The downturn turned upturn is not the

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1 A Fleeting Opportunity: Expanding the Traditional Fleet Buyer-Seller Relationship As fewer new-vehicle purchases forced automakers to sell to fleet buyers their largest (albeit lowest-margin) customer group it became a buyer s market for those in the fleet business. And they knew it as they cherry-picked fleet mix and volumes and aggressively negotiated terms with the auto companies. Now, with the recession ending, the buyer s market is turning into a seller s market and disrupting the traditional fleet buyer-seller relationship. The downturn turned upturn is not the only dynamic at play in the automotive industry. Other industry trends are also poised to disrupt the relationship between fleet buyers including car rental firms, large corporations and governments and their automotive sellers who must act fast to adapt: Formerly mere threats, Craigslist, ebay and other automotive websites are now fully developed rivals, playing havoc with traditional

2 automotive markets and sales channels. Automakers are entering new businesses, such as car-sharing services, and competing with their commercial fleet customers. Fleet buyers are consolidating and strengthening their demand-side bargaining power. Green technology players are entering the market. Circumventing the dealer sales network, original equipment manufacturers (OEMs) are introducing green vehicles such as electric cars through commercial fleet buyers. We expect the shift from a fleet buyer s market to a seller s market to begin early in 2011 (see figure 1). As OEM capacity and consumer demand align, the automakers are moving vehicles into the more profitable retail sales channel, raising vehicle prices and reducing purchase incentives (see figure 2 on page 50). For fleet buyers, it will mean a far less favorable vehicle mix, an escalation in prices and a shortage of supply. As a result, the traditional fleet buyer-seller relationship will have to change. The companies speediest to adapt will capture an earlymover advantage. There is no time to lose, as the window of opportunity for change is closing rapidly. Getting Down to Business We recognized earlier this year that what s needed in the automotive manufacturer-fleet buyer relationship is a true game-changer a new business model that will transform the current operating model of both parties. We didn t arrive at our conclusion in isolation: It became clear during our work for a fleet buyer, as we helped the company roll out a post-recession strategy. The game-changing approach that we developed, called the Total Collaborative Value Contribution Relationship (TCV) model, encourages automakers and fleet buyers to engage in long-term relationships, FIGURE 1 Auto market crashed in , with projected recovery initiating in North America new vehicle sales (millions of units) Buyer s market Seller s market Europe new vehicle sales (millions of units) Buyer s market Seller s market Sources: AutoInsight Q database; A.T. Kearney analysis Crisis Recovery Stabilization Actual Forecast Crisis Recovery Stabilization Actual Forecast A.T. Kearney EXECUTIVE AGENDA 49

3 FIGURE 2 As price per vehicle rises, automakers reduce purchase incentives, especially to fleet buyers Price per vehicle (North America) 90% 85% 80% 75% Transaction* 70% 1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 Incentives per vehicle (North America) $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Q1 07 Q2 07 Truck Q3 07 Q4 07 Car Q1 08 Q2 08 Q3 08 Q4 08 *Transaction is based on manufacturer s suggested retail price Source: A.T. Kearney analysis Q basis points Q % Q3 09 Q4 09 working together closely to take a shared approach to markets, investment plans and operational structures. Essentially, it is a call to get involved in your business partner s success. It is no secret that when large buyers and sellers work collaboratively, value in the form of revenues, efficiencies and profits may be created for both parties; as witnessed for almost 30 years now in the consumer goods and retail industry. What ultimately compelled Procter & Gamble and Wal-Mart to collaborate was the recognition that their relationship expanded beyond procurement into supply chain and customer service. Alone, their operations did not reach full potential; as a team, they flourished. P&G and Wal-Mart built their relationship on a single objective: to eliminate inefficiencies across the entire value chain, from production processes and delivery lead times to customer service. Together, they reduced product ordering time by three to four days, improved billing accuracy from 15 to 95 percent, and expanded knowledge and insights about their customers in an effort to improve performance. FIGURE 3 Manufacturer profits could rise through collaborative relationship with fleet buyers 1 OEM additional profits 2 (US$ millions) $2.80 $0.80 $ % $0.10 TBD $4.50 Advantages of new model Increase cash flow Improve fleet utilization and revenue generation Maximize network asset utilization Minimize working capital Raise car sales price Traditional relationship Acquisitions Fleet operations Car sales Products and services Notes: 1 Scenario analysis based on 7,500 new vehicles and 2,500 used vehicles; 70% buyback, 30% risk units 2 OEM is original equipment manufacturer Total profit Sources: AutoInsight; A.T. Kearney analysis 50 a fleeting opportunity

