Vertical View

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.
he 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

Kearney analysis ‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16 ‘18 ‘20 A. the automakers are moving vehicles into the more profitable retail sales channel. 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. FIGURE 1 Auto market crashed in 2008-2009.2 16.0 16. We didn’t arrive at our conclusion in isolation: It became clear during our work for a fleet buyer. with projected recovery initiating in 2011-2012 North America new vehicle sales (millions of units) Buyer’s market 1 21 20 19 18 17 16 15 14 13 12 11 10 9 2 Crisis Recovery Europe new vehicle sales (millions of units) Seller’s market 3 Stabilization 20. We expect the shift from a fleet buyer’s market to a seller’s market to begin early in 2011 (see figure 1). such as car-sharing services. • Green technology players are entering the market.2 19. Kearney | EXECUTIVE AGENDA 49 .9 Seller’s market 3 Stabilization 23. • Fleet buyers are consolidating and strengthening their demand-side bargaining power.6 Buyer’s market 1 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 2 Crisis Recovery 21.5 18. A.8 12. As OEM capacity and consumer demand align. As a result.Vertical View automotive markets and sales channels.3 14. The companies speediest to adapt will capture an earlymover advantage. There is no time to lose. The game-changing approach that we developed. as the window of opportunity for change is closing rapidly. the traditional fleet buyer-seller relationship will have to change. as we helped the company roll out a post-recession strategy. For fleet buyers. an escalation in prices and a shortage of supply. it will mean a far less favorable vehicle mix.T . Circumventing the dealer sales network. encourages automakers and fleet buyers to engage in long-term relationships. raising vehicle prices and reducing purchase incentives (see figure 2 on page 50).T.1 18. called the Total Collaborative Value Contribution Relationship (TCV) model.9 20. • Automakers are entering new businesses. original equipment manufacturers (OEMs) are introducing “green” vehicles such as electric cars through commercial fleet buyers. and competing with their commercial fleet customers.8 19.7 Actual Forecast Actual Forecast ‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16 ‘18 ‘20 Sources: AutoInsight Q2 2010 database.

their operations did not reach full potential.T. 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 buyers1 OEM additional profits2 (US$ millions) +60% $0.50 $2.10 $0. 30% risk units OEM is original equipment manufacturer 50 a fleeting opportunity . efficiencies and profits — may be created for both parties. improved billing accuracy from 15 to 95 percent. 70% buyback.80 $4. they reduced product ordering time by three to four days. Essentially. from production processes and delivery lead times to customer service. especially to fleet buyers Price per vehicle (North America) 90% 85% 80% 75% Transaction* 70% +900 basis points 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 $3. it is a call to get involved in your business partner’s success. as witnessed for almost 30 years now in the consumer goods and retail industry.000 $1. It is no secret that when large buyers and sellers work collaboratively. Alone. investment plans and operational structures.80 TBD 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 Notes: 1 2 Acquisitions Fleet operations Car sales Products and services Total profit Sources: AutoInsight. Kearney analysis working together closely to take a shared approach to markets. value—in the form of revenues. 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.000 $5.000 $2.70 $0. P&G and Wal-Mart built their relationship on a single objective: to eliminate inefficiencies across the entire value chain.500 new vehicles and 2.T.Vertical View FIGURE 2 As price per vehicle rises. Kearney analysis Scenario analysis based on 7. as a team. A.500 used vehicles. they flourished. Together. automakers reduce purchase incentives.000 $4.000 Truck Car – 40% Q1 ‘07 Q2 ‘07 Q3 ‘07 Q4 ‘07 Q1 ‘08 Q2 ‘08 Q3 ‘08 Q4 ‘08 Q1 ‘09 Q2 ‘09 Q3 ‘09 Q4 ‘09 *Transaction is based on manufacturer’s suggested retail price Source: A.

Fleet acquisition. 30 percent risk.Vertical View Similarly. 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. the TCV model is designed with advantages for both sides of the fleet buyer and seller relationship.T . 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. • Fleet buyer acquires a balanced fleet mix: 70 percent program buyback. Kearney | EXECUTIVE AGENDA 51 . • Manufacturer and fleet operator share distribution (in. Kearney analysis A.T. real-time maintenance and vehicle reliability data. Figure 4 highlights the areas of intersection in the fleet buyer and seller relationship. In the TCV relationship model. early defect detection and warranty analysis Monetization of media assets Joint car sales networks and collaborative car sales strategy Vehicle sales Monetization of media assets Virtual store operations Source: A. Figure 3 offers an illustrative case.and outbound logistics) costs and remarketing channels to reduce total cost of operations and maximize resale profit. buyers and sellers establish an end-toend view of all costs in fleet operations and The collaboration points between fleet buyers and sellers Fleet functions Procurement Acquisition Fleet operations Logistics Marketing Remarketing Optimized program and risk business models New procurement models Joint maintenance network Logistics integration Marketing campaigns and promotions New product and feature launch analysis Fleet activities Products and services Vehicle allocation based on customer segmentation and market penetration Quality diagnostics. • Manufacturer procures segmented consumer FIGURE 4 data. All points in the network are opportunities to make strategic tradeoffs and capture value. with an average holding period of 6 and 17 months respectively.

