A sweeping, 500-page rewrite of Volkswagen's agreement with its vast European dealer network alters the way VW brand retailers earn revenue and interact with customers and the factory.
The deal — a potential framework for upcoming negotiations with VW's U.S. retailers — lets the automaker build a more direct link to its customers. But it includes revenue-sharing arrangements and eases infrastructure demands to help dealerships remain profitable, particularly as they begin selling electric vehicles that generate less service business.
Dealers would earn incentives when customers buy upcoming "on-demand" performance software upgrades for their vehicles, such as a temporary 20-hp power boost or a post-purchase upgrade to LED headlights — even if they had no direct role in the customer's decision.
The agreement, set to take effect in April 2020, also will end brand requirements for expensive "glass palaces" in favor of leaner, more cost-efficient dealerships. It was shown to dealers in Europe this month after more than two years of negotiations.
The pact may form the basis for a new U.S. dealer agreement but won't transfer directly. One reason: The European agreement allows for direct sales of vehicles to consumers over the Internet, though VW expects them to comprise 5 percent at most. Negotiations in the U.S. have yet to begin and have not yet been scheduled, a Volkswagen Group of America spokesman said.
"This is a different market from Europe, and we will need to approach things in a manner that makes sense for the U.S.," Derrick Hatami, head of sales and marketing for Volkswagen of America, said in a written statement to Automotive News. "The changes that are coming in automotive retail represent an industry-wide opportunity, and all OEMs and their dealer partners will need to figure out how to best address these changes."
But in Europe, where VW will debut its fleet of EVs, the situation is more ominous.
"It's a matter of survival," Matti Porho, who owns a group of VW dealerships in northern Finland, told Automotive News Europe.
Porho, president of Volkswagen's European Dealer Council, played a key role in the European renegotiations, helping define new contractual obligations for dealerships and the factory. The council represents VW's 5,400 sales and service points in Europe.
The agreement will go into effect about the same time VW launches its new I.D. family of fully connected, battery-electric vehicles in Europe.
Pohro said the majority of profits his members earn are generated not from sales, but from service and repair work. "But electric cars will only need about half the maintenance of a combustion-engine vehicle," he said.
With the coming EVs and digitalization of retail in Europe, Porho said VW's European network had reached an inflection point: Either its longstanding factory-dealer business relationship had to change, with dealerships learning to live on lower revenue, or the stores would face a financial crisis.
"The current system has essentially been in place ever since General Motors first created it in 1915," Porho said.
Matthias Loebich, global leader for production industries at consulting firm BearingPoint, said automakers are finally realizing their need to mine customer data as well as Amazon or Facebook do. Traditionally, interacting with customers has been outsourced to dealerships, but they lack both the technology and resources required to learn a vehicle owner's preferences in real time.
Not only does the dealer "always have the wrong car" on the lot from the perspective of a customer, it is also becoming more difficult to offer meaningful advice given how informed customers are today, Loebich said.
To help fix that, VW aims to create a global digital platform for customers, regardless of market, to store their profiles and preferences as well as purchase products and services online. The platform, called We, will collect and analyze customers' data, with their consent, much like Amazon, Facebook or Google. But bridging that gap electronically threatens to sideline dealers, reducing their role to little more than delivering and servicing vehicles.
"One critical task could be to help clients navigate in that complex digital world, but currently, most dealers are not prepared to do that. They are selling hardware rather than selling software or educating customers," Loebich said.
In Germany, this dawning reality has dealers of all brands spooked. Average returns in the $200 billion market dropped to as little as 1.3 percent last year despite historically high new-vehicle sales and rising turnover, so profits that migrate to the automaker could pose a significant threat.