4 Similarly, the TCV model is designed with advantages for both sides of the fleet buyer and seller relationship. Figure 3 offers an illustrative case, highlighting how an automotive manufacturer would use the model to increase profits by more than 60 percent. Those in the relationship have the following characteristics: Manufacturer sells approximately 10,000 vehicles to a fleet operator earning profits at 2009 levels. Fleet buyer acquires a balanced fleet mix: 70 percent program buyback, 30 percent risk, with an average holding period of 6 and 17 months respectively. Manufacturer and fleet operator share distribution (in- and outbound logistics) costs and remarketing channels to reduce total cost of operations and maximize resale profit. Manufacturer procures segmented consumer data, real-time maintenance and vehicle reliability data. Touch Points and Intersections to Value The success of any collaborative relationship rests on the ability to move beyond performing simple one-off transactions and instead work within a network of relationships in which buyers and sellers have multiple touch points and areas of collaboration. All points in the network are opportunities to make strategic tradeoffs and capture value. Figure 4 highlights the areas of intersection in the fleet buyer and seller relationship. Fleet acquisition. In the TCV relationship model, buyers and sellers establish an end-toend view of all costs in fleet operations and FIGURE 4 The collaboration points between fleet buyers and sellers Fleet functions Procurement Logistics Marketing Remarketing Fleet activities Acquisition Fleet operations Products and services Vehicle sales Optimized program and risk business models New procurement models Joint maintenance network Logistics integration Marketing campaigns and promotions New product and feature launch analysis Vehicle allocation based on customer segmentation and market penetration Quality diagnostics, early defect detection and warranty analysis Monetization of media assets Joint car sales networks and collaborative car sales strategy Monetization of media assets Virtual store operations Source: A.T. Kearney analysis A.T. Kearney EXECUTIVE AGENDA 51

