April 30, 2009

Can Web 2.0 rekindle America’s love affair with the automobile?

As many of you know I made the decision to go back to school this year and have been attending an extended learning program at MIT Sloan School of Business. I have my quarterly meeting in Cambridge coming up and was reading through my assigned case studies this weekend. One of the readings concerned a supply chain situation at Ford that was taken from events earlier this decade. I don’t know if the professor was looking to evoke this line of thinking, but I started wondering if the automobile world could transform itself and convert to the Dell distribution model. So while this is outside the realm of my normal blog topics I am hoping to leverage this forum to get some quick feedback for this zany idea.

The Dell Direct Model has been very successful from a supply chain and margin contribution perspective. Dell Direct is a business model that eliminates the traditional distribution channel and goes directly to the consumer. Traditionally, as is in the case of Ford and others, there is a supply chain that supports the manufacturer (the “brand”); the finished goods are shipped to a variety of distribution outlets and the consumer selects a branded product from one or more of these outlets.

Dell broke this model by using a Web 2.0 enabled business model that removed the traditional hardware distributors and opened a line of communication directly with their customers. They also ensured/marketed that the computers they sold would be customized for each client and delivered to their home. They built a website with a well defined on-line configurator and allowed the consumer to craft the PC of their choice.

Stick with me – I know this may sound crazy, but with the automobile industry in chaos-wouldn’t this model work for cars just as it has for computers?

One of the many problems with the auto industry is over supply. In 2008 manufacturers had the capacity to make 17 million cars annually to support a 10 million domestic car demand. The current cost-to-market structure and low margin of profit per vehicle has collectively rendered auto company business plans not successful at the 10 million vehicles sold rate. Regrettably, the industry has continued to blindly build significantly more than 10 million cars, go deeper in debt and is now financially and credibility bankrupt.

By changing their go-to-market strategy Dell proved they could derive stronger margins, control their inventory costs and nurture a very satisfied consumer base. So what would this mean for the car buying consumer? First the buying experience would change dramatically. Showrooms would be totally reconfigured with more interactive displays and computer simulations but the overall footprint would be reduced dramatically. Sure the auto dealers would need to have a few, very few, new models in stock for the person who just wanted a good, better or best model and wanted a new car today. There would still be used cars, but for a new car the majority of us would configure our new car, do the paperwork and have it arrive 3-4 weeks later. Or, we might never visit a showroom and simply configure and buy the car on-line.

If you let your mind wander a bit and if you have ever configured a Dell system you can begin to think about how this buying experience might work. Packages and promotions would be similar. Like a free upgrade to a XM/Sirius radio instead of an upgrade to a DVD Burner from a standard CD drive. How about custom wheels in lieu of an extended battery? Door to door shipping is a premium option, but a cost-efficient pick up area near a rail distribution hub could provide the lowest shipping cost option.

The advantages of this system could be remarkable. The cost to build and maintain (just think of the property tax savings in some states) a dealership would be significantly reduced. Even rural communities would be better supported with this model. While the assembly-line process would need to evolve to ensure overall vehicle costs do not rise dramatically, the advantage of knowing your exact demand would eliminate excess inventory and floor-plan costs would be dramatically reduced. Because manufacturers are primarily shipping product on demand it is likely transportation costs would improve – the carbon footprint would also be reduced.

I can imagine unique designer packages for interiors that are truly unique. Resale values might hurt downstream with some poor choices, but why not a Martha Stewart, NASCAR, or NCAA interior of your choice? All would add license opportunities and potential additional revenue. Buying online also provides click through revenue from alternative financing sources or custom items from tailpipe extensions to HD-DVD systems made for the vehicle, but not available from the manufacturer.

More importantly, just like Dell, the auto manufacturer would begin to know what motivates the consumer and cars would evolve just as PCs have to meet the usage demands of the consumer. Lower R&D costs, fewer miscalculations (can anyone say Pontiac) and an overall improved track record for consumer loyalty. Can you imagine blogs and twittering by designers, engineers and quality assurance folk who were sincerely interested in market feedback?

There are a number of specific business planning details I will need to construct before going to MIT next week, but help me out with a little informal survey…would you buy a car using a system like this? If not, why not?

THIS JUST IN -- Chrysler files for Chapter 11 (http://tinyurl.com/d3f5kf) -- are they better off dead or alive??


23 Responses to "Can Web 2.0 rekindle America’s love affair with the automobile?"

@reggiewideman said... April 30, 2009 at 3:09 PM

I would and you sort of can on cars.com today. I imagine your model would allow for a greater level of granular customization. The trick is though, it's a car not a laptop. Disposable income is most quickly acquired on disposable purchases (1,500 vs 15,000 is a big difference). Most car purchases are not impulse purchases. Most car purchases don't end up on a credit card to be briefly forgotten paid off later.

