What price local knowledge?
The ICDP team is currently planning the research programme for the coming year, and one of the topics we are going to return to after a gap of some years is the relative attractiveness of a national sales company compared to an independent distributor for a manufacturer in a specific market. When we last looked at this in 2018, we broadly concluded that manufacturers were using national sales companies in markets where the volume potential could not cover the typically higher operating costs, and thereby missing out on the opportunity to access shared resources and the local knowledge of an established importer.
Although the research will continue over the coming months, there has been some recent news that suggests the timing could be appropriate. Two weeks ago the news broke that BYD will not renew their existing distribution contract with Inchcape for Belgium and Luxembourg. This follows on from the termination last year of the arrangement that they had in Netherlands with Louwman, and in 2024 of the arrangement with Hedin Automotive for Germany. Both Inchcape and Louwman are highly capable distributors with a proven track record, Hedin a relative newcomer to the role, but it appears that consistent with their general policy of vertical integration, BYD want to be in more direct control of pricing and the customer experience.
In their response to the termination, Inchcape pointed out that it had recently taken on new distribution arrangements with Aion and XPeng, and we have also seen the arrival in Europe of Saudi Arabian headquartered A L Jameel, whose fortunes are based on distribution of Toyota in that market. Whilst the arrival of so many new brands has put the spotlight on their market entries and choice of distribution strategies, we have also seen changes in the distribution strategies of the established manufacturers over the last few years such as Stellantis increasing the use of independent distributors, and of large dealer groups who, like Hedin, have decided to extend their business into distribution. We have also seen some very significant relationships sustained – such as the various Volkswagen arrangements across significant European markets and that of Louwman with Toyota in the Netherlands.
This all paints a highly complex picture. There is clearly some value in distribution experience, and this can be transferred between markets – demonstrated by Emil Frey, Inchcape and Jameel who have all entered multiple markets over the years where they had no prior experience, yet secured contracts and delivered results. At the same time there are local specialists who have retained a national focus, but applied this to multiple manufacturers, such as Autowallis and Grand Automotive who each represent multiple brands within a tight Central European focus. Established manufacturers are more likely to have national sales companies, even in small markets, and new entrants are more likely to employ distributors, but here the picture is more complicated as a number also choose direct distribution models – just to add to the confused picture. One also needs to consider the evolution of the manufacturers – some who have been in the market for decades must adjust to lower volumes and future expectations, others who only recently arrived appear to have bright futures, but are still learning the market even as they set new sales records.
When we did the previous research, there was a general acceptance by established manufacturers that in a market where they would expect to sell less than 10,000 units annually, it would be more effective in terms of market share and operating costs to appoint an independent distributor. We were able to show that independents operated more cost efficiently at least at these volumes due to a combination of leaner headcounts and lower total employment costs than a manufacturer. We found mixed views in terms of whether distribution in smaller markets could be operated on a regional basis, i.e. grouping the Balkan or Baltic markets together under a single organisation. Probably some activities such as new vehicle supply and stocking, and spare parts operations could benefit from the additional scale, but there was still a consensus that network management and marketing required a genuinely local touch.
We have also concluded when looking at new entrants that they can theoretically benefit from adopting different business models such as direct to consumer or agency in the early stages of their market entry, but given that both are highly dependent on local knowledge and drive a higher headcount requirement, the reality is that they need local partners from a very early stage. This could be either through a national sales company recruiting capable dealers, or by selecting strong independent distributors. Where some new entrants have stumbled has been where they have focused on the distributor margin and used this as the primary criteria, rather than the capabilities and experience that the distributor brings in return for that margin.
Whether we can bring clarity to this confused and ever-changing picture, we will determine over the coming months. If any readers of this blog have personal experience that they think is relevant, we will be very happy to hear from you. In the meantime, stand by for more updates!
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