Back to Contents of Issue: March 2000

Net auto trader Reo burns rubber

by John Stern

For Japan's business veterans and Gen-Xers, the Internet offers opportunities to create new profit models that were impossible with traditional business methods. I recently checked out some of the sparkplugs powering the nation's online auto business, and didn't find an earring or a ponytail among them.

In recent months, new auto-related websites have attracted corporate heavyweights like Softbank, Microsoft, and 7-Eleven Japan (shareholders of CarPoint) and C. Itoh and Recruit (the muscle behind AutoByTel Japan), and it looks like selling cars via the Net is finally attracting serious attention. Also, US online auto advertising professionals like James Besselman of iXL Inc. are parachuting into town. This is all good news for Reo, whose Creative House online car sales division was virtually alone when it opened in 1997.

Back then, Reo was a typical electronic display parts wholesaler. Asian competitors attacked its inexpensive product line, and the collapsing Japanese economy helped ruin the market in large displays. While visiting customers who were auto dealers, Reo's president, Yoshikatsu Hieda, learned the iron rules of auto distribution in Japan. Dealers typically are not allowed to handle cars from more than one manufacturer and are forced to take allocations of each model whether those models sell well in their territory or not. And sales are restricted to their own territory. Thus, most dealers are stuck with unwanted cars that they are desperate to sell.

Reo's business model is to find customers who have already decided on the car they want and are searching for the best price. Unlike most other online automobile sites, which live off referral fees or commissions, Reo buys the car from the dealer, making money on the sales margin. Reo sells only new cars under warranty, which can be serviced at any domestic dealer; indeed, a Reo customer cannot choose which dealer will deliver the car. Reo offers a rock-bottom price by buying from dealers with excess inventory, buying when pressure on the dealer to meet sales quotas is highest.

Reo also offers car loans at 1.9 percent interest (serviced by affiliated finance companies). "We actually have a low-risk business," says Hieda. "The manufacturer builds in the quality, the dealer handles delivery and service, and the finance company takes the risk of nonpayment."

Unlike Amazon.com, Reo decided to give the customer less, not more. "We spent a lot of time and money trying to create a search system that gave the customer all kinds of information," adds Hieda, "but we found that our core customer has already researched the car they want, has probably tried out the car at a regular dealer, and is visiting us for only one reason: price. So we got rid of the fancy system."

Hieda sees automobiles increasingly being sold like consumer electronics: Quality control has reassured the customer that a Sony will work the same, wherever purchased. When this happens, price and convenience of purchasing take over. No dealer pesters, or even communicates with, a Reo customer, and Reo offers one quick, low, final price.

When the Creative House division began, Hieda expected to be inundated by the archetypical Japanese Net surfer, a single 27-year-old male. In fact Reo's online buyers come from a spectrum of Japanese society, including "college professors, judges, and sumo wrestlers," of whom 30 percent live outside Tokyo or Osaka.

The online auto sales industry in Japan has a few such interesting turns in the road. AutoByTel Japan's president, Keishin Sasaki, claimed his site received more than 10 million hits in the first two weeks of business. So much for the conventional wisdom that Japanese culture requires face-to-face sales negotiations to build trust.

Another curious twist: In Japan, the automobile is largely a form of entertainment. CarPoint's president Saburo Kikuchi, the man who built Lotus Development Japan before its acquisition by IBM, points to the many Japanese magazines devoted to car accessories and auto outings as evidence. Entertainment is ideally suited to the Internet, says Kikuchi, so CarPoint runs an information portal site, making money from advertising on the portal and from introductions.

Reo's Hieda is selling cars today, but he sees new businesses developing if Japan's Internet penetration increases -- namely, the selling of empty seats in movie theaters or trains in an online spot market. Even in Japan -- even for a middle-aged small business executive -- the Internet is the new field of dreams.

John Stern (jme@consultant.com) is President of Japan Market Engineering.

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