5 expand negotiations to include used vehicles. Negotiations still revolve around traditional targets such as depreciation rates and price discounts, but go a step further to include maintenance terms, refurbishment and transportation costs. This expanded scope broadens the upside potential for both parties. Indeed, using this approach, our fleet buyer clients have saved between 7 and 17 percent in acquisition costs, spent less on elements that were disproportionately high, balanced their fleet mixes to match demand more precisely and, due to economic constraints, purchased refurbished vehicles. As part of the deal, the fleet buyer and a few select global automakers agreed on the purchase of more than 5,000 used vehicles, whereby the buyer achieved advantageous conditions and the automakers generated some sizeable revenue streams from otherwise unproductive assets parked in their lots. The approach also introduces several new procurement models including revenue sharing and pay-as-you-go which not only increase the number of vehicles available but also make the deals more flexible. 1 For instance, in the revenue-sharing model, the automaker retains ownership of the vehicle and is paid by the fleet buyer based on the revenue the vehicle generates (see sidebar: The Case for Revenue Sharing). The pay-as-you-go model is similar, except that the automaker owns the fleet vehicles and the fleet buyer s payment is based on each vehicle s use. These models are designed as win-wins for both sides: The buyer can increase its fleet of vehicles during peak and seasonal The Case for Revenue Sharing Companies that operate large fleets of vehicles often struggle with unique demand issues, requiring them to hold different fleet levels throughout the year. Rental car companies, for example, must fulfill demand during summer peak times, so fleet size might double over the course of one to two months. There is usually a shortage of vehicles during these summer peak times as automakers programs require cars to be kept for a minimum of four to six months. The obvious disconnect (one-to-six month peak season versus four-to-six month program time) does not allow fleet buyers enough flexibility and forces them to cut demand. The solution to this problem is a revenue share model in which the automaker and the fleet buyer team up to provide excess inventory during short periods of peak demand (see figure). The revenue generated from these sales is shared between the partners, allowing for win-win situations: The fleet buyer captures FIGURE: Revenue-sharing procurement model Source: A.T. Kearney analysis market share and the automaker gets an above-market depreciation rate and expanded exposure to its vehicle lineup. All associated risk factors, such as maintenance or damage costs, are factored into this ready-to-go business model. Number of vehicles 20,000 18,000 Peak demand 16,000 1 Low demand 14, ,000 Expand fleet portfolio 10,000 8,000 Readjust fleet 6,000 1 Vehicle utilization (high) portfolio 4,000 2,000 2 Vehicle utilization (low) 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1 Historically, companies use one of two procurement models: A program model where the automaker retrieves the vehicle after a set time period, or a risk model where the fleet buyer takes full ownership of the vehicle. These models tend to limit the pool of vehicles available for negotiation. 52 a fleeting opportunity

6 periods, while the seller earns higher revenues per vehicle. Fleet operations. Automakers and fleet buyers often have overlapping and redundant vehicle maintenance networks. By negotiating joint use of maintenance networks, both sides benefit. Right-sizing maintenance networks, for example, can cut costs, increase scale and cash flow, improve maintenance practices and make use of the best shops. Joint workshops can reduce costs by between 5 and 15 percent and operate workloads at maximum efficiency. Combining operations and logistics systems can be particularly rewarding in the vehicle acquisition and buyback processes, as our fleet buyer learned firsthand when it broadened its in-fleet operations to combine transportation volume with select automakers and then chose the most economical transporters. Products and services. Products and services is perhaps the area with the most under-realized value because both parties share customers but seldom share information about their customers. Fleet buyers offer an excellent platform to present an automaker s products to a target audience while also capturing product feedback from customers. The following are several ways in which buyers and sellers can collaborate: Marketing campaigns and promotions. The complementary character of fleet buyer and seller businesses supports target marketing and the cross-selling of products to each other s customers. Fleet buyers can also offer automakers firsthand experience with their products. For example, they can promote vehicle models to specific customer segments, launch joint marketing campaigns to target specific customers (such as a campaign to sell electric vehicles to customers who want to purchase green products), and advertise products in the partner s branch or through joint promotional campaigns. New-product analysis. Fleet buyers can provide a venue for test marketing new products and new features in certain markets or with new customer segments. Buyers can analyze usage patterns and collect feedback from Fleet buyers offer an excellent platform to present an automaker s products to a target audience while also capturing feedback from customers. drivers, which can help automakers refine their products prior to market launch. Customer segmentation. Combining buyer and seller customer relationship management (CRM) capabilities can yield valuable information for manufacturers use in product development and customer segmentation. Figure 5 on page 54 illustrates a collaborative vehicleallocation strategy designed to capture new customers by increasing a manufacturer s presence in select areas. We assessed the concentration of target customers in the fleet buyer regions, analyzed the manufacturer s penetration across markets, and then reallocated vehicles to underpenetrated geographic areas with a large concentration of target customers. Quality diagnostics. Given their extensive customer reach, management and technical- A.T. Kearney EXECUTIVE AGENDA 53

