By on January 13, 2010

Can you deliver a six pack? (courtesy: The Washington Post)

The prospect of US launches by Chinese and Indian auto brands like Tata and BYD have at least one of the established US-market players in a paranoid froth. Honda VP John Mendel revealed a few of the nightmare scenarios that keep him up at night to USA Today [UPDATE: more on Mendel's fears at Automotive News [sub]]. One, inspired by BYD’s plans for a 2010 US launch without a distribution channel in place, is that newcomers could skip the dealer model altogether. Mendel worries that “warehouse stores or electronics stores” (sound familiar?) could be used to cut dealers out of the loop, “blowing up” business-as-usual for US distribution strategy.

Mendel’s fear clearly owes something to the post-9/11 paranoia of asymmetrical warfare: a new enemy, exploiting its smaller size to wreak havoc on an already-fragile system. Happily for America and its fine car dealers, fears of such asymmetry are typically overplayed. An industry that lives and dies on volume isn’t likely to be dominated by a firm that rejects a large-scale, dedicated distribution network. A BYD could theoretically get a toehold by selling its EVs through some other retail chain, but there’s nothing in the history of the car game to suggest BYD could really become a Toyota-challenging global player (as it aims to) without securing a US dealer network.

Mendel’s second mania is based on a equally shrewd insight into the American psyche, specifically our love for all things disposable. Like his direct-marketing theory though, it takes the insight a little too far. The prospect of a US-market version of a Tata Nano has Mendel worried that Americans could become accustomed to the concept of a “disposable automobile,” to the detriment of established players like Honda. He quails:

If you’ve just spent a few thousand dollars on a car, and it needs repairs, maybe you won’t fix it. Maybe you’ll decide you want a new one in a different color, and just get another one.

Maybe. Or, maybe you’ll decide you’re tired of driving a Kei car and buy something that can go faster than 70 MPH. Besides, a US-market Nano would still cost well over $5,000, which is probably enough to discourage too much disposable car mania.

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28 Comments on “Honda Exec: Chinese and Indian Automakers Could “Blow Up The Distribution Chain”...”


  • avatar

    “Mendel worries that “warehouse stores or electronics stores” could be used to cut dealers out of the loop, “blowing up” business-as-usual for US distribution strategy.”

    And when your Tata Nano craps out you can just call the Geek Squad at Best Buy.

  • avatar
    gslippy

    He should worry.
     
    The value-add of a dealer network for low-end vehicles is overplayed.  People routinely purchase online, and it’s not a leap to suggest that buyers might be interested in doing so with new cars.  He has heard of Ebay, right?
     
    In the bad old days, the variability between cars was such that it paid to select the ‘best’ one from the lot.  That need is gone.  All buyers need now is to see a representative example, and test drive one.  “Dealers” could work from home, keeping a Nano in their garage.  Ordering could easily be done online.  Service could be done at authorized centers, similar to electronics support.
     
    I don’t need a shiny building with a shiny salesman; that’s too much overhead that I’m paying for.

  • avatar
    chitbox dodge

    Yea they should worry. Wasn’t it Sears that had Allstate rebrands of Kaisers that could be bought in just about anyone’s hometown or out of a catalog? Fast forward 50 years and could the same scenario not be played out with a company like BYD and a Wa-Mart? Pep Boys is even already making inroads to that effect with el cheapo scooters, trail bikes, and “dune buggies.”
    As far as the concern for the disposable car, the big three have to blame themselves for that. No diehard “buy-American” type I know even in this day and age, has any real expectations of getting anymore than five or so years of regular use. They have been more or less conditioned that way from birth.

    • 0 avatar
      MadHungarian

      That is what Sears did and it failed miserably.  Also, I think Crosley tried to market its cars through appliance stores since, after all, Crosley also made refrigerators and radios.  And the Crosley was definitely the Tata Nano of its day.  There’s even a bit of a resemblance, like the Nano could be the natural result of 55 years of design evolution of a Crosley.

      So the track record for this isn’t good.  One would think especially that if anyone could have established a different car marketing channel, it was Sears in the 1950′s, which at the time was a national retailing powerhouse (hmmm, kinda like Walmart today) and had auto service centers at most stores (hmmm, kinda like Walmart today).  Yes, it might have helped if Sears had a better product than a badge engineered Henry J.