The trick is, much like Dell attempted with the defunct Mall kiosks, is that you still need a local presence. Perhaps this is something that could work in conjunction with an auto rental firm or one of the hourly firms like Zipcar, because people are still going to want to kick the tires.

On the other hand, I think Netflix has handily shown Brick and Mortar DVD rental companies that consumers are willing to wait for product if the value is realized.

This could work. I would love to buy my next hybrid with zero carbon impact.

David Childers said... April 30, 2009 at 3:46 PM

Reggie, I think that the credit system could be melded directly into the buying process. Your last comment is the most telling. VALUE in the process. If that can be achieved it might work. Thanks for posting.

Anonymous said... April 30, 2009 at 3:47 PM

After reading Wikinomics, I too thought the "Prosumer" would work directly with the manufacturers in creating/designing a personalized automobile. So, answering your question directly, I would purchase an auto in the manner in which you explained. Great question and good luck at MIT.

Stephen Molen said... April 30, 2009 at 4:06 PM

Yes, Car dealerships definitely ruin the process. There is a reason for the thousands of jokes about car salesmen.

Rodica Buzescu said... April 30, 2009 at 4:20 PM

I think you can take it even one step further– we have a democratization of content design. The average internet user now have the tools to create their own identities & graphic content online(granted, some of these graphics are very ugly - just look at the initial designs people did on myspace). This is why I think the next generation of business is allowing user online customization/personalization - and it doesn't stop at interiors.

Scion is almost there – they are allowing people to customize their vehicle with options and exterior designs. It might be an interesting brand for your to research, since it seems to appeal particularly to gen Y (or generation V) folks who live online

Adam said... April 30, 2009 at 4:23 PM

I know enough about both the automotive and computer industries to be dangerous, so take my comments with that caveat.

The idea certainly has a lot of appeal on paper, but I'm not sure that it would fully work in practice. On the one hand, Edmunds reports that more than 70% of buyers of Minis order theirs (www.edmunds.com/advice/buying/articles/120208/article.html).

And buying a car through a service like Cars Direct essentially works like ordering a custom vehicle. You spec out the car you want, and they find it for you. They'll even deliver it to you.

But most people I have encountered buy from dealer inventory or arrange to have a dealer get the car from another dealer who has one.

Why? For one, despite all the supposedly rational considerations that come into buying a car, the actual process tends to be filled with irrationalities, including what color the car is. Second, there is a tactile, emotional aspect to touching, seeing and smelling that new car when you buy it. Third, while people may know when their payments are done or their lease is due to expire, they tend to postpone things and often buy a new car when they have to, not when they want to. As a result waiting two months for your new car is not an option.

But, I wonder if a better model is not the ability to infinitely customize but to simplify. Japanese carmakers have greatly limited the range of variations on their cars. Unlike US car companies, which at least used to have an endless range of options, Japanese carmakers have simplified things greatly.

They offer cars with two or three levels of trim, and, for the most part, the only other options are color, stick vs. automatic, and with or without a nav system.

Greater profitability and happiness may come from less choices not more.

Emmie {orange + barrel} said... April 30, 2009 at 4:52 PM

I think it could work, especially since a lot of people in my generation already buy their computers on the internet. If I design my shoes, my computer, really just about anything these days, why not my car?

The need is visually apparent to me. I live next to the Port of Los Angeles and there are tons of brand new cars just sitting near the docks.

However, it might under estimate the American need for instant gratification that comes along with car buying.

Sherry Carpenter Lane said... April 30, 2009 at 5:18 PM

I could see myself buying a car utilizing a system like this.
Personally, the make\model of the car would need to be available for me to test drive locally before I purchased an item in the thousands of dollars online.
When I purchased my car new, I spent a few weekends test driving different cars to see which ones I liked best. Once I made my decision,
I sent an email to the mfg car dealer explaining what I wanted (color, accessories and amount I was willing to spend). Within 2 days, the fleet dealer found the car I was looking for, agreed to my price and advised it would be available at the end of the week for pickup. It was by far the best experience I ever had at a dealership especially since I didn’t need to deal with a salesman and I walked out with paying under invoice for the car. If I could have cut out all the paperwork and the extra sales (extended warranty, oil changes for a lifetime, etc) I would have been ecstatic 

I would add a financing option with banks\credit unions available (similar to how Dell offers Credit accounts) and perhaps the ability to “rush the shipment”.

Some people may still want the Sales guy and car dealership interaction, however I believe the Y generation and tech savvy would love this type of system.

avery said... April 30, 2009 at 5:41 PM

I already have (twice) using motors.ebay.com. Two other times, the ebay motors site has pointed me in the direction of a dealership where I could test-drive the car.