7 support capabilities, fleet buyers can help manufacturers identify potential quality problems early and analyze the root causes. An integrated communications system allows the fast exchange of information about product performance. Media strategy. Automakers and fleet buyers manage a broad range of assets, from real estate and corporate websites to license tags and loyalty programs, that can be used to promote each other s products. A joint media strategy can help both partners reach a wide range of new customers at minimal cost. Vehicle sales. One challenge for fleet owners and automakers is learning how to unlock the value in used cars. Used-car sales are a safety net for automakers in recessionary times, as they help offset a decline in new-vehicle sales and generate additional cash flow. Although there are profits to be made in used cars, the amounts are often not what they should be as automakers and fleet owners vie for the same customers and are limited by geographic reach. Often, transactions become purely about price. Through collaboration, however, both parties can reap some of the potential rewards. Consider the following: Joint sales networks. When automakers and fleet sales join forces, each partner s portfolio of used vehicles is exposed to a broader customer base. Technology connects these sales networks presenting offers to customers in several different locations at the same time. Collaborative sales strategy. A joint-sales strategy will capture the highest margins possible for each vehicle, while ensuring that partners do not compete against each other with the same products in the same markets. The strategy should coordinate vehicle portfolios based on time-to-market, portfolio mix and geography, and systematically allocate the most vehicles to the sales channel that provides the highest margins. Partners can expand their vehicle value propositions as they see fit, offering add-on services, such as transportation offers, maintenance plans or usage guarantees. Virtual store operations. Not to be overlooked is how networks can be expanded via Internet direct sales, aggregators and e-auctions. For example, when we developed an online channel to help a fleet buyer sell to its largest customers accelerating the vehicle selection, delivery and payment process we soon realized that a similar channel could easily speed up the internal transactions that take place among automakers, fleet buyers and their third-party vendors. Capturing First Mover Advantage The strong, mutually beneficial relationships made possible by our Total Collaborative Value Contribution Relationship model will allow automakers and fleet buyers to sustain a mutually profitable relationship. Armed with a strategy, 54 A FLEETING OPPORTUNITY

8 the next step is to capture first-mover advantage. The advantages to first movers are clear: Partner choice. Ensure choice of partners that presents the best fit in terms of procurement, operations and vehicle sales. Partner opportunities may vanish rapidly, as market players recognize the new world order and develop alliances, limiting the availability of potential allies. Time. Time is your enemy in a competitive market, so moving now will provide an essential head start in developing the structure to support the new relationship, including integrating IT and communications systems, coordinating fleet planning and negotiations with third-party suppliers, and developing sales strategies. Speed. The faster you move, the sooner you can capitalize on current market conditions, improve profitability and counter emerging trends. Exclusivity. Both partners are able to lock in the new approach across the fleet value chain for a minimum of two to three years, which is enough time to sustain and expand on the competitive advantage. The ability to act fast is one requirement for making the most of this new relationship model. Securing a commitment from the executive branches of both organizations to make the new relationship a strategic priority is also necessary. Mid-2011 and Beyond By this time next year, it should be relatively easy to recognize the leading fleet buyers and sellers in the industry. They will be working within fairly solid partnerships; they will have made the necessary trade-offs to maximize the overall value that both parties can create; and they will have established how to communicate the new relationship without disrupting each other s operations or other partnerships. The real measure will be that they are here at all. The surviving fleet buyers and sellers will not only have recognized the opportunity early on, but will also have figured out how to capitalize on it. Consulting Authors Dan Oxyer is a partner in the automotive practice. Based in the Detroit office, he can be reached at dan.oxyer@atkearney.com. Andreas Liedtke is a principal in the automotive practice. Based in the Zurich office, he can be reached at andreas.liedtke@atkearney.com. Arsenio Martinez Simon is a consultant in the transportation, travel and infrastructure practice. Based in the New York office, he can be reached at arsenio.martinez.simon@atkearney.com. Arun Kumar is a consultant in the automotive practice. Based in the Detroit office, he can be reached at arun.kumar@atkearney.com. A.T. Kearney EXECUTIVE AGENDA 55

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