  • avatar
    lahru

    Oh, Honda does not have to worry. It seems that Mr. Mendel needs to go work in a dealership for a few weeks and get his head around what actually happens there. Here’s the rinse and repeat on what happens.
    You walk in and select the car you want to buy.
    You have the car you presently own sitting outside and unless it is already paid for you must payoff  the loan on that old car before you’ll qualify for another loan to buy the new one. Yes, if you have enough income you will qualify for two auto loans but I doubt many would buy the new one without the prospect of not having a buyer with cash in hand to rid yourself of the payments on the “old” one. So the dealer becomes your only source of securing a buyer for the old ride, hence trade in time!
    Now you have to secure financing , unless your paying cash, and I doubt many banks or credit unions would be eager to give you a loan based upon only a VIN as it might be current year, but is it new or used, they would want to know and in title hold states they need to be sure they are listed as lien holders and be able to hold someone other than you accountable should they not, some one with cash no less.
    Who preps and state inspects your car and make sure that all safety devices are in proper order when it is placed in your hands and can be held accountable if they are not and also makes sure that it complies with Federal and State emmisions laws?
    Should it breakdown who repairs it and has the trained people to fix it right the first time should it break? Be trained in warranty procedures and be confident that they will get paid by the manufacturer? Who handles recalls and has the facilties to be notified by the mfg’s to know what to do and has a parts department to stock whatever parts are needed? And last but not least, how can you be sure that with emmision and many safety warranties running out for 6 or 7 tears be sure that you will have a place to get the work done? Simply replacing a dealership with a Best Buy does not change the fact that you need to go to someone else to get your needs met. There’s the money, disposing of your old car, warranty, prep, cleaning the car for delivery, being shown how things in the car work, repairs and a facility that has properly trained personel and ….
    I’m tired of typing. You can dream all you want about this Nirvana of going online and selecting that hot new ride and having it dropped off at your house and it’s full of gas and nice and clean, seeing as you just more than a years salary on it and it runs like a top and if it breaks you’ll just what? Take it back to the check out isle at Best Buy, Give me a break!

    • 0 avatar
      carguy65

      Ed, Honda should worry, Chrysler  and anyone selling basic cars and trucks should consider a different channel for selling cars.  Oops they have no choice do they.  Even with bankruptcy. The consumer HATES going to the dealership. They hate  the experience and the dealer who charges too much for service. Only politicians like the dealers.  Blow up gorilla’s don’t make them any more welcoming.   They are traps.  Internet shopping is fearless. The consumer loves buying online or going shopping in general. I would like to order my car like my laptop or I-phone and if it fails me turn it in for a new one, same day and drive off with a new or reconditioned one.  It is just a matter of time before this happens in my opinion.  Eventually you can buy with or without the warranty once they put the repair parts up online.   There is enough competition now for this to happen. 

    • 0 avatar
      carguy65

      Hey Lahru,
      Your post shows exactly why whoever does this first and right will be a huge success.   Just like with transmissions now,  almost all repairs will be done by centralized repair centers or trucked enmass to the factory.
      If done properly it will appeal to people who want a bumper to bumber warranty or to people who want to fix by themselves.  But the repair parts neeed to be made readily available and not at the typical 10X price so that local shops can assist or do the maintenance.  

    • 0 avatar
      carguy65

      Hey Lahru,
      Your post shows exactly why whoever does this first and right will be a huge success.   Just like with transmissions now,  almost all repairs will be done by centralized repair centers or trucked enmass to the factory.
      If done properly it will appeal to people who want a bumper to bumber warranty or to people who want to fix by themselves.  But the repair parts neeed to be made readily available and not at the typical 10X price so that local shops can assist or do the maintenance.  

    • 0 avatar
      ihatetrees

      Who preps and state inspects your car and make sure that all safety devices are in proper order when it is placed in your hands and can be held accountable if they are not and also makes sure that it complies with Federal and State emmisions laws?

      Yeah, certifying indy shops to do that would be freakin’ impossible.
      A more important question:
      Who makes the appropriate kickback paymentscampaign contributions to  state legislators to keep laws on the books that prohibit manufacturer quality control of dealerships’ practices?

      Should it breakdown who repairs it and has the trained people to fix it right the first time should it break?Be trained in warranty procedures and be confident that they will get paid by the manufacturer? Who handles recalls and has the facilties to be notified by the mfg’s to know what to do and has a parts department to stock whatever parts are needed?

      Two words: “Bill Heard”
      Yes, there are good, honorable dealers. But the system does nothing to encourage their existence and actually encourages borderline unethical practices  (like 72 month loans on vehicles with a history of Enron-grade depreciation – Hello GM!)
      Separating the sales and repair functions could work.
      Some day someone will get it right and make a pile – if the G stays out of the way.