the fleet buyer and a few select global automakers agreed on the purchase of more than 5.000 12. purchased refurbished vehicles.000 10. in the revenue-sharing model. or a risk model where the fleet buyer takes full ownership of the vehicle.000 used vehicles. Indeed. The revenue generated from these sales is shared between the partners.000 18. whereby the buyer achieved advantageous conditions and the automakers generated some sizeable revenue streams from otherwise unproductive assets parked in their lots. 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). This expanded scope broadens the upside potential for both parties. 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.Vertical View expand negotiations to include used vehicles. 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. our fleet buyer clients have saved between 7 and 17 percent in acquisition costs. balanced their fleet mixes to match demand more precisely and. allowing for win-win situations: The fleet buyer captures market share and the automaker gets an above-market depreciation rate and expanded exposure to its vehicle lineup. using this approach. 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. requiring them to hold different fleet levels throughout the year.000 16.000 14. As part of the deal. except that the automaker owns the fleet vehicles and the fleet buyer’s payment is based on each vehicle’s use.000 6. due to economic constraints. refurbishment and transportation costs. The solution to this problem is a “revenue share” model in which the automaker and the 1 fleet buyer team up to provide excess inventory during short periods of peak demand (see figure).000 0 Peak demand 1 Expand fleet portfolio Low w demand deman 2 1 Ve Vehicle utilization (high) V 2 Ve Vehicle V e utilization (low) Jan Feb Mar Apr May Jun Jul Readjust fleet portfolio Aug Sep Oct Nov Dec Source: A. All associated risk factors. 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. are factored into this ready-to-go business model. 52 a fleeting opportunity .000 4. companies use one of two procurement models: A program model where the automaker retrieves the vehicle after a set time period.1 For instance. These models tend to limit the pool of vehicles available for negotiation.000 2.T. for example. Kearney analysis Historically. such as maintenance or damage costs. so fleet size might double over the course of one to two months. Rental car companies. Negotiations still revolve around traditional targets such as depreciation rates and price discounts. spent less on elements that were disproportionately high.000 8. The pay-as-you-go model is similar. but go a step further to include maintenance terms. FIGURE: Revenue-sharing procurement model Number of vehicles 20. must fulfill demand during summer peak times.

Products and services. Figure 5 on page 54 illustrates a collaborative vehicleallocation strategy designed to capture new customers by increasing a manufacturer’s presence in select areas. Joint workshops can reduce costs by between 5 and 15 percent and operate workloads at maximum efficiency. Fleet operations. By negotiating joint use of maintenance networks. and then reallocated vehicles to underpenetrated geographic areas with a large concentration of target customers. 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. Right-sizing maintenance networks. Given their extensive customer reach. Combining operations and logistics systems can be particularly rewarding in the vehicle acquisition and buyback processes. improve maintenance practices and make use of the best shops. Fleet buyers offer an excellent platform to present an automaker’s products to a target audience while also capturing product feedback from customers. management and technicalA.Vertical View periods. Kearney | EXECUTIVE AGENDA 53 . 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. Customer segmentation. analyzed the manufacturer’s penetration across markets. The following are several ways in which buyers and sellers can collaborate: Marketing campaigns and promotions. Fleet buyers can also offer automakers firsthand experience with their products. both sides benefit. 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. Combining buyer and seller customer relationship management (CRM) capabilities can yield valuable information for manufacturers’ use in product development and customer segmentation. can cut costs. Automakers and fleet buyers often have overlapping and redundant vehicle maintenance networks. For example. The complementary character of fleet buyer and seller businesses supports target marketing and the cross-selling of products to each other’s customers. increase scale and cash flow. while the seller earns higher revenues per vehicle. New-product analysis. drivers. for example.T . Fleet buyers can provide a venue for test marketing new products and new features in certain markets or with new customer segments. We assessed the concentration of target customers in the fleet buyer regions. 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. they can promote vehicle models to specific customer segments. Quality diagnostics. which can help automakers refine their products prior to market launch.

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

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

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