets, allow the management to set reasonable targets, dealer policies and a network construction plan based on market demand and dealers’ profitability, and at the same time make thorough adjustments to the company structure, business processes and manufacturer-dealer relations. This will require great courage and wisdom from all three shareholders.

Obviously, Mercedes has learned its lesson from the overstocking crisis. Li Hongpeng (Deputy Executive President of Beijing Mercedes-Benz Sales Service Co.) once told me, “We have never seen the relationship between auto makers and dealers as clearly as we do now”. After more than a year of adjustment, Mercedes Benz finally recovered from the crisis. Though it is now developing rapidly, it still bears in mind the hard lessons it learned from overstocking and remembers to keep its dealers’ interests at heart.

BMW, after experiencing the crisis of the huge claim filed by dealers at the end of 2014, straightened out the manufacturer-dealer relationship all over again and has already got its sales back on the right track. Now it is time for FAW-VW-Audi to make some changes.