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eBay & Autos: A New Model?

The most successful dot-com firm is starting to make big waves in the auto business. eBay continues to grow by leaps and bounds—just as if the Internet boom never ended.

The most successful dot-com firm is starting to make big waves in the auto business. eBay continues to grow by leaps and bounds—just as if the Internet boom never ended. It is taking the used-car business by storm. The aftermarket parts business may be next. eBay’s quite profitable auction business sharply contrasts with the automotive industry’s own business-to-business (B2B) exchanges. They have yet to live up to expectations.

eBay Motors is growing at a blistering 186% a year. Last year it handled $3-billion in auto-related business. About 250,000 vehicles were sold last year on its popular Web site. eBay Motors has, in effect, created a whole new channel for selling used vehicles across state lines. Traditionally, a used car is sold locally, but over 70% of eBay used cars are sold to out-of-state buyers. The bulk of the vehicles are bought sight unseen. Nevertheless, there is typically a flurry of preceding emails and phone calls between buyer and seller. The majority of vehicles are sold by dealers. The average sale price is slightly under $10,000, noted eBay vice-president Simon Rothman.

Sellers love eBay because it offers a huge marketplace of 55 million registered users. Buyers love it for the ease of shopping and the wide vehicle selection. eBay itself plays a critical role by cleverly providing a “safe” environment for such transactions to occur. Through a set of eBay services, features and “rules,” it helps reduce the inhibitors for buying used vehicles. Vehicle sellers gravitate to eBay because it offers a very affordable, big distribution channel. To list a vehicle costs $40; if it’s sold, eBay charges an additional $40. Avoided are the traditional dealer expenses of advertising (about $250/vehicle on the average), expensive real estate, and salesmen’s salaries. These savings allow a “virtual” dealer to sell the same vehicle for less. The large eBay marketplace draws about eight bids/vehicle. This represents far more interested buyers than is the case for buyers who physically visit a dealer lot. Magic Imports in Texas is an example of a nearly pure “virtual dealer.” It’s 100+ employees concentrate primarily on eBay sales.

Buyers like eBay because it vastly expands the number vehicles they can consider. Furthermore, the seller’s reputation and integrity are far more transparent on eBay than in a traditional used-car business. In particular, eBay makes highly visible all the customer feedback on each seller. Also conspicuously posted is an overall satisfaction rating eBay computes for each user. It is based on past feedback. Many eBay users religiously rely on this score to select whom they do business with. The more confidence the buyer has in the listed vehicle and seller, the higher the bid price will be generally. Hence, a seller can also reduce buyer angst by fully and objectively disclosing the condition of the vehicle in the eBay listing.

eBay facilitates the transactions by offering a number of services and options. These include a free, limited warranty on “eligible” vehicles. For an additional $85, a seller can also get an eBay-certified inspection to lessen surprises to the buyer. eBay, furthermore, contracts with carriers to offer eBay buyers a favorable rate for transporting vehicles. Another attraction to the eBay marketplace is its favorable vehicle prices. These are due, in part, to regional price differences for the same year, model and color of vehicle. For instance, a black car without air conditioning sells for less in sweltering Houston than it does in Boston.

Despite the fast growth of its used-car business, eBay sees even more potential in aftermarket parts. The U.S. parts and services business is huge. It’s also extraordinarily inefficient from a logistics and parts-availability standpoint. For instance, about 30% of the cost of a part is in logistics. eBay believes performance parts and parts for older vehicles are especially well suited to its business model. The eBay site sold $500-million in auto parts last year.

eBay’s success with auctions contrasts starkly with user experiences in auto industry B2B exchanges. Certainly the B2B vendors Covisint and FreeMarkets cite impressive, gross-sales figures. Nevertheless, they do not come close to the profitability and growth of eBay.

Uniquely, eBay has perfected the art of building trust, confidence and support of both buyer and seller alike. It does this by quietly, yet powerfully insisting on ethical behavior acceptable by its members. For instance, eBay will throw out a seller who regularly receives negative feedback from its customers. In contrast, the automotive B2B auctions have suffered in part from behavior that suppliers resent. For instance, original equipment manufacturers (OEMs) have held many auctions without awarding contracts. Suppliers believe the OEM in such a case is simply using the auction as a club to beat down its incumbent supplier on price; the auction wasn’t run to find better suppliers, they contend.

In automotive B2B exchanges an OEM can get away with this behavior. This is possible because the OEM is often part owner of the exchange, or it is just so large that no one wants to offend it. At eBay, however, a party regularly acting in this way would generate massive, very public, negative feedback. Ultimately eBay would probably kick that party off its site. The auto industry lacks such a powerful, independent, market maker. Instead, some OEM misbehavior is contributing to the demise of the most prominent, automotive exchange, Covisint.

If eBay continues its penetration of the auto industry, structural changes could certainly occur in auto retailing. For example, auto manufacturers currently get a “free ride” in new vehicle sales. Their dealer networks sell new vehicles at near zero markup. Dealers make up for this money-losing operation through two “cash-cows”: used vehicle sales and the parts/service business. Imagine that those two businesses move away from bricks-and-mortar, franchise dealers. This could be to an electronic marketplace, discount independent garages, whatever. If this happens, OEMs could wake up one morning and discover they no longer have an economically viable sales channel.

Certainly much of the hoopla over the Internet is over. Nevertheless, disruptive technologies are certainly still at work. eBay and other innovators will continue to apply new technologies to inefficient markets. Such “disruptors” absolutely will certainly change some markets—forever.

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