August 24, 2020 by Ravi Bhatia

Shortening product lifecycles are forcing OEMs to increase incentive spends to achieve targeted lifecycle volumes

Developing and manufacturing a motor vehicle is a costly endeavour with uncertain paybacks. OEMs typically justify platform and powertrain business cases over a multi-year time horizon to justify the internal rate of return (IRR) hurdle rates.

Recent shortening of platforms and powertrain lifecycles and introduction of higher technologies-driven in part by rapidly increasing regulatory burden and adaption trends for new emerging features (electrification, Safety, ADAS and in-car conveniences) -makes it difficult for OEMs to recover their investments in product and manufacturing.

Customers preferences are getting more fragmented and it is becoming difficult for brands to meet their volume targets. This leads to higher costs and profitability pressures.

The competitive pressures are expected to significantly increase as low-cost producers from China enter the market. And like many businesses’ OEMs are operating in a marketplace disrupted by COVID-19 and economic turmoil-several forecasting negative growth until 2024 – meaning the prospects of making profits on new products continue to narrow as competitors race to compete for customer acquisition.

On average, OEMs spend between 8-12% per cent of their revenue on incentives, to engage customers and shift their products. Whether this is taken from revenue or profits acquired through cost reduction in the production process, the shortened product life cycle, and a resulting requirement to sell inventory as soon as possible are having a detrimental effect for manufacturers brand image and profitability.

To achieve the minimum sales threshold OEMs are forced to increase the spending on incentives.

To tight incentive-market fit the incentives must be revised multiple times thus increasing the complexity. According to JATO research there are more than 4200 unique incentives types thus increasing the complexity for OEMs to track competitive spends.

High incentives and discounts also hurt the brand image and resale value in the long term. Every 10,000 rupees reduces the future resale value of the brand by 6,000 rupees thus eroding the brand’s value investment image.

It is clear that the responsibilities of incentives managers are becoming increasingly complex, not only do they have to deliver higher sales volumes to justify investment business case, they are also facing reduced budgets to counter competitive incentive programs. Every rupee saved flows directly into the company’s bottom line. These savings can be reinvested to strengthen the brand.

Every rupee saved flows directly to a company’s bottom line and improves profitability. These savings can be reinvested to strengthen the brand, so, if incentives managers do not have access to a reliable data tool, helping them to stay ahead of incentives and new offers, it is likely their policies will be unnecessarily generous – wasting money and damaging overall profitability.

But how can automotive players optimise incentives spending?

Transparency and data sharing play an important role here. Increased transparency and access to competitor information, would allow players to compare incentives policy. With access to this vital information, OEMs will find it far easier to demonstrate to dealers exactly why their deals are competitive and likely to result in positive sales outcomes.

Greater transparency will also promote fact-based planning with data dispersion across all segments and models, helping to tailor incentives effectively by product type and brand.
Most importantly, the industry needs to move towards elevating incentives planning and instead build alliances among sales teams to solve the inherent conflict between incentives spending and volumes.

Until the latter is achieved, JATO Dynamics can help tackle these problems. We have developed an incentives taxonomy which allows us to research and track incentives types across the top 20 markets.

JATO Dynamics’ optimiser tracks historical events in the market, to help businesses best track and compare incentives and volumes in the marketplace. Not only does this technology allow companies to understand which incentives are gaining the most traction but it also delivers alerts for incentives news and allows incentive teams to track the correlation between their investments and the corresponding results. We can help incentive teams remain on top of the competitive landscape and spending behaviour, all using one sophisticated optimiser tool.

One response to “Shortening product lifecycles are forcing OEMs to increase incentive spends to achieve targeted lifecycle volumes”

  1. Rod Tucker says:

    Simple strategies work better in India. The product should speak for itself instead of some celebrity speaking for the product in an advertisement. Imagine Datsun getting back the money spent on advertising with a big star of Bollywood with their sales numbers. Sell online and apply all discounts. Just create delivery and service stations in the cities instead of dealerships. Anyways all the claims go through the OEM creating customers dealing with OEMs to argue their case. Dealers are an unnecessary part of the line in India. I hope one day Tesla comes to India with a cheaper product and teach this lesson to all other OEMs.