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GAC Fiat Chrysler Lowers Channel Cost by Putting Multiple Brands in One Store

Date:09-29 09:05 Source: Authour:Wu Yue

The smooth progress of the GAC FIAT Chrysler channel integration suggests that the new company is blazing a new trail for dealers in the two major channel systems amid the current general decline of the auto industry. As the only auto JV in China with multiple brands, GAC FIAT Chrysler's all-brand stores have clear profit prospects with very little requirement for investment. The channel integration - aimed to lower dealers' operating costs - may indicate a process of alignment between China's auto sales industry and mature auto markets.

The newly founded GAC FIAT Chrysler Automobiles Sales Co. is a business move in every aspect: integrating the channel systems of Chrysler China and GAC FIAT can substantially reduce the operating cost of dealers on both sides, selling four brands (Chrysler, Jeep, Dodge and FIAT) in the same store will bring synergy to the world's most renowned SUV brand, high and middle-end SUVs and medium and low-end sedans, and boosting the weaker brands with stronger ones will allow the consumer to become more familiar with FIAT, a European brand that should not be underestimated.

GAC FIAT Chrysler's channel integration also accords with the developing trend of the domestic auto industry. The Chinese auto market in now in the stage of micro growth, profits from new car sales are falling significantly, and "Internet Plus" and e-commerce are aggressively gaining ground, all of which pose unprecedented challenges to traditional dealers. In this new competitive landscape, whoever takes preemptive steps in resource integration and cost control will win the future market. Although the four brands under GAC FIAT Chrysler vary vastly in market position, the new company is lucky in that its resource advantages are unmatched among its competitors. The localization of Chrysler/Jeep represents perfect timing for the integration of the two channel systems.

Do dealers of GAC FIAT and Chrysler China support the integration?

GAC FIAT Chrysler Automobiles Sales Co was founded on July 16, 2015. Previously Chrysler China and GAC FIAT had 400 dealerships in total, more than 50 of which had passed the exam on the new operating model by the end of August; some have already completed store upgrading and are in service. Qi Xiaopei, vice president of GAC FIAT Chrysler Automobiles Sales Co, told International Business Daily (IBD) that "we plan to have 280 dealers covering the whole product line by the end of this year."

It seems that the channel integration is proceeding very smoothly, suggesting that the new company is highlighting a new direction for dealers in the two major channel systems amid the current general decline of the auto industry. It transpires that GAC FIAT Chrysler started preparations in March this year, and the first group of all-brand stores could not have been launched so quickly without the support of dealers on both sides.

Such channel integration is doubtlessly "pennies from heaven" for GAC FIAT dealers, who, as the "weak group", have gained both confidence and benefits. But Chrysler China's dealers can hardly help but wonder whether GAC FIAT's RMB100,000 economic sedans in the same store as the RMB800,000 Jeep won’t take a toll on Jeep's brand image. What's in it for Chrysler China's dealers except for the uncertain market prospects of the locally-produced FIAT?

All-brand stores have clear profit prospects; dealers are most sensitive to market

The five-star-rated Suzhou-based Jiujiu Dealer Group is one of the best-performing dealer groups of Chrysler China, and had the first operational all-brand store under GAC FIAT Chrysler. Li Yumin, investor and president of the group, talked about three points with IBD.

First, GAC FIAT Chrysler will have a rich product line in the future. It will launch 10 new models in the next five years and four locally-produced Jeep models in the next two years. One will be the Jeep Cherokee, Patriot, a model exclusive to China; the other as yet remains unknown. As to FIAT, in addition to sedans, the compact SUV Freemont, one of its leading products worldwide, will also be localized. For GAC FIAT Chrysler and for our all-brand store, we need one or two quick-selling sedans to seize market share, and GAC FIAT can make up for Chrysler's weakness in that line.

Second, we have full confidence in FIAT. As a century-long European brand from the same family as Ferrari and Maserati, it is attractive for first-time car buyers. Its models all have market appeal, with generous specifications and lower prices than their competitors. The poor sales of locally produced FIAT models can be attributed to a range of complicated factors. But even though they are now being sold in the same store as Chrysler models, we won't build our hopes of market performance too high - the competitors are all strong (Focus and Cruze sell 500-600 cars a month in Suzhou). Instead, we will treat it as a new brand and focus on experience marketing. We'll be satisfied if we can seize 10% of the market, and we have our eye on FIAT's future locally-produced models.

Third, multi-brand operation is good for customer retention and expansion, meaning that word-of-mouth from satisfied existing customers will bring new ones. This type of marketing contributes 20% of our total sales now, and the arrival of FIAT, rather than pulling down the brand image of Chrysler, will help cultivate more potential customers. The concept of customer-retaining marketing means that while the first car is sold by the sales team, the second, third and subsequent cars are sold by the after-sales team, which makes high demands on the after-sales service level. I believe GAC FIAT Chrysler's all-brand store is good for fostering brand loyalty.

