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Is it OK if there is no inventory backlog for car sales?

From:Internet Info Agency 2019-04-14 15:42:00

Author:He Lun, IIA’s Co-Chief Content Officer, Deputy Head of IIA Academy of Auto

Automobile hot topic Q&A (Ep.200)

TEXT:

Since the beginning of this year, the auto market has been continuing to decline month-on-month. The automakers fought a price war, and the dealers "cut their wrist for survival. Then, the problem of dealers' inventory backlog was once again surfaced.

Pan Qing, Vice-president of Jaguar Land Rover China, Board of Director of Jaguar Land Rover

Q: The market is sluggish, and dealers suffer from the backlog of inventory. Even some top joint ventures’ inventory, such as SAIC Volkswagen’s, Geely’s and other Chinese brand dealers’, has significantly exceeded the warning of 1.5 months. In January, Jiangsu Automobile Dealers Association even issued a document accusing SAIC Volkswagen: “For the sake of the competition, the dealers were forced to backlog the inventory, and the SAIC Volkswagen 4S stores were in trouble.” You have said many times that inventory backlog is the "source of all evils." Vicious competition between the same brand dealers, excessive price war between different brand dealers, all led dealers to sell cars at a loss, caused service levels declined, resulting in damage to manufacturers and their brand image. However, some people think that it is difficult to increase sales without backlogging inventory. What do you think?

A: Lexus has achieved the best sales performance and the most stable price through the “zero inventory” strategy, Last year, the dealers' inventory ratio of FAW Toyota and GAC Toyota were between 0.3 and 0.8, which was the lowest, while the sales volume increased markedly, which was the highest. However, looking at those brands with poor sales, most of the dealers' inventory ratio are at a high level for a long time, and it is in a vicious circle. Some brand inventory backlogs are not so serious, and can be adjusted from time to time. So, sales can grow. But with prices and profits fallen, their brand value are also losing.

Q: Brands like Ford and Jaguar Land Rover sold poorly last year, but inventory ratio was high. Therefore, the newly appointed Ford China President Chen Anning said recently that Ford "has established the basis of a retail-oriented sales strategy, focusing on reducing dealer inventory, effectively stabilizing the transaction price of the terminal market, and helping dealers improve profitability." Pan Qing, President of Jaguar Land Rover China, also recently told the media that "Previously, manufacturers often pushed dealers to increase sales, which must be changed." We must "resolutely keep pace with dealers, and never backlog inventory." In fact, it is the industry consensus that the production and marketing system should be transformed from production promotion to demand pull. But why is it so difficult for the manufacturers, and they always have to backlog inventory?

Chen Anning, Vice President of Ford Motor Company Group, President and CEO of Ford Motor Company (China) Co., Ltd.

A: The first reason is the shareholder. Many shareholders, big bosses, or parent company executives often don't understand the market changes and the pain of terminal sales. They are only keen on unrealistic sales targets, either to make money on the stock market or to promote. However, if the sales company's CEO can’t achieve sales goals, they will be cut, so that the backlog of inventory is inevitable. Especially for joint ventures, the pressure from Chinese state-owned shareholders is often greater. When sales are falling, and products cannot be exported which is determined by the nature of the joint venture, resulting in short-selling and unemployment.

Therefore, for joint ventures, the management team must persuade the insatiable shareholders of both sides to adjust their sales targets according to changes in the market and product lines to form a demand-driven production and sales system is difficult beyond the imagination of outsiders.

Q: Last July, Changan Automobile and Ford China jointly established a new national sales service organization, and Li Hongpeng, who made great contributions to the reversal of Mercedes-Benz's sales performance, was the president. The first priority for him was to reduce the dealer inventory, which was agreed by both shareholders. However, sales declined further, and the inventory ratio rose again. Pan Qing is the global director of Jaguar Land Rover and the president of Jaguar Land Rover China. At the end of last December, he began to act as the president of Jaguar Land Rover China and Chery Jaguar Land Rover United Market Sales and Service Agency (IMSS), directly responsible for sales, and the main job in 3 months is also to lower inventory, but sales are still falling, and the reduction in inventory is not large enough. What do you think?

A: Reducing inventory is not immediately effective. Cars are the longest industry in the value chain. When terminal sales are blocked, it is almost impossible to stop the final assembly, logistics, and parts supply. Just like a sudden brake on the highway, it is easy to cause continuous rear-end collision, and the loss is heavy. In automobile production and sales chain, taking parts and components as an example, the supply cycle of parts and components is different, and coordination is very difficult. Especially in China, many brands' production and marketing systems have been used to catch up with the market. However, the market is shrinking now, and it takes a certain amount of time to adapt.

Executive vice president of Lexus China once told me that reducing inventory is complicated, involving market research, dealers placing orders, parts procurement, vehicle production, logistics, warehousing and other aspects. He worked in two joint ventures, FAW Toyota and GAC Toyota, and was responsible for the adjustment of supply and demand. However, because the Chinese market is very special, there are many uncertain factors. Moreover, in the joint venture, it is necessary to get the understanding and help from the Chinese side. Therefore, it has also been explored for a long time, and after constant adjustment and running-in, he found a solution that is more suitable for China's national conditions. Therefore, just the right inventory is a management art, which is a test of the strategic strength of carmakers.

Q: In 2013, Mercedes-Benz achieved a major reversal in half a year. How long does it take for Ford and Jaguar Land Rover to get out of the trouble?

A: It's hard to say. When Mercedes-Benz decided to change the previous production and sales model, they regarded dealers as the “first customer”. Fortunately, it coincided with the Mercedes-Benz product year, and the automobile market was also rushing upwards, so the transformation was smooth. Nowadays, the auto market has continued to shrink, and the price war is unprecedentedly fierce. Even those brands that have not been a problem would be affected. For brands such as Ford and Jaguar Land Rover, which are in serious problems, it is even worse. If there are not enough new products, it will be very difficult to achieve a reversal, at least it will take longer.

Editor:He Lun

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