Japan's franchise system favors the factories
In 2004, a Japanese magazine published an expose of Eiji Iwakuni, then Mitsubishi Motors Corp.'s head of domestic marketing. The article expressed outrage at his lavish lifestyle - including a pricey Tokyo condominium and membership in a tony sports club - at a time when Mitsubishi was struggling.
The story behind the story was even more intriguing. Word quickly spread that Mitsubishi dealers had paid a private investigator to dig up dirt on Iwakuni and leak it to the media as part of a smear campaign.
Dealers appeared to be retaliating for Iwakuni's plan to cancel the franchises of those who failed to meet Mitsubishi's new standards for showrooms and customer satisfaction. Iwakuni left Mitsubishi after DaimlerChrysler pulled out of its alliance with the Japanese automaker.
Factory-dealership disputes are familiar to U.S. dealers. But the Mitsubishi dispute's escalation into mudslinging indicates a basic flaw in Japan's franchise system.
Mitsubishi dealers had to vent their rage in a roundabout manner because Japan's dealers are much less independent than their American peers. The Japanese system leaves far fewer means of resolving factory-dealer grievances than the U.S. version.
Japanese automakers like the power imbalance. They think it helps them boost sales. But manufacturers too often have given in to temptation to open too many dealerships, chase volume at the expense of efficiency and thus muddy their brand images. Only recently have Japanese carmakers started to fix the costly and inefficient distribution system they created.
It is a cautionary tale for the U.S. industry. General Motors is pushing the consolidation of Buick, Pontiac and GMC brands in the same dealerships, after years of selling too-similar vehicles under all three brands. The same thing is happening at the Chrysler group's Chrysler-Dodge-Jeep stores.
Many Big 3 dealers are nervous, wondering whether their single-point stories will be the next to go. The Japanese example shows that reducing differentiation among sales channels is the first step down a path to dealership consolidation.Factory stores
The Japanese experience is not directly comparable to the American one. Many more Japanese dealerships are owned in whole or part by the factory than in the United States.
All Japanese automakers own at least some stores, but the proportions vary widely. Honda Motor Co., for example, is at least half-owner of 80 of the 1,000 retail companies - comparable to U.S. dealership groups - that sell its cars in Japan. Mitsubishi owns a stake in 38.8 percent of its Japanese retail outlets.
Mazda Motor Corp. owns a portion of just 6.4 percent of the sales companies that distribute its cars. But the Mazda Autozam network includes a large number of tiny stores, which amount to little more than repair shops that also handle catalog sales of 660cc minicars.
If you exclude that network, the manufacturer is at least a minority owner of 20 of the 60 sales companies that make up the Mazda and Mazda Anfini networks.
Among truly independent Japanese dealers, few own multiple franchises. They may operate several dealerships, but typically all of the stores sell the same brand. The concept of a dealer's overseeing a portfolio of brands, as a hedge against one make being hot and another not, has never caught on in Japan.
Yoshimi Inaba has seen the difference in the U.S. and Japanese franchise systems firsthand. The former head of Toyota Motor Sales U.S.A. Inc. is now Toyota Motor Corp.'s executive vice president in charge of China operations. Inaba is building a retail network in China based on the U.S. model.
Chinese dealers "see it's good to have a portfolio of franchises," Inaba told Automotive News. "They acquire the franchises and sell them. Stuff like that is going on, which is not happening in Japan."
In the United States, the portfolio model took off with the rise of import brands and franchise "dualing." A Dodge dealer, for example, might decide to add a Subaru franchise.
But sales of all import vehicles make up only about 6 percent of the Japanese market. An independent Nissan dealer may own an import franchise or two, but they often are little more than a sideline.
The factories, in turn, often have viewed their Japanese dealerships as adjuncts of their human resources departments, or as ways to push out volume.
When times were bad, automakers would ship excess white-collar employees to their affiliated dealerships. The relocated workers were expected to become instant salespeople, distributing fliers door to door in an attempt to drum up business.