There is no doubt that dealers are most sensitive to the market. Suzhou Jiujiu's analysis of GAC FIAT Chrysler's channel integration represents the view of most Chrysler China dealers. "As the only auto JV in China with multiple brands, GAC FIAT Chrysler's all-brand store has clear profit prospects with very little need for investment. Competitors do not have the ability to match this even if they want to - how could we pass up such a golden opportunity?"

Modular combination: cost reduction is key

It must be noted that Suzhou Jiujiu's all-brand store isn't the standard version designed by GAC FIAT Chrysler, but a new FIAT showroom next to its Chrysler store. The new showroom is only responsible for sales, while it shares the after-sales service team with Chrysler. This situation will be adjusted according to its sales performance.

Suzhou Jiujiu's new store reflects the flexible upgrading and transformation approach to the new GAC FIAT Chrysler all-brand store. Qi Xiaopei told IBD that in terms of appearance, existing stores will only be upgraded, while newly-built stores will adopt a uniform style and image. But "we won't adopt a sweeping approach that takes no account of actual situations. That would contradict the thinking behind the channel integration – which is to lower dealers' operating costs."

How much cost can be saved by building or upgrading a GAC FIAT Chrysler all-brand store? According to information from GAC FIAT Chrysler Automobiles Sales this is related to their innovative modular design and management of 4S stores, which involves three main factors.

First, different brands will be in different zones of the same store, but instead of a simple spatial separation, they are separated based on their different positioning, which will be felt by customers the moment they step into the store.

Second, the Chinese auto market features considerable regional differences. Some mature markets may have larger demand for high-end SUVs than sedans, some less developed markets may have more demand for medium and low-end sedans, while medium and low-end SUVs may sell best in the western region due to the road conditions and environment there. So we will provide different modular combinations for different markets and allow the dealers and investors to mix & match the brands themselves because they know the local market needs best.

Third, since we focus on different brands in different markets, we will also differentiate the showroom and the workshop from region to region and will provide three combination modules (A, B and C). For instance, if the investor is entering a fresh market, there is no need to build a 4S store with full functions in the early stage, so he can choose the combination of an A-Class showroom with B or C-Class workshop, depending on the market situation. A wide range of flexible combinations will be offered for investors (AA, AB, AC, BA, BB, BC…).

Qi Xiaopei emphasizes that the company is promoting the channel integration on two levels. On the one hand, they are encouraging top dealers in the existing network to move forward quickly. Most of those dealers are located in tier-1, tier-2 or central cities, where land is in short supply, so as a general rule the existing stores will be upgraded. On the other hand, if the market in a tier-3, tier-4 or lower-level city reaches a certain scale, the dealer will be encouraged to build a new 4S store. Where the market isn't big enough to support a 4S store yet, dealers will be encouraged to build city showrooms or other forms of store.

"All existing dealers find our modular concept practical and feasible, and new investors are constantly signing up. According to our estimation, in areas where land isn't a problem it will take a minimum of RMB1 million to build an all-brand city showroom with our modular combination. GAC FIAT Chrysler Automobiles Sales Co will subsidize both new and upgraded stores, up to 50%," Qi Xiaopei told IBD.

Conclusion: a glimpse of the future industrial landscape

GAC FIAT Chrysler's channel integration, aimed to lower dealers' operating costs, indicates a process of alignment between China’s auto sales industry and mature auto markets. In the US, only 1/3 of 4S stores have sheet spray shops because the job is usually outsourced to cut costs. And many automakers in China are indeed now turning from the all-inclusive 4S store to small-scale city showrooms, 2S stores and fast repair centers, according to the actual situation in different regional markets. But GAC FIAT Chrysler is obviously a better reference for the industry in pushing all-brand stores and modular combinations in their sales outlets.

A recent report by Automotive News may serve as a reference for GAC FIAT Chrysler in marketing. In 2015H1, Strategic Vision’s Total Quality Index, an authoritative and independent new car quality assessment organization in the US, interviewed 46,000 car owners and found that among more than 30 models from mainstream brands, six from FIAT Chrysler ranked first in their respective segments, more than any other brand. The six models were the Fiat 500 (SMPV), Fiat 500e (a small pure EV), Dodge Challenger (cabriolet), Dodge Charger (medium and large-sized sedan), Jeep Wrangler Unlimited (entry-level) and Dodge Durango (a mid-sized SUV). In the channel integration of GAC FIAT Chrysler, the future of locally-produced FIAT models - which have suffered chronically poor sales - has fallen under the spotlight, but the fact is that Chinese consumers know little about FIAT's brand value, product power and sales performance in the European and American markets.

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