The Online Auto Scene in Japan

Roadmap 2000: Japan's Online Auto Market

PARTS PROCUREMENT

Plenty of open road here. MITI forecasts Japan's business-to-business market in autos and auto parts will be worth ¥17.4 trillion by fiscal 2003, according to a report by Nikko Salomon Smith Barney. An Internet-based parts procurement system, by reducing inventories and cutting delivery times, would be "like a Holy Grail for the auto industry," says industry analyst Shu Nung Lee at Lehman Brothers Japan. The market is just starting to take shape. Ford and GM planned on competing at first -- and courted Japanese counterparts to join them -- but in late February they joined with DaimlerChrysler to create a joint-venture Internet-based auto parts supply exchange. Two days before their announcement, however, Toyota unveiled its own system: iStarXchange, developed in partnership with software maker i2 Technologies. Both of the new exchanges will be jointly owned but operate as independent companies. Toyota will hold a majority stake in iStarXchange, which will operate out of Torrance, California.

In Japan -- well, who knows? It's hard to even compare the Japanese situation. For one thing, very few studies have been carried out, according to Daiwa Research Institute's Shogo Noguchi, author of one of the few reports dedicated to the subject. And while use of the Net is clearly rising -- the number of active adult Net users in Japan went from 7.6 million in 1998 to 10.3 million in 1999, and will rise to 16.5 million this year, according to eMarketer -- whether that increase will lead to a significant number of cars being researched and bought online is anyone's guess.

Noguchi estimates that Japan's fledgling online auto industry garnered less than 1 percent of all new auto sales in 1999. Attribute part of that low figure to the sector being new, but Noguchi argues that another reason is that buying a car online offers few benefits to Japanese consumers. He blames it on Japan's old-fashioned, iron-clad auto distribution system, reminiscent of more feudalistic days: makers tightly control their associated dealers, who can offer only one brand and certain predetermined models. Dealers, for their part, fiercely protect their stringently defined territories, upon which -- traditionally -- others dare not tread.

The demerits of this system are obvious. Dealers are mandated to sell cars that may not do well in their territory. The lack of overlapping territories keeps price competition to a minimum. Japanese consumers must travel from one dealer territory to another to compare the pluses and minuses of different models sold on different lots, with little bargaining power.

But nearly a decade of recession has made auto dealers here increasingly desperate for innovative ways to squeeze out a profit. Depressed sales, new international management, and the Internet are forcing the industry to consider change. For a dealer, teaming up with a Web player can mean reduced staff and marketing costs and increased productivity. The difference is that, in Japan, the Internet doesn't necessarily increase competition or make cars any cheaper.

RULES OF THE ROAD
Doing business in Japan is still very much about harmony, something the major online auto players seem to be aware of: both Autobytel-Japan and CarPoint Japan stick to being information portals, or "online buying services," instead of presuming to sell directly. Their sites offer such information as vehicles' popularity ratings, purchasing guides from independent sources, insurance package comparisons, and dealer referrals. "Until now," says Autobytel-Japan spokeswoman Tsukako Oishi, "customers couldn't find all this information about what we call 'Car Life' in one place -- not on the Internet, not in magazines, certainly not from dealers or makers."

On these sites, users request a price estimate on a vehicle and enter their name, address, and email. The site automatically determines whether there's a local associated dealer who can supply such a car. If so, the request is relayed, and the dealer contacts the potential customer within two working days to further negotiate the deal.

AUCTIONS

Will auto auctions be the next online tsunami in Japan? In February CarPoint Japan cooperated with Softbank Group's Onsale Japan, an Internet auctioneer, for a test auction of Ford's new subcompact "Ka" model. CarPoint Japan says it's considering more auctions in the future. Onsale Japan started Internet operations last year, specializing in computer hardware. Autobytel-Japan is considering online auctions of used vehicles through its link-up with AucNet, an auto auction business with 5,700 member companies and its own online auto site, e-Carnet. Autobytel-Japan also has links to Gulliver International, which features used auto auctions on its site. Honda Motor reports that it will be the first manufacturer to get in on the used car online auction scene, with vehicles offered by dealers and other companies. Yahoo Auction was launched last September, and by mid-January the total daily average bidding amount was estimated at more than ¥90 million, with about 28,000 pieces of merchandise coming in per day. Nikko Salomon Smith Barney estimates there will be up to 6 million Internet auction users in Japan by fiscal 2003.