That temporarily cut the manufacturer's head count and helped relieve pressure on the parent company's earnings. If the new sales staffer sold a car, even better. Since sales staffers in Japan are paid salaries and do not work on commission, it was easy to move people in and out of dealerships.
The practice was not especially productive. But it enabled Japanese automakers to make their financial results look better, since stock market analysts paid less attention to the performance of the parent companies' subsidiaries.
And the belief that anyone can sell a car runs deep in the Japanese auto industry. Explaining Toyota's continued dominance of a market where it controls more than 40 percent of all sales, Credit Suisse analyst Koji Endo sums up the common wisdom: "Unit sales is a function of how many salespeople you have, and Toyota has more than anybody else."
It is a recipe for highly inefficient operations. Japanese dealerships' sales productivity is lousy.
The average sales employee in Japan sold 4.7 vehicles a month in the fiscal year that ended March 31, 2004, according to the most recent survey data from the Japan Automobile Dealers Association.
And even that average was pulled up by the minicar segment - where some franchised dealers sell cars by catalog, without benefit of showroom, inventory or dedicated sales staff. The average minicar sales staffer sold 9.8 vehicles a month.
Networks' fuzzy images
In addition, Japanese retailers often have paid little attention to branding. Different sales networks used to carry different vehicle nameplates. Toyota, for instance, would release slightly different versions of the same sedan to its five distribution networks.
Honda would do the same for its three networks, even though its overall vehicle lineup was much smaller. There was often little rhyme or reason behind which network got which nameplate.
One Toyota network sold the Japan-market version of the Lexus RX 300 alongside the Platz subcompact, sold as the Toyota Echo in the United States. Another sold the domestic version of the Lexus LS 430, the Prius and the Coast 26-person bus. Both networks shared the Caldina station wagon.
The distinctions among sales networks began to break down as automakers tried to push best-selling vehicles into more outlets by offering them to more channels. Honda, for example, stopped assigning one nameplate to only one network when it put the Odyssey minivan in all three of its networks.
Now all the major automakers are trying to sort out their undifferentiated Japanese distribution networks. But they are taking different approaches. Mitsubishi and Honda are going beyond the Buick-Pontiac-GMC route by merging their networks.
Honda is phasing out its Verno, Clio and Primo networks. Honda doesn't want to spend its branding resources on Clio vs. Verno anymore. It wants to redirect those resources to Honda and Acura.
The company plans to introduce Acura-branded cars in Japan by autumn 2008. By then, all Honda-brand cars will be sold at dealerships that bear only a Honda sign.
Toyota used the August 2005 launch of Lexus in Japan as a catalyst to revamp its networks. It merged the undefined Vista network into the youth-oriented Netz network. It also set new target identities for its remaining Toyota, Toyopet and Corolla sales networks.
When Mitsubishi's Iwakuni ran afoul of his dealers, he was well ahead of what later became an industry trend. He not only proposed the then-radical idea of merging the company's Car Plaza and Galant networks but also said he planned to trim the number of retail outlets.
He foresaw Mitsubishi's Japanese store count dropping from 1,042 in 2002 to fewer than 930 in 2004. Mitsubishi achieved that goal. The number of stores continued to drop, reaching 855 this year.
Few dealer options
In the United States, dealers have several options if they are unhappy with the factory and one-on-one negotiations don't bring satisfaction. They can work with their regional dealer advertising associations to take a united stand on regional issues. National dealer councils are not shy about confronting manufacturers, either.
And individual dealers can take unilateral action. They can deliberately move their best salespeople to another store. Ultimately they can turn in a franchise and put another automaker's franchise in the same dealership.
Japanese dealers don't have as much room to maneuver. There are no regional dealer ad associations in Japan. National dealer councils include too many factory-owned stores to be confrontational.
And although it's not impossible for, say, a Mitsubishi dealer to give up the franchise and put a Mazda store in that location, it is extremely rare.
So Mitsubishi's dealers set out to tarnish a factory executive with scandal. The real scandal, though, was a franchise system that has allowed factory-owned stores to undercut the independence of Japan's independent auto retailers.
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