Tesla's entry to Israel could end importers' dominance

Tesla

Other manufacturers are likely to follow Tesla in direct marketing of cars in Israel, thereby bypassing the vehicle import agencies.

The Israeli auto sector is one of the most stable branches in the economy where marketing a new vehicle and the balance of power between the players throughout the marketing value chain are concerned. Even this change-resistant sector, however, is subject to substantial changes in the next few years. Two developments over the past week provide indications of this.

The first is the Jerusalem District Court's dismissal of a petition by a number of auto importers. The Court required the petitioners to provide a manufacturer's warranty to purchasers of vehicles that were not imported through the petitioners. The second concerns US auto manufacturer Tesla, which is sizing up the Israeli auto market with a view to direct activity in Israel, perhaps as early as 2020.

These two ostensibly unconnected events have an important common denominator: they upset the long-standing model in Israel of auto marketing through official franchise holders, and pave the way for the auto manufacturers themselves to market vehicles directly in Israel.

Tesla's direct marketing revolution

Israelis are familiar with Tesla through the company's luxury electric/autonomous vehicles manufactured using advanced production methods. These vehicles have been winning a substantial share of the premium market in recent years at the expense of gasoline-powered cars.

In the global auto industry, however, Tesla is known for trying, thus far successfully, to replace the industry's traditional method of marketing through a traditional network of franchise holders with direct marketing of a new car to the consumer by the manufacturer.

The Tesla method, which is being applied by Tesla in all of its markets around the world, gives the auto manufacturer complete control of the entire customer experience, without intermediaries, including online purchasing, maintenance, and upgrading the customer to a new model at the end of the ownership period, with resale of the customer's old vehicle in the used car market.

This amounts to complete adaption of Apple's marketing model for smartphones to the global auto market. As in the case of Apple, Tesla's customers can view the new auto models in display halls owned by the company, arrange a test drive, or forego the entire physical process and make the purchase online, without meeting a salesperson, including payment, clearance, and financing through an app.

Visits by a Tesla customer to garages, owned by the manufacturer, of course, are much less frequent than for gasoline-powered vehicles. Most of the upgrades and periodic handling, including repairs, take place over the air (OTA).

Early in the decade, the traditional auto industry regarded this method as a deadly threat. In the US, for example, its penetration was accompanied by legal contests between Tesla and the strong dealers' lobby, supported by the other manufacturers. The industry's mood, however, is changing now. All of the auto manufacturers, including the most hidebound, realize that this model, which was ahead of its time, offers them substantial advantages.

The main advantage for the manufacturers is an increase in direct profit, which makes up for the unavoidable decline in traditional profit centers, such as physical maintenance in service centers and marketing of spare parts. In this situation, the traditional dealers, who receive a 7-20% sales commission, are gradually becoming a burden, instead of an asset. Another advantage of the Tesla method is manufacturing on demand, i.e. complete control of the sale process, thereby reducing the need to produce inventory for lots.

A further bonus for Tesla is a direct connection with customers, through a direct online connection between the vehicles and the manufacturer.

As a result, almost all of the world's large auto manufacturers are now running pilot programs for adopting Tesla's direct marketing, and are considering implementing the method on a regional or global scale. Some are doing this quietly behind the scenes in order to avoid upsetting their traditional marketing set-ups. Others, such as the Volvo-Geely group and various Chinese auto manufacturers, are adopting the method openly.

For the manufacturers, Israel is likely to be a test case for Tesla's direct marketing strategy. One of the reasons for this is the unique structure in Israel, in which leasing companies have substantial market power, with a large proportion of actual sales being conducted by a secondary network of dealers - the leasing companies' auto marketing set-up.

The auto manufacturers are well aware of the fact that this indirect network is fed by the substantial discounts given to importers at the expense of the manufacturers' profits. The secondary dealers' network has therefore been, and still is, a focus of friction between the manufacturers and the official importers. It is a safe bet that many in the auto industry will closely follow Tesla's effort to export its direct marketing method to Israel.

A direct importer becoming an indirect one

If Tesla's entry into Israel increases the auto manufacturers' motivation to change the prevailing marketing method in Israel, the Jerusalem District Court's ruling requiring importers to grant warranties and service for vehicles that they did not import is likely to increase the official auto importers' motivation to become indirect importers.

For decades, the prevailing franchise method generated great wealth for the auto import agencies in Israel. The market has changed, however, and the "secondary" profits from services and spare parts are dwindling in Israel, as vehicles become safer and more electronic. The legal ruling requiring the importers to absorb the cost of servicing and maintaining indirectly imported vehicles is likely to speed up the decline in these profits even more, especially in the premium sector.

Up until now, indirect imports have been a marginal nuisance in the general picture. According to figures of the Ministry of Transport, however, indirect and very small-scale imports almost doubled in the first half of 2019, in comparison with 2018, and this trend is projected to pick up steam, as more and more entrepreneurs obtain licenses to import popular brands of vehicles.

This puts the official importers at a disadvantage, particularly in view of the heavy costs resulting from the need to maintain parts, know-how, and service systems for vehicles that the official importers did not import, and which do not generate profit for them. It is therefore quite likely that some official importers will move to the other side, initially as a secondary activity in addition to official auto imports, and later perhaps even as their main activity, while abandoning their import franchise, with or without encouragement from the manufacturer for doing so.

Switching to the status of indirect importer can substantially increase the conventional importers' business flexibility through the importing of other brands. It will eliminate the need to invest in buying and maintaining prime location properties and get rid of the constant pressure from the manufacturer to meet unrealistic sales targets and promote the brand.

There are also disadvantages, for example the need to compete in marketing in the future against the manufacturers themselves marketing directly in Israel. On the other hand, the Ministry of Transport's import regulations already grant significant commercial advantages to indirect importers, and these advantages will become greater.

Israel regulation and the looming obstacles

It is difficult to predict when Tesla's direct marketing method will be adopted in Israel by the other auto manufacturers on a large scale at the importers' expense, and if and when the official importers will become indirect importers. This process is already taking place now, but quietly and marginally. Some of the official importers have already requested and received a license for indirect importing, in addition to their official license.

Regulation in Israel has quite a few tools for blocking, or at least slowing, the process of direct entry into marketing in Israel by the auto manufacturers. These include antitrust regulation and assistance from the strong lobby at the disposal of the indirect importers in the Ministry of Transport.

The international auto manufacturers, however, are not novices. Many of them have a physical presence and interests in Israel in the auto-tech sector, which gives them the ability to closely monitor developments. Progress is inevitable, and it is doubtful whether even the Israeli regulator will stop the winds of change in auto industry, which are assuming the proportions of a hurricane.

Published by Globes, Israel business news - en.globes.co.il - on October 23, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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