LEASING

Low! Low! Low! monthly payments are on their way to Japan. Car lease revenues here total less than 10 percent of car sales to individuals, leaving considerable room for improvement. GE Capital bought ¥320 million worth of shares in Autobytel-Japan late last year, in anticipation of launching an affiliated auto leasing service: Japan Leasing Auto Co. will start operations this year.

For its part, CarPoint Japan has agreements with Nissan, Mitsubishi, Isuzu, Fuji Heavy Industries, and Mazda, as well as BMW, Ford Japan, and Citroen, allowing it to offer visitors price estimates from about 800 dealers. Investors include Softbank E-Commerce, Yahoo (which has its own auto info portal), 7-Eleven Japan, and Microsoft, the parent company of CarPoint.

In an arrangement with 7-Eleven, CarPoint Japan's site can be accessed from terminals in any of the convenience-store chain's 8,000-plus terminals. "More than 3.2 million 7-Eleven customers arrive by car, and there are many car magazines on sale there," says CarPoint Japan spokeswoman Yukiko Suzuki. "So we know that 7-Eleven shoppers are interested in cars." She also notes the chain is open 24 hours a day. Autobytel-Japan is taking konbini-based e-commerce seriously, too, teaming up with nationwide chain Lawson, which has 7,200 outlets. It remains to be seen whether anyone wants to research a car purchase while standing up in a convenience store.

Methods employed by Autobytel-Japan and CarPoint harmonize very carefully with the existing auto distribution system in Japan. Consequently both outfits are welcomed by dealers eager for a new sales channel.

BE DIRECT -- AND DISCREET
Across the ocean, however, the original Autobytel.com and MSN CarPoint are moving toward direct online sales. With their Japanese counterparts emphasizing that such treacherous notions are not even beginning to form in the backs of their minds, selling autos directly online in Japan is left to maverick Net outfits, which must go against tradition to win profits.

Two of the main direct sales sites for new cars are Quick and Creative House/Reo, both privately owned. Like CarsDirect.com and CarOrder.com in the US, these companies handle negotiations and delivery, meaning consumers never have to visit a dealer. Unlike their US counterparts, however, they have to rely on "underground" channels to secure their new vehicles.

One such channel is the auto dealers themselves, who are becoming more open to the idea of offloading unsold new cars to "subdealers" like Reo. Traditionally carmakers have offered big financial incentives to dealers to make their monthly quotas, while strongly discouraging them from passing unsold vehicles on to subdealers.

Online used car sales in Japan are gaining speed. Small wonder -- in the offline world, used car sales outpaced new car sales in 1998, according to analyst Shu Nung Lee at Lehman Brothers Japan. Just about every site that offers information, dealer referrals, or sales of new vehicles does the same for used autos, and a number of companies that specialize in used vehicles offline also sell direct or have auctions online. Used-car auctioneer USS Co. began Net sales earlier this year with an inventory of 60,000 vehicles. CarPoint K.K. signed on as a business partner, handling the online system operations. Though 80 percent of the online auto business in the US pertains to new vehicles, CarPoint believes used vehicles may command 50 percent of the Japan Net business, so, along with USS, it's positioning itself to respond accordingly. Autobytel-Japan users can search megasite Recruit's online database of used cars, also available at Recruit's own site, Isize. Toyota is getting in on the used auto market too. Market share for used Toyota vehicles is less than 7 percent, but the Gazoo site is geared to increase this. Gazoo also provides information on any make of used vehicles carried by its partner dealers.

ADDITIONAL LINKS

Autobytel-Japan CarPoint Creative House/Reo Quick Gazoo.com Recruit's referral/info service Yahoo Japan's auto portal @Cars, Yomiuri Online's portal Car24's "Internet car business" E-carnet's used car sales and auctions Gulliver E-car AucNet auto auctions

Since companies that sell directly from the Internet are not considered official dealers, they aren't constrained by the usual hassles of territory and brand restrictions. The small staff and space required by online sales (with no physical stock of cars) makes for unusually low overhead, enabling the direct dealers to come up with more competitive prices. Their profits come from the sales margin between supplier and customer, and from related services like loans. Hieda estimates Reo's annual revenues at ¥2.4 billion.

The Reo site doesn't feature any vehicle information online, however. Instead, the company targets customers who already know the make and model they want and are just looking for a low price. A customer indicates the desired specifications, and then Reo contacts one of the more than 400 dealers it works with to track down matching vehicles and arranges for shipment with a delivery company. Reo also lures customers with its low-interest financing, starting at 1.9 percent. (See Venture Watch)

Quick takes advantage of wholesale dealers to supply vehicles upon customer order. "This isn't a new system," says whiz-kid owner and company president Osamu Sato. "Some dealers have been making profits this way for years. The Internet just makes it faster." The company specializes in rapid-fire responses to estimate requests, sometimes as fast as 30 minutes after receipt. Sato says Quick's delivery system is unique in Japan: vehicles may be supplied from anywhere in the country, regardless of the customer's location. "It's not about breaking down the barriers of traditional auto distribution," he says. "It's about jumping over them."

