Winning direct-to-consumer strategies for auto OEMs in China

Engaging with auto customers directly is becoming a make-or-break strategy for OEMs

In many industries in China, especially technology and consumer goods, businesses are focusing on customer engagement as a key differentiator to address shifting consumer demands, and improve customer experience (CX).

Whereas CX captures the overall impression consumers have of their journey with a company, including its products or services, customer engagement refers specifically to the interactions a company has with its customers. Personalized purchase recommendations and in-store community events are two typical examples.

Over time, consistently excellent customer engagement enables brands to forge an emotional connection with their customers akin to a sports fan’s relationship with their team: loyal and potentially outspoken in their support.
This in turn elevates CX and drives higher revenues. Global leaders in the field as well as leading Chinese companies, delivered returns to shareholders over the past 10 years that were on average three times higher than competitors with weak or limited customer engagement (Exhibit 1).

We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

In many cases, companies that are doubling down on consumer engagement deploy direct-to-consumer (DTC) sales models to manage their customer interactions end-to-end. However, many OEMs in China suffer strategic failure when shifting to DTC because they lack clear objectives, or apply DTC approaches from Europe and the U.S. that focus more on distribution costs than customer engagement. To be successful in the highly competitive Chinese market, we suggest that customer engagement should be the core objective of DTC transformations.

The problem: Weak customer engagement underpins auto consumers’ pain points

Strong customer engagement begins with a seamless omni-channel sales process during which potential and existing customers are treated attentively throughout their lifecycle. For auto OEMs in China, this poses a challenge as 98 percent of their customers are not fully satisfied with the car purchase journey, according to McKinsey auto consumer surveys.

A poor purchasing experience, especially inconsistent transitions between online and offline touchpoints, is a major pain point. Consumers are frustrated by disconnected consumer data and disparities between online and offline channels on test drive availability, inventory, and promotions. Moreover, slow online interactions and responses, weak price and promotion matching between livestreaming events and dealers’ websites, lack of personalization features, and clunky website functionality all present room for improvement, our research suggests.

Opaque pricing is another issue as a majority of Chinese consumers find it tiresome to haggle with multiple dealerships to achieve the best price. Instead, they seek consistent pricing for car purchases. As consumers tend to shop around dealerships attached to the same OEM, intra-brand competition is also a problem for auto manufacturers.

Stiff competition: EV disruptors are outclassing traditional OEMs on CX

EV disruptors, such as NIO, have successfully achieved a step-change in customer engagement by deploying DTC strategies that sell directly to end customers through brand-owned or agent-managed stores. This marks a significant departure from OEMs’ traditional dealer-led sales model (Exhibit 2).

In an era where customer engagement is king, the direct model is beneficial because it enables OEMs to connect directly with their customers and ensures that prices are set across touchpoints, thereby eliminating the problem of opaque pricing identified in our surveys.

We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

In the wake of the EV disruptors’ success, we are seeing a strong tendency for auto OEMs to adopt DTC models. However, these companies often focus on the technical implementation of a different sales model, such as invoicing and dealer remuneration, rather than elevating customer engagement to the next level. They therefore miss the opportunity to drive higher loyalty, which in our view should be the core objective of a DTC transformation.

Sidebar

The strategy: 7 golden rules for successful customer engagement

Traditional OEMs are struggling to match EV pioneers’ customer engagement success, leaving significant value on the table as the market adapts to the DTC disruption. Auto OEMs have also lagged behind apparel and consumer electronics companies in terms of investment in, and strategic focus on, customer engagement. Companies with an open-minded approach to adopting best practice from leaders in other industries can take advantage of the lessons learned.

For example, Lululemon has built a store-centric social model around 100 store-based communities, enabled by store-level key opinion consumer (KOC) partners, and strong, headquarter-directed social commerce capabilities. The athletic apparel brand has developed a holistic WeChat presence to support store-level KOC partners with sales referrals and promotions. Store managers act as mini-CEOs, responsible for content generation, store-tailored events, and ambassador recruitment. As a result, store communities not only drive sales but also enhance consumer engagement and bring traffic back to stores.

Auto OEMs, on the other hand, traditionally have only limited engagement with their end customers and will need to learn how to manage a large number of users and user groups, either directly or via their dealers. Our analysis of customer engagement champions across industries, including automotive, flags seven golden rules that underpin stellar customer engagement through DTC:

1. Identify your sales model: OEMs seeking to invest in superior customer engagement must first decide on their value proposition, choosing between a service-oriented approach with a high degree of personalization and a cost-conscious model more focused on automation. In our experience, strong customer engagement requires adoption of at least some elements of a DTC model. For example, in a forthcoming article we will address the importance of focusing on user operations – customer-centric activities that deepen the bond between a brand and its customers. That said, not every OEM will find it necessary to adopt every aspect of DTC such as switching to full ownership of retail touchpoints.

2. Double-down on digital and analytics: Our research indicates that the majority of customer touchpoints on the car purchase journey are digital, and that customers expect a personalized experience. This requires automation and advanced analytics to tailor the approach to each customer’s needs across user operations and pricing. For example, successful OEMs are enhancing lead management via machine learning data analytics solutions that process multiple sources of internal and external data, including customer, retail, and vehicle data to identify the highest value leads. This is important because a majority of auto OEM sales are generated from the top 20 percent of leads. OEMs can maximize conversion rates by leveraging digital and analytics resources to identify and engage the most promising customers at the right time, through the most suitable channel, and in a way that is personal to them. This includes matching top performing sales agents to the highest potential leads, and nurturing them with personalized content, such as information about models in their target price range, or that match their color, fuel, or power preference.