    • 0 avatar
      njoneer

      Ugh. Now that you spell it out in detail, I think someone SHOULD blow up the distribution chain.
      Yes, China, please come up with  a new plan for sales and financing and service.

    • 0 avatar
      chitbox dodge

      In theory, if the new car buyer knew the car was disposable, who gives a rat’s ass if it breaks? I’d also be willing to bet that the person looking for low low low buck transportation with four wheels and a roof as their only requirements, ain’t gonna be to picky about the soft touch plastics being gone and the radio only picks up two channels fuzzy and scratchy. Who needs a warranty if you can get a new one for the same cost as replacement or a free replacement if it breaks down in a year? See Harbor Freight tools as an example.

  • avatar
    James2

    Didn’t Daewoo try to bypass the burden of establishing dealers as well?  My memory is fuzzy here but I recall them trying the direct-sell approach.

  • avatar
    lw

    It’s about time…    Cut a deal with Wal-Mart…
    Buy the car at Wal-Mart/Sams…  They ship it to the store.. and train the guys in the Wal-Mart/Sams tire centers to service them.
    Would immediately create a massive dealer/service network that would rival everyone else.

    • 0 avatar
      cory02

      +1.  Wal-Mart couldn’t do any worse than some dealers.
      Most car buyers either know more than the salespeople about the cars they are looking at or aren’t really interested in anything other than going from point A to point B.  So you don’t really need a salesperson, just someone to ride along on test drives and fill out paperwork once the car is purchased.  If the cars are built right, most of the attention they need is things Wal Mart already does (fluid changes, new tires, etc.).  For more difficult service, I’m sure there are plenty of ex-GM or Chrysler dealers that would work on anything if the price was right.

  • avatar
    Neb

    Mendel is both right and wrong to fear ‘disposible’ cars. While many consumers view cars as disposible appliances (otherwise the Chev Cavilier would have vanished years ago) in North America we have so many cars that all sorts of (less) disposible cars can be bought for the same money. It’s one of the reasons the old Geo Metro was such a hard sell. Why pay 10 K for a 1.3L embarrasment when the same money can get you a lightly used Honda or Toyota?
    As for “blowing up” the supply chain, that sounds a bit more plauseable. The lower end of the market is very price sensitive, so cutting out the dealer would be a sensible way to save money. The only function dealers do that can’t be replecated more cheaply outside of the dealer network is warrenty work/customer service. Considering how many dealers are existing on the margins, it seems you’d have a good market to subcontract out to. Hell, you could survey the local area and only offer your little subcontract out to a dealer only with a sufficently good customer service record, revoking it if the dealer got too shoddy in it’s service. That’d give you another advantage, since you could have more control over your service provider, and not have to worry about some greedy asshole dealer souring a local area on your brand.
     
     

  • avatar
    john.fritz

    …Americans could become accustomed to the concept of a “disposable automobile”…

    We already have disposable automobiles, plenty of them. The Kia Rio is one that comes to mind.

    • 0 avatar
      kol

      How does this make your point? The Kia Rio doesn’t sell that well, doesn’t create a high profit margin, and is generally regarded as terrible. New auto makers want to AVOID that example, not take it as proof the market is ripe for their arrival.

  • avatar
    eastcoastcar

    I’ve been waiting for this. A ‘disruptive change agent’ to come along and destroy the existing regime. Like the Model T, we could buy these cars at Sears, fix them ourselves (or community college graduates could go into business as repair stations), and blow the Big 3 or 4 or whatever, away. Let’s have the same with banking and loans—Indian banks off shore making loans online, depositing funds in their off shore systems, etc. And the last bastion is: medical care. Let’s have off shore cruise ships staffed with Cuban, Chinese and Indian doctors—you take a yearly cruise and get dental and medical care, and via online, you keep your doctor up to date with your vitals and get prescription drugs via FED EX, sent from off shore.

  • avatar
    Bill Wade

    Honda has a WHOLE lot to be worried about. As carguy65 pointed out, there’s a lot of people that consider cars as being no different than a laptop or TV, especially a lot of kids.  All they care about is the thing starts, doesn’t break, gets good mileage, cheap to insure and has a killer stereo with an IPod dock.