With estimated annual revenues of ¥4 billion, Quick averages sales of 90 vehicles per month and is aiming for more than a thousand per month within two years. Soon it will be the first online dealer to sell imported cars directly. "It's easy," Sato says. "Just a matter of acquiring a dealer's license. It'll be the bipolarization of 'real' dealers and 'virtual' dealers."

ACTING LIKE IT OWNS THE ROAD
Gazoo, Toyota's e-commerce site, launched an auto mall in April 1998, offering information on Toyota vehicles, repair and maintenance, appraisal and insurance, and introductions to local dealers. About 1.2 million people access the auto mall's Car Life information each month, and there are more than 480,000 registered users. Toyota expects that number to hit a million by next year.

Toyota has long been the dominant auto maker in this country; currently, its new vehicles have a 40 percent market share. Gazoo works in a similar way to CarPoint Japan and Autoby tel-Japan, with the one massive qualifier that it covers only Toyota autos and official Toyota dealers (though it introduces other makes of used vehicles). Toyota says it has no intention of selling vehicles direct through its site, leaving that up to its elaborate dealer network.

CAR PARTS & ACCESSORIES

While there's nothing in Japan to compare to the scale of US-based CarParts.com, online auto businesses are eyeing the parts and accessories market hungrily. CarPoint Japan signed up with Nippon Mitsubishi Oil, Softbank, and leading car accessory wholesaler Empire Motor Co. to form the company e-Shopping CarGoods, capitalized at ¥300 million. Empire Motor deals in more than 100,000 products; displayed on CarPoint, they can be ordered by users and then picked up at Nippon Mitsubishi service stations. Autobytel has a deal with NetVillage, a parts and accessories business. Autobytel-Japan users can get quotes, and in the future will be able to buy these products through the site and pick them up at associated dealers. NetVillage's homepage has information on about 40,000 products from 150 auto parts manufacturers.

Of all Japan's automakers, Toyota's vehicle distribution system is the most impenetrable, according to Daiwa's Noguchi. "They won't change," he says, "because they don't have to." Noguchi says Toyota dealers trying to join referral services like Autobytel or CarPoint would face an increasingly unfavorable relationship with the manufacturer. "It's like bullying."

More than 5,000 dealer referrals per month are now made through Gazoo, with 13.6 percent leading to sales. While this success is partly attributable to the increase in Net users, Toyota also gives credit to Gazoo's new virtual shopping mall. Opened in December, Toyota is talking to about 300 companies regarding direct sales of a wide range of goods. In cooperation with software distributor DigiCube, Toyota launched a media mall peddling music CDs, DVDs, and computer software in February. "One of the goals is to attract traffic to the Toyota auto mall, but everyone realizes there's a lot of potential for e-commerce," says Toyota spokesman Paul Nolasco. The company's "slight" commissions from shopping mall sales are projected to reach ¥600 billion annually by 2003. "This is not a number you can neglect," Nolasco says. "We're expecting none of this to pertain to auto sales."

THE ROAD AHEAD
Even with little effect on sales figures so far, consumers and dealers alike are pleased with the high information value and convenience offered by most Japanese online auto buying services. Some online auto dealers have shown that the Internet can also facilitate instant purchases and cheaper prices, but one question remains: is that what Japanese auto buyers ultimately want? Maybe not, according to auto industry analyst Shotaro Noguchi at Nikko Salomon Smith Barney, who says that the status appeal of expensive vehicles is intact. "What Japanese consumers and American consumers are looking for is fundamentally different. Japanese people have this custom of spending Sundays going around to different dealers. With the Internet, you never see anyone face to face. It goes against their sense of values."

In terms of traffic, Gazoo is the most popular site, he says, leading one to wonder if consumers here aren't more interested in merely enhancing their Car Life, like a form of entertainment.

And while younger Japanese embrace the Internet and e-commerce -- it's new, it's convenient, it's cool -- their purchasing power is limited. "People in their 20s have come of age post-bubble. They don't have much money compared to people their age a decade ago," Nikko's Noguchi explains. "It may take 20 to 30 years before the economy is centered around these people, and for Internet auto sales to be a major part of the industry."