VW's dealer talks in U.S. will target profitability

BERLIN — Volkswagen brand's plan to revamp its dealer relationships around the world to gain more direct digital access to consumers is largely complete in Europe and about to get started in South America.

But when formal discussions with U.S. dealers begin in 2019, they'll be much different from talks in the rest of the world, Volkswagen of America officials insist.

Negotiations in the U.S., which will be led by Werner Eichhorn, head of sales for VW's North American region, are expected to focus not only on new digital revenue streams, but on improving the lagging profitability of U.S. dealerships.

At an event here last month, Juergen Stackmann, Volkswagen brand board member responsible for sales, told Automotive News Europe that the global talks are aimed at giving the automaker better access to consumers — allowing VW, its dealers and other third parties to market to them digitally through a single unified platform similar to Apple's iTunes or App Store that can be accessed from a connected device, whether the car or a smartphone. The goal, in part, is to create new revenue streams for dealers to replace those lost from service operations as VW prepares stock its lineup with electric vehicles.

Last month, delegates representing some 3,500 VW sales points across Europe agreed in principle to renegotiate their contracts effective April 2020, which coincides with the new I.D. family of fully electric and digitally connected vehicles. Stackmann expects virtually all to sign off by the Nov. 30 deadline.

Company officials declined to provide details about the amended agreements in Europe, since the roughly 400-page set of agreements has only just been sent and not yet seen by VW's retailers.

However, a source told Automotive News Europe that the new pacts include fewer manufacturer requirements on such things as the minimum number of training hours required for sales managers. They also have provisions for shared access to customer data and a new, separate contract governing how the automaker and the dealer will work together to offer digital services, the source said.

Volkswagen says it wants to use much of that European model globally.

"We will have to reach agreement on the business model with the regions regardless of where they might be, since a seamless customer journey logically can only exist when we work differently" from the past, Stackmann said. "Whether we have to renegotiate contracts, we will have to see, but we have to start talks with our retailers worldwide, and we're using Europe as a blueprint."

U.S. franchise laws

But in the U.S. — which Stackmann says will be among the last markets addressed — strong franchise laws preclude interfering with the relationship between a dealership and customers. What's more, the brand has little desire to pick fights with its struggling dealer network.

"We are a very different market from Europe, and our parent recognizes that," said Derrick Hatami, head of sales for Volkswagen of America. "We're on our own timeline, and we have to approach things differently here. But the evolution that's happening in retail is an industrywide phenomenon that all OEMs have to figure out."

Hinrich Woebcken, CEO of Volkswagen Group of America, told Automotive News last year that average profitability among the brand's U.S. dealer network was only 1 to 2 percent, compared with the 2.5 percent average among nonluxury dealers, according to the National Automobile Dealers Association.

Woebcken at the time pointed to several changes the factory could implement to help make dealerships more profitable, especially as the brand prepares to launch the I.D. Crozz electric crossover in 2020 and at least three more battery-powered vehicles after that. One was to simplify the way dealers and consumers order their vehicles, to both reduce complexity and allow dealers to maintain smaller inventories. He also said he wanted to look at unnecessary factory mandates.

Michael DiFeo, chairman of the Volkswagen National Dealer Advisory Council and dealer principal of Linden Volkswagen in Roselle, New Jersey, said dealers look forward to the conversation.

"In general, there's going to be a change in our industry, with disruptions coming from evolving technologies and use of motor vehicles, which all dealers will have to navigate," DiFeo said. "I appreciate that Volkswagen has been inclusive, indicating that they are willing to share in what could be new revenue streams. But it all has to be counterbalanced with the fact that there are strong franchise laws in the U.S. that have to be respected."

Offsetting lost revenue

Volkswagen's actions are driven in large part by changes expected to flow from its introduction of several EVs, which require fewer general maintenance visits to a dealership.

But VW is taking the opportunity to address other niggling issues that could mean dealers see their customers less. For example, the VW.OS software that will be introduced with the EVs and possibly in the next-generation Golf will allow for cloud-based over-the-air updates, eliminating another reason a consumer might have to bring in the vehicle for service.

To offset that lost revenue, Volkswagen wants to open marketing opportunities for itself, its dealers and potential third parties via a new platform branded Volkswagen We. The platform is accessible to anyone with a connected device and interested in mobility-related content and services. VW believes it can attract new customers and increase loyalty of existing ones this way.

By the start of the next decade, the brand wants each new EV that leaves the factory to be fully digitally connected, serving as a node in the Internet of Things and capable of communicating with other intelligent devices. That would enable Volkswagen to track a car owner's preferences and provide relevant offers. Such a system would require the driver to log in to a cloud-based digital platform the way an Apple ID is used to browse and make purchases in the iTunes store.

One key advantage of such digital ecosystems such as iTunes is the high rate of loyalty companies achieve for their products. VW officials point out that with every third-party app, book or song bought digitally and linked to a specific Apple ID, the likelihood that a smartphone owner might purchase a competing Android-based tablet sinks since those items cannot be transferred.

At present, company officials note, automakers often have little information about end users, and even when they have the registration data, it doesn't give reliable clues as to who is driving the vehicle. That has real-world consequences far beyond marketing.

For example, in Europe, the recall of noncompliant diesel models was more difficult for VW in part because a car registered in Germany might now belong to someone in Italy.