By lowering selling costs, JAC can cut the price, boosting sales.
JAC Motors sells a half a million trucks a year in China, but when it introduced a compact car in 2010 it was a flop. Hoping to turn around sales, the automaker in April 2012 became the first in China to sell its cars exclusively online. With lower distribution costs, the company cut the price by 17% and sales soared. Now other brands are also selling cars online in China.
The price break was important because JAC (the brand name of Hefei-based Jianghuai Automobile Co., Ltd.) initially offered its Yueyue compact car for 43,800 yuan ($7,200), well above the 30,000 yuan ($4,900) average price of competing brands, says Feng Qianbao, the sales director of Yueyue. Selling through its dealer network, sales were only a modest 200 units per month, he says.
“I have worked in traditional industry for many years and did not know e-commerce very well,” Feng says. “But I did know we would have to think of something different to sell our car.”
Market research showed there was an overlap between the kind of consumer JAC was targeting—mainly young workers just out of university or middle-class workers in midsized cities—and online shoppers. That led JAC to open a store on Tmall.com, the big online marketplace operated by Alibaba Group, No. 1 in the Internet Retailer Asia 500 rankings. What’s more JAC became the first Chinese automaker to sell its cars exclusively online.
By reducing the costs of distributing cars through dealers, JAC was able to cut the car’s price from 43,800 yuan ($7,200) to 36,800 yuan ($6,000) while keep the same profit margin. “Online consumers, especially buyers of Yueyue, are very price-sensitive. The $1,200 discount is a huge incentive.” Feng says. Sales now total 1,500 per month, a 650% increase.
A consumer who buys a car at the JAC storefront on Tmall.com can choose to pay a 500 yuan ($80) deposit if he wants to test drive the car at one of JAC’s 260 dealers across China. If they choose to buy, they pay the balance at the dealer. But, Feng says, 80% of buyers skip the test drive and simply pay the full price of the car online. JAC then ships the car to the dealer within 20 days.
The automaker pays dealers 1000 yuan ($160) for each car they deliver. “For any auto dealer, their major profits come from after-sales services, such as repairs and parts, not from selling the car,” Feng says. “Although they earn less from selling, they can still make money through after-sales services. Besides, dealers realize they could save a lot on marketing and inventory expenses.”
Other automakers are following JAC’s lead and selling directly to Chinese consumers via the web. There are now 15 automotive brand stores on Tmall.com, includes such international brands as Chevrolet, Buick, Volvo, Volkswagen, Peugeot and Citroën. Some of them sell their cars in a special edition online to avoid conflicts with their dealer networks.
Tmall.com started selling cars in 2011. Car sales on the online marketplace increased from 2,000 in 2011 to more than 10,000 in 2012. Tmall estimates sales will reach 50,000 this year and jump to 250,000 next year.