Personally speaking, the feature I would like to see most is a system that can +/- custom fit the car to the driver. You type in measurements (height, waist height, arm length, waist, shoulders) and, for a small premium, you get a driver's seat that actually fits. For someone like me (6'3" 230 lbs), that would be a huge selling point.

Unfortunately, I think that, for the population over the age of 30, a hands-on buying experience is the only way to gain enough peace of mind to drop tens of thousands of dollars. Your best sell would be to a brand that markets towards the younger crowd, which Scion has been doing successfully for Toyota for a few years now. Ever tried their site? They don't stock Scions at dealers. Instead, you go to their site, pick the model (and sometimes year) you like, customize the heck out of it, and get it delivered to the dealership.

avery said... April 30, 2009 at 5:56 PM

Two final notes -
1.) I just noticed that Rodica and I had nearly identical points. Sorry for doubling up.
2.) I'm not so sure that the last portion of Adam's comment is factually correct. For instance, Honda even offers the option of adding a body kit while you're customizing your car - and that's on an Insight! The customization options on auto manufacturer's websites continues to grow in defiance of an insecure (understatement?) market.

Harold said... April 30, 2009 at 9:18 PM

I would buy a car this way as long as the dealer had a basic demo that I could test drive. It's efficent, non-confrontational, and the web site probably knows more than an on site salesman.

P.J. said... May 1, 2009 at 5:38 AM

I hate dealing with car salesmen and love getting a good deal. I also agree that the majority of people buy new cars when they need them, not when they want them (unlike you David). The model of car dealerships need to change as the internet savey consumers age and can afford more expensive cars that Scions. I also agree that the Toyota model of less options works.

Andrew said... May 1, 2009 at 6:11 AM

I think what makes the Dell model work for me is that a computer is both simple enough in terms of the components and varied enough in terms of configuration. It makes sense to me to start with a simple piece of hardware and allow choices about how to configure it (how much memory, upgraded graphics package or not, etc.).
A car, however, is not simple in terms of hardware, nor would I necessarily trust a company enough that the hardware issues do not matter. Do I trust that every car coming off of a Ford or Toyota or Honda assembly line is good enough that I don't have to worry about the hardware in the way that I don't really worry about the quality of the hardware of a Dell computer? Do I really only care how the car is configured? I suppose you could resolve that issue through warranty and satisfaction-guaranteed policies, but that could be costly for such a high priced item. In the end, I may be able to become accustomed to buying a car in this fashion (particularly since I could essentially customize it), but I would it take some convincing to overcome my, perhaps old-fashioned, need to kick the tires before I plunk down $30,000 - $50,000.
I may not be in the target market anyway. I still read a printed newspaper every morning.

Watty said... May 1, 2009 at 8:39 AM

I think the concept is an interesting one. I can see myself selecting and designing the car/make/model online, down the the floormats. However, I would need to test drive whatever selection I had made and know if there was a problem with the car that I could easily return it. With that being said, I believe the model could work, with a few adjustments, and by easing consumers into the process a bit!

Valerie said... May 1, 2009 at 9:17 AM

I would absolutely support and use this model for purchasing a vehicle!

My first home was bought remotely, sight unseen, if that tells you anything about my level of support of this philosophy. My first new car was direct order from manufacturer (no web app at that time).

To make the short answer long...

I feel the manufaturer would have to implement an acceptable limited return/exchange policy (manufacturer absorbing these costs, of course) in the event the purchase were not acceptable to the buyer. (reference Zappos.com -shoes)

Small satellite show rooms should be strategically and sporadically (using population density metrics) placed allowing for test drives. However, I would like to see more of an Apple/Mac marketing concept in these. Modern! Single color, one of each model, with high-tech showroom allowing for simulation and graphic displays of options, features, additions, etc.

I love the delivery model. While I feel home delivery should be an option for those willing to pay extra; the carbon footprint of delivery to a location with close proximity to the drop point, be it shipping dock or train station, would suit the needs of the majority.

The cost of surplus inventory, square footage for current day showrooms, warehouses, inventory storage, etc., have been a thorn in my side for years. Not to mention the visual pollution. I would welcome the absence of such waste.

Let's do it!

Mony said... May 1, 2009 at 10:51 AM

Possibly, but probably not if I didn't have to. If I did do it the only way would be if I could test drive one locally as many people suggest. I agree the model possibly could help the auto industry (although they have bigger problems), but I am not convinced of the benefit to most consumers.

I am "old school" and want to touch and see what I am buying. Another important issue is that there are also a percentage of us people that want the instant satisfaction. I don't even like ordering furniture. When I am ready to buy it, I want it.

In reality I am guessing this concept would be more of a minority practice then a majority practice. The wild card here is price. A nice price incentive could turn those tables.