    When it fails trade it in for another one similar or just like it and go on about their way. This model will work if the manufacturer of these cheap appliances make sure it’s very reliable and have an easy process to swap them out at reasonable cost. I have kids that absolutely could care less about cars as an object of desire. If it goes and stops with no problems then they are happy. They are much more excited about computers, trick cell phones, movies and friends than they apparently will ever be with cars

  • avatar
    kol

    Well, I agree that someone – not just Chinese or Indian companies, but anyway – could cause disruption by re-thinking the traditional dealer. I think most buyers really think of dealers as dreadful places to be, and it seems silly that no one has come up with a means of selling cars which customers don’t actively hate (although I suppose online sales are growing very popular).
    However, BYD and Tata? In America? I can’t believe anyone in a major auto manufacturer would worry about that, but I guess Honda has been acting very strange as of late.
    Americans are not going to buy the Nano. They’re too small, they feel too cheap, they don’t cater to our desire to have a lot of bulk around us in our vehicles. Despite the focus on small cars in the automotive press, the sales numbers speak for themselves. Small cars are still vastly less popular than mainstream pickups and mid-size sedans, and they will continue to be unless gas hits ten dollars a gallon or some other crazy event occurs.
    Now if some new company had an amazing new sedan to sell, then it would be reason to worry. But they don’t. So there is no need to freak out yet.

    • 0 avatar
      gslippy

      Americans are not going to buy the Nano. They’re too small, they feel too cheap, they don’t cater to our desire to have a lot of bulk around us in our vehicles.

      You could have written that in 1970 about Toyota, Honda, and Datsun.  People said it in 2008 about the smart fortwo, but I already see more of them than the Ford Flex.

      People hate the dealer experience.  They routinely purchase PCs online that cost as much as small cars, and service happens at independents, or by travelling repair shops.  I even got my current mortgage online, and that was in 2001.  I never spoke to a person until the closing, and got better terms than I could have by walking into a bank ‘dealership’.

  • avatar
    tubacity

    “Blow up the distribution chain.”?  Why not question it?

    Cannot bring many tears when Honda Sales cries “wolf”.  They are profitable.  Have bad memories of the local Honda dealer.  When times were very profitable for Honda, I found the local Honda Dealer charged thousands of $$$ added dealer markup on every new vehicle.  Remember the arrogance of the Honda Dealer Order Taker.  “Take it or leave it” attitude.  (Left it.)  Why not allow another distribution plan?

    Back in 1993, Honda Sales and some dealers were part of a big bribery scandal.  See short quotes below.

    http://www.nytimes.com/1993/06/29/business/company-news-honda-settles-on-dealer-s-charge-of-bribes.html?pagewanted=1

    “In lawsuits around the country, dealers and former executives have testified that Honda sales executives solicited bribes or accepted payments and gifts for cars and franchises. Although Honda says payments or gifts worth more than a nominal amount are against company policy, its executives have acknowledged that it has dismissed a few top sales executives over the last two years for violating that policy. ”

    http://www.amazon.com/Arrogance-Accords-Inside-Story-Scandal/dp/0965776611

    “Arrogance and Accords: The Inside Story of the Honda Scandal is the tale of the largest commercial corruption case in U.S. history. Between 1994 and 1997, eighteen former executives of American Honda Motor Company, along with four other people, were convicted on federal fraud and racketeering charges. The big secret at Honda was out: Over a 15-year period, the gang of greedy Honda officials had received over $50 million in cash and gifts from automobile dealers eager to obtain additional hot-selling Honda cars and franchises. The ill-gotten booty included briefcases stuffed with up to $750,000 in cash, palatial homes, luxury German automobiles, secret ownerships in dealerships and other businesses, and Hong Kong shopping sprees. ”

    Why not allow another distribution plan?

    HOW selfish a still profitable manufacturer gets when the Status Quo of their cozy arrangement gets questioned by a small upstart with a model that has never succeeded. 

  • avatar
    John Horner

    One problem any newfangled seller of automobiles faces is how to deal with the trade-in problem. I suppose they could simply sell all of their trades to CarMax or at auction though.

  • avatar
    stuki


                    How wonderful wouldn’t that be! Buy a car from anyone, anywhere, without having to worry about dealer this and dealer that. I can see American Honda, which is already stuck in idiotic contracts with politician sponsored (or was it the other way?) car dealers being a bit worried, though. For the rest of us, regulatory arbitrage is always a good thing, just as it was when the Japanese brands “circumvented” the UAW.
     
                    As pertains to disposability, the more cars rely on rapidly changing and changeable electronics and software, the shorter their reasonably up to date shelf lives will become. And if necessary electronics becomes what’s limiting cars’ longevity, over engineering the mechanicals becomes simply a waste.
     

     

     


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