This chapter provides some background to the Australian retail automotive industry and explores changes in the distribution models employed by manufacturers, including the introduction of the agency sales model.
Australian retail automotive industry
The Australian automotive industry is broad and includes a variety of activities and businesses. According to the joint submission from the Department of Industry, Science, Energy and Resources, and the
Department of Education, Skills and Employment (the departments), the new car retailing industry encompasses three key areas:
Manufacturers (represented by distributors) – import vehicles to distribute to dealers and commercial fleet buyers. Distributors are typically wholly owned subsidiaries of foreign car manufacturers and act as links between foreign manufacturers and Australian dealer networks.
Dealers – sell new and used cars to consumers and businesses. While large businesses often purchase cars directly from distributors, smaller businesses typically purchase vehicles from dealers. Dealers also provide a range of other services, including servicing and repair, aftermarket sales and finance and insurance services.
Independent repairers – typically small, independent establishments that service a local area.
The new car market in Australia is one of the most competitive and deregulated car markets in the world and contains between 60–72 brands and more than 400 model variants. This compares to between 35–40 brands servicing the needs of around 320 million people in the
United States of America market.
Following the cessation of Toyota Motor Corporation Australia (TMCA) and General Motors-Holden's (GM Holden) domestic manufacturing operations in October 2017, all new passenger vehicles sold in Australia have been manufactured and imported from overseas. As a result, Australia's vehicle manufacturing industry now primarily produces heavy vehicles, engines, and other vehicle components.
During 2019, over 1 million new cars were sold in Australia with car dealer revenues estimated at $56 billion. This compared to around 1.2 million new cars that were sold in 2016–17 and revenues for the same period of $64 billion. According to the Australian Automotive Dealer Association, the new car retailing sector employs an estimated 55 815 people, including
4463 apprentices. An overview of the supply chain for new car retailing in Australia is shown in Figure 2.1.
Figure 2.1: Supply chain for new car retailing in Australia
Source: FCAI (VFACTS) motor vehicle sales data (as at December 2017); IBISWorld Industry Report F3501 Motor Vehicle Wholesaling in Australia, May 2018; IBISWorld Industry Report G3911 Motor Vehicle Dealers in Australia, April 2018.
Submitters to the inquiry commented on the many unique characteristics of the Australian automotive market. For example, the Motor Trades Association of Australia (MTAA) noted that:
Many factors contribute to Australia's unique automotive market. Geographic dispersal of a comparatively small population; one of only 75 global right hand drive markets (as opposed to 165 left hand drive markets); national reliance on road transport for goods and service delivery and community connection; and trade policy including free trade agreements.
The MTAA also observed that Australia has one of the youngest motor vehicle fleets in the world and pointed out that each vehicle is unique to Australia 'due to design rules and regulatory requirements'. As a result, it argued that 'even though a particular make and model of vehicle may look the same as one sold internationally, it has attributes that can only be found in Australia'.
The Federal Chamber of Automotive Industries (FCAI) indicated that the small size of the Australian market and the large number of brands 'results in numerous suppliers with very-low overall volumes' and noted that 'in 2019 25 passenger vehicle brands sold less than 5000 units nationally'.
In addition to these factors, the Australian automotive market is also being influenced by the broader structural transformation occurring in the global automotive industry. The departments pointed out in their joint submission that 'disruptions such as electric vehicles, automation, changing ownership models and other emerging technologies have the potential to transform the industry and how we view transportation'.
The departments also noted that:
…analysts predict automotive retail will shift from being product-driven to a customer-centric approach with key supply chain participants (manufacturers, dealers and independent repairers) garnering consumer loyalty through responding to consumer behaviour and expectations.
Franchised new car dealers
A key component of Australia's two-tier automotive franchise distribution system are the more than 1500 new car dealers in Australia that operate more than 3000 dealerships that link overseas manufacturers and local dealer networks.
These authorised dealership networks are used by manufacturers 'as the primary retail distribution mechanism for the localised stocking, display, demonstration, sale, pre-delivery, accessories, service, parts supply, and warranty provision, safety recall, financing, and marketing, of their vehicles'.
As noted in submissions to the inquiry, the last five years saw significant consolidation in the Australian car retailing industry, with larger public dealership companies taking over smaller private dealerships.
As a consequence, the FCAI reported that 'fewer than 16% of all dealerships were owned and operated as a single new motor vehicle dealership' and that '60% of new car sales in Australia are made by dealer conglomerates that own five or more new car dealerships'.
Mr Bruce Wilson, Head of Division, Industry Growth, at the
Department of Industry, Science, Energy and Resources, stated that while Australia's highly competitive automotive market had delivered benefits to consumers, it had also put 'a lot of pressure on the dealership component of the market'.
Similarly, the MTAA noted that:
Tightening returns, on margins that are already lean, encourages dealers to increase emphasis on finance and insurance and servicing revenue streams to gain even a modest return on investment. Since 2018 this emphasis has been undermining and severely impacted by targeted regulatory changes to the provision of finance and insurance products by dealers.
While acknowledging the challenges presented by a rapidly evolving new car market, the FCAI argued that 'new car dealers have adapted to meet the challenges and opportunities afforded through this competition'. The FCAI submitted:
Significantly, most dealers have diversified to retail multiple brands across their dealer sites. As such, an overwhelming majority of dealers are multi-franchise operations, with, for example, this model accounting for approximately 90 per cent of Holden dealerships in 2020. Many dealers also own their strategically important sites, which is an extremely significant advantage in the competitive Australian market.