When it is all said and done though, remember that Dell and the others sure do sell a good deal of computer through Best Buy too.

David Childers said... May 1, 2009 at 12:29 PM

Thanks all the great feedback and ideas. Keep them coming.

Barry said... May 1, 2009 at 2:10 PM

A key question to ask: who buys from Dell, who buys from Best Buy, and why. Andrew essentially pointed out that a computer is a customizable commodity. For many of us, so is a car.

Imagine a continuum of consumers. On one end are consumers who are highly knowledgeable about the product & very particular about what they want. On the other end are consumers who are not especially knowledgeable or interested, for them the product is completely utilitarian. In the middle are consumers who don’t know that much about the product, yet they really want to make the “right” choice. This middle group is the most susceptible to (or needy of) a salesperson, and some consumers in this group literally need an “excuse” to justify their selection to their neighbor or brother-in-law, e.g. “it had 0% financing” or “she loved the color”.

Dell started out selling mainly to the first (knowledgeable) group, then later added a chunk of the utilitarian group at the other end of the spectrum. To this day I doubt they sell very many computers to the middle group. Different channels work best for different consumers.

You could also look at all the usual demographics, i.e. which age groups, education levels, income brackets, regions of the country, etc., would be more amenable to which buying experience. And because cars are the classic “personal identity” purchase for most buyers, you could also slice this by manufacturer – I’d bet that Honda buyers (“advanced yet practical”) would be more amenable to online purchasing than Mercedes (“I’ve made it and I deserve it”) buyers.

Personally I am very fussy and would LOVE to be able to go online and custom-order the exact vehicle that I wanted – after first devouring Consumer Reports, questioning trusted friends, and visiting two or three dealers to scrutinize my two or three “finalists”.

David Childers said... May 2, 2009 at 10:01 AM

Barry, well spoken by the simple, non-fussy man that ran Maserati Asia. Thanks!!

Jackson said... May 4, 2009 at 7:42 PM

I like the idea. As long as I was able to test drive a basic model, I am old school and need to feel myself in a car before I buy. A concern would be financing. For most people the "90 days same as cash" promo would not work.

Anonymous said... July 30, 2009 at 9:13 PM

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Tom Goddu said... October 9, 2009 at 7:35 AM

Instead of asking a dinosaur company to cater to individual tastes, let's organize a buyer's market that would design several popular packages by wiki and provide popular solutions to large groups of people at commodity prices.
First we organize people to tag along with fleet purchases of taxis, police cars and delivery vehicles, then we organize interest groups and help them synchronize their purchases, perhaps organizing the disposition of their used vehicles in the process. Next we organize their service contracts and provide well targeted insurance.

apeopleplace said... October 9, 2009 at 3:22 PM

I might buy a car this way. I'm kind of a touch and see it kind of guy, yet convenience and cost could drive me to do it. If there was no cost or convenience improvement, I probably would not go there.
The idea of On-demand car manufacturing is not exactly new. I remember seeing video demonstrations of this in an auto factory on TV probably 5 yrs ago, actual working facilities. The setup I think was choice of color, motor and interior and was done in-line as part of the regular production line. I don't remember enough to find it again. It seems Scion and Mini are doing some of this.
Your idea, the Dell approach, goes further I think to perhaps standardizing some "platforms" on which MANY additional choices may be added, like motor, color wheels, doors and body panels, interior, etc.
There is an interesting example of this sort of thinking (including the idea of distributed manufacturing) in a company called Ponoko http://www.ponoko.com/ The ultimate goal is to provide truly distributed manufacturing where designers and manufacturers independently compete and mini manufacturing facilities would be all over the world near the end user. In this case it is just laser cutters. Not so complex.
Another idea that has a tiny bit of connection with your idea about automobiles is with the innovations in electric car manufacturing, in particular with the idea of a modular battery system, one-size-fits-all battery. People buy a car and just rent battery (gasoline replacement) service http://www.think.no/think/content/view/full/264. You pull into a fill-up station and just exchange the battery. So, different car companies would make different platforms, yet they all have the same battery connection compartment.
I personally think that the economy and energy choices away from oil will be the driving factors in our automobile industry's direction. Your idea includes some of those concerns, trying to reduce inventory and such while enlarging choice.
I have to agree with one person's idea from above, that automobiles are complicated enough that most people feel inadequate to make the choices they make now in purchasing an automobile. I think many look for an "expert" to aid them in their automobile decision. So, to add more choices may be problematic, decision overload. Yet, the same challenge existed with Dell!
By the way, I found your blog because I just applied with your company for the Senior Product Marketing Manager position. Perhaps you would take a moment to look at my resume in the system. I see I can send it to you directly also. I live just up the road from the company and would appreciate a change to meet you.
I wish you good success in your pursuits at MIT!!
Michael Brooks

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