Marcos Arruda and General Motors’ Internet Strategy

Brazil

Overview of the Auto Industry in the Last Few Years

VW 30.51%

GM 27.81%

FIAT 27.51%

FORD 6.75%

RENAULT 3.64%

HONDA 1.30%

DAIMLER/CHRYSLER 1.29%

TOYOTA 1.19%
Until 1996, only the first four brands had manufacturing operations in Brazil, though in 1991 the French producer PSA entered the market with the brands Citroen and Peugeot.
Subsequent to the stabilization of the economy a number of established companies, in particular GM and Ford, have built new plants. Those new plants were almost all built as all-integrated plants: most of the main suppliers share the same site as the OEM plant.
Competition has increased among the producers, resulting in quality improvements and falling absolute prices, especially in the entry-level cars, called “popular cars” with engines under 1,000cc.

Internet-Specific Factors

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  The number of Internet users has reached 23 million people, which corresponds to 19% of the population over 14 years old. This population is younger and better educated than the overall population, and matches the target market for the “popular” cars. Brazilian Internet users can be considered “heavy users” spending an average of 8 hours a month on the Internet, second only to the US. It is estimated that 2/3 of the potential car-buyers have direct access to the Internet in Brazil, and 80% of the consumers in the target market for “popular cars” have direct Internet access. These percentages are higher than in most other countries.
  

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  The integrated plants allow the producers more flexibility in their relationship with the main suppliers and provide for an information sharing process within the supply chain;
  

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  With the exception of Volkswagen, the big manufacturers are concentrating their Internet investments on selling popular cars, which do not offer many options to the customers. This makes it easy, not only to design the process of Internet sales, but to guarantee higher availability of the chosen models and simplify the process of build-to-order. Usually the models sold through the Internet allow the customer few choices, such as no more than 2 distinct motors, 4 or 5 different colors and 2 or 3 standard bundles of optional items;
  

• 
  The manufacturers and dealers are using sales thorough the Internet as a way to reduce taxes. In the model adopted, the customer buys the car directly from the producer and the dealers receive a commission. This allows dealers not only to reduce their costs of holding inventories but also make them exempt from a sales tax, which is common in Brazil.
  

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  Given the economies in taxes and cost of inventories, the price of the cars sold through the Internet can be from 6 to 8% lower than through the traditional channels.
  

As a result of those factors, in 2000 11,000 cars were sold through the Internet, and the expected sales for 2001 and 2002 are 100,000 and 250,000 respectively.

General Motors Brazil and the CELTA

Excerpt of an article in the Wall Street Journal – December 2000
General Motors estimates that its efforts in 2000 to boost traffic at its main Internet site have generated nearly 50,000 additional vehicle sales in the U.S., Mark Hogan, head of the e-GM unit, said Tuesday. That figure is at the low end of initial expectations...
…Mr. Hogan was speaking at a press conference announcing the results of what GM said is the first high-volume online car sales system in the world, run by GM's Brazilian unit. That division has a new small car called the Celta, which is sold primarily over the Internet, although most buyers still go to showrooms to use computers and order the car.
The system allows GM to rationalize inventory by keeping cars at central sites, instead of dealer lots. Consumers get a 6% discount for using the Internet and their cars are delivered to the dealer within about a week. Dealers earn a fixed commission on each sale, but they don't have to bear the risk of holding inventory beyond a few cars for the showroom. GM officials said the company earns more profit from Internet sales of the car than through traditional sales.
So far, GM said it has sold 15,500 Celta cars since September and 8,679 of those have been sold via the site. Next year, the company said it plans to sell 5,000 to 6,000 Celtas a month.
GM Brazil officials said they have no immediate plans to expand the system to other models, but said they ultimately hope to use it to build Celtas to order, reducing inventory costs further.
CELTA is the only car produced at a brand new plant in the south of Brazil, a plant build under the concept of an integrated consortium between GM and its suppliers. (See Exhibit 1 for a picture of a CELTA.)
In addition, GM Brazil has also entered in agreement with UOL – Universo On Line, the leading Internet portal in Brazil to develop a common Internet strategy for the auto market.
The dealers actively participate in the program, and a substantial part of the actual sales are made through the dealers—where the customer can see the car and proceed with the purchase under the guidance of the dealer’s sales people. The cars are also delivered to the customer’s dealer of choice.

Renault Clio

In June 2001, Renault Brazil and Yahoo Brazil jointly conducted the launch of the first co-branded car to be sold only through the Internet in the world. (See Exhibit 2 for a picture of the car, known as the Clio)..
The process was conducted in partnership with the Renault dealers. Renault plans to achieve the following targets in 2001:

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  6% of the sales of new vehicles over the Internet in Brazil – larger than its actual market share in conventional sales;
  
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  7% of all sales of Renault Brazil to be conducted thorough the Internet and
  
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  15% of the sales of the Clio model through the Internet
  

United States Auto Industry Background

For many Americans, the fundamental choice in buying a car used to be Ford or Chevy. Once that decision was made the consumer drove down to the local dealership to either pick a vehicle off the lot, or special order the exact car that he or she wanted from the manufacturer.
Historically, in the United States, the major auto manufacturers have maintained extensive dealer distribution networks to deliver automobiles. While the dealers are on the front line of the manufacturer’s customer relations, most are franchisees, and, as such, the manufacturers have incomplete control over the customer’s shopping experience. This is of particular concern for manufacturers attempting to establish strong relationships with customers, because the relationship between dealers and customers is at best adversarial. One can attribute some of the acrimony in the dealer/customer relationship to the existence of asymmetric information: the dealers had complete information while the purchaser had almost no information, at least regarding the price of the car.

Rise of E-Business

Given the contentious nature of dealer/customer relations, there would appear to be ample room for a new channel through which to sell automobiles. In the hey-day of the Internet revolution, many people felt that the Internet was that channel. In fact, some predicted that traditional auto-dealers were dinosaurs doomed to extinction. Indeed in 1999, Forrester Research Inc. predicted, “that by 2003 nearly 8 million new-car purchases will be influenced by the Internet and nearly half a million new cars will be purchased entirely online.” (Naples Daily News) James L. McQuivey, a senior analyst at Forrester, remarked, “The rise of online car buying will radically alter the automobile and retailing landscape.” (Naples Daily News) For more information on online shopping, see exhibit 3.
Despite the hype surrounding the Internet, at this point, it seems unlikely that the Internet will completely replace traditional dealers.
However, the Internet has significantly changed the dynamics of a customer’s relationship with the dealer; the Internet provides information that eliminates, in large part, the information imbalance between the customer and the dealer. The Internet is not entirely a negative for dealers; many use the Internet as a tool to expand their marketing efforts.
While there are countless Internet sites related to auto buying, we believe that they can all be divided into four broad categories. First, the Internet is a channel for auto manufacturers to communicate directly with the customer. Second, existing dealers can incorporate the Internet into their marketing program. Third, a new independent class of Internet auto referral services has emerged. Fourth, and finally, there are a number of purportedly independent information providers.

Directory: Ebusiness
Ebusiness -> Computing Productivity: Firm-Level Evidence

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