3. Deliver an omni-channel customer experience: OEMs seeking to deploy exceptional customer engagement can focus on fostering a truly omni-channel customer experience that clearly defines how to maintain links and ensure smooth transitions across online and offline channels. This should seek to address information disparities between online and offline channels, such as a tendency for customers to book test drives online only to be informed by dealers that their chosen slot or vehicle is unavailable. NIO’s success in building a loyal brand community across online and offline touchpoints shows the positive impact this strategy can have when deployed to its full potential. (See sidebar, “Inside track: A Chinese auto OEM’s winning customer engagement strategy”)

4. Master the technology evolution: Companies shifting to DTC should develop a plan to adopt supporting IT architecture, including applications, data, infrastructure, and a suitable IT operating model to support the new sales approach. Customer-facing touchpoints such as mobile apps, WeChat mini-programs, and websites delivering community information, as well as loyalty point management systems and other customer interfaces like test drives, should be built using agile development methodologies to facilitate updates every few days or weeks. The same approach is needed for sales and aftersales agent interfaces and services for partners and suppliers. Meanwhile, core business solutions such as finance and accounting, customer relationship management (CRM), and order-to-delivery (OTD), should focus on system stability and consistency across the software development lifecycle. This allows auto brands to improve time-to-market without having to overhaul back-end systems that control customer relationships, finance, and enterprise resource planning, among other key systems.

5. Establish cross-functional Customer Engagement Office: Auto OEMs traditionally have been organized functionally. However, with customer engagement throughout the lifecycle and the increasing importance of digital, analytics, and other replicable capabilities, it is crucial in a direct-to-consumer model to have a cross-functional unit looking after the OEM’s customers. This is even more important, as many OEMs have multiple brands, channels, or sales models across regions which can be served more cost-efficiently when leveraging economies of scale.
Inspired by Internet companies, many auto OEMs have set up middle offices with a focus on IT infrastructure. However, such middle offices are often misinterpreted and misunderstood by auto OEMs as an IT-focused functional unit.
What auto OEMs need is a Customer Engagement Office serving as a cross-functional middle layer that bridges different functions, such as marketing and sales, pricing, and customer service. The Customer Engagement Office should also develop, consolidate, and provide “out-of-box” replicable capabilities to frontline sales units, helping them to accelerate business expansion and boost efficiency. Such a Customer Engagement Office serves as a coach as well as a supervisor, and shares accountability for key performance indicators (KPIs) such as sell-out rates and customer experience with the corresponding frontline units. Customer Engagement Offices should also monitor and review the performance of different frontline channels and customer touchpoints and provide feedback for improvement. In a DTC model, the Customer Engagement Office is a crucial enabler for auto OEMs to rapidly and cost-efficiently scale up and operate while ensuring consistency in customer experience.

6. Adopt a customer-centric culture: Auto OEMs should consider abandoning their channel-steering mindset in favor of a customer-centric culture. Companies can adjust KPIs to incentivize customer engagement while empowering customer-facing staff. For example, a leading Chinese grocery retailer prioritized customer experience as part of a shift from a traditional sales model to
a digital customer journey. The team applied a three-to-four-week test and learn approach using A/B testing alongside KPIs linked to customer satisfaction. After each sprint, they adjusted their approach
based on customer feedback. The result was significant business impact in terms of user growth, revenues, and customer service ratings.
Shifting mindset also requires workforce capability building and upskilling. Rather than engaging in a costly bidding war for talent in key positions such as community operations, end-to-end lead management, and agility coaches, OEMs can emphasize talent management and training, focusing on instilling a more customer-centric culture across the organization. Internal brand communications signaling the shift, supported by strong executive leadership messaging, is a key enabler
of enterprise-wide mindset change.

7. Make dealers part of the solution: Auto OEMs can turn legacy dealer networks’ close customer relationships to their advantage. Retail touchpoints continue to be an important factor for auto customers’ purchasing decisions. Therefore, making dealers part of the DTC setup is a win-win solution. For example, a leading international OEM in China engaged dealers more than one year before shifting to a DTC model through presentations, focus group discussions, training and pilot programs, building-up of new core capabilities, and driving buy-in across the network. The new sales model enabled dealers to double down on customer support while the OEM handled inventory management and other logistics, as well as back-office activities like invoicing. Dealers focused on their key strengths such as local marketing, model and feature recommendations, deliveries, and after-sales service.

Jump-start: Define the approach and seize the opportunity

Auto OEMs in China should take heed of the customer engagement-focused DTC transformations sweeping across consumer-facing industries. Closer to home, digital-savvy EV disruptors have moved the goalposts on customer interactions. Chinese consumers appreciate the superior purchase process and ownership lifecycle engagement, heightening competitive pressures across the auto industry. DTC sales models empower auto OEMs to curate omni-channel, end-to-end customer journeys in which customer engagement and experience are prioritized. Those that act fast to define a clear strategic focus that puts the customer first are most likely to win the next frontier of automotive retail in China.

Explore a career with us