The implications of increased domestic competition on automotive dealerships was also addressed by the MTAA which submitted:
There has also been significant growth in public listed dealership entities, which now account for almost 20% of total dealerships nationwide. Traditional family-owned-and-operated, or private, dealerships continue to survive, but in decreasing numbers, and these are arguably dealers who are impacted most by decisions of car manufacturers and/or their distributors/importers to vacate the Australian market or substantially change their retail distribution network or method of retailing.
Current and proposed business models for selling vehicles
As noted above, the standard model of new car sales in Australia involves independent car dealers entering into agreements with manufacturers to purchase new vehicles and selling them to customers.
In addition to selling new cars, dealers and associated salespeople also provide a variety of other services, including assisting with administrative tasks, undertaking vehicle maintenance and repairs, and facilitating trade-ins of older vehicles where required. Traditionally, the dealer has been the sole point of contact for the customer.
However, manufacturers are increasingly exploring alternative approaches to the traditional sales model to better leverage off consumer preferences to research and purchase new cars online with limited dealer interactions.
For example, many newer car brands, such as Tesla, do not have a traditional dealer network and sell new cars almost entirely over the internet. In Australia, Tesla only has four physical galleries located in Sydney, Melbourne, Brisbane and the Gold Coast.
The 'agency model' of new car sales enables direct sales of new cars from manufacturers to customers while still utilising traditional dealerships, albeit to a reduced extent. In an agency model, the role of car dealers is transformed to that of agents who act on behalf of the manufacturer and are remunerated through a commission on each vehicle that is sold or delivered.
For example, Honda Australia has announced that it will be moving to agency sales for its Australian retail network and has indicated that it will restructure its dealer network from 1 July 2021. This restructure will reduce the number of existing Honda dealers.
Mercedes-Benz Australia/Pacific (MBAuP) has also announced that it will move to an agency model in 2022 and has given all its dealers the opportunity to transition to the new model 'when the tenure of their current Sales, Service and Parts Dealer agreements expire at the end of 2021'. It argued in its submission that under its new model:
Dealers will continue to use the same facilities, signage and resources that exist within their current businesses as both agents for MBAuP, and importantly, in relation to the continued operation of other aspects of their business that will continue to operate under a traditional licensing model (i.e. sale of pre-owned vehicles, vehicle servicing, parts sales and vehicle financing).
MBAuP will not require agents to make any additional or significant capital expenditure specifically in connection with the transition to the agency model.
MBAuP noted that the global brand has successfully introduced an agency model for new car sales in South Africa and Sweden.
Similarly, Volkswagen has also proposed an agency model in Germany to sell its flagship electric car, the ID.3, and upcoming electric vehicles in its ID range at a standardised price regardless of whether it is purchased from a physical branch or online. Dealerships will receive a commission to deliver the cars to customers.
The agency model has also been introduced in New Zealand by several brands which have each introduced their own version of the concept.
In 2000, Honda New Zealand's Price Promise effectively introduced an agency model in that jurisdiction. Toyota New Zealand moved to an agency model in 2018.
The National Toyota Dealers Association (NTDA) noted that Toyota New Zealand's introduction of an agency model 'was not without difficulties and faults but ultimately, it is proving to be a model that could work in New Zealand'. It also noted:
TMCA has assured the NTDA and all Toyota dealers that there is no plan to introduce a similar model or some other new model in Australia for the foreseeable future. TMCA has advised that it considers that the agency model is suited to New Zealand and that it is not indicative of a general shift to that business model.
According to a study conducted by Accenture, the agency model holds five major benefits for manufacturers:
access to customer data which is currently only available to dealers;
full control over online and offline channels, allowing manufacturers to build seamless customer journeys with a consistent experience;
ability to set a single price across all sales channels to eliminate intra-brand competition;
effective steering of sales activities, enabling manufacturers to push digital services and new offerings into the market; and
increased transparency about market performance at the showroom level, allowing manufacturers to continually optimise the sales network.
That said, moving to an agency model requires manufacturers to develop the capability to take over direct sales functions, such as, pricing, order and stock management, marketing, customer services, and associated online portals.
The agency model also has benefits for dealers, including:
reduced capital requirements and financial risk as ownership of new cars rests with the manufacturer;
increased accessibility to a national stock pool of new vehicles; and
reduced cost base associated with a small physical footprint
(e.g. showrooms and associated facilities).
Indeed, the Australian Competition and Consumer Commission noted that changes to distribution models could have a positive impact on consumer guarantee issues and be beneficial to dealers:
As noted in our new car retailing market study, certain features of the commercial arrangements between manufacturers and franchised dealers can act to constrain and influence the behaviour of dealers in responding to consumer guarantee claims. However, we also note that in our experience, individual dealer franchisees can and do advocate on behalf of their customers with the manufacturer. There can be differences in approaches between a dealer and a manufacturer in dealing with consumer guarantees claims. Under an agency model, such conflicts may be reduced, which may make it easier for consumers to obtain remedies for consumer guarantees claims.
During the transition to an agency model, there may be costs for dealers who choose to reduce the size of their facilities to more appropriately accommodate a smaller number of vehicles in stock. Likewise, some dealers may be left with the legacy costs associated with significant showroom investments which cannot easily be changed to service other brands. In extreme cases, some dealers may not have their dealer contract renewed as manufacturers make decisions to reduce the overall number of dealers in a geographic area.
Indeed, concerns were raised by submitters in relation to the announcement by some manufacturers that they intended to move away from a standard dealer model to an agency model. In particular, submitters expressed concern in relation to the potential impact such structural changes would have on individual dealerships. These concerns are explored in Chapter 4 of this report.