Daewoo Cars: Changing the Rules About How To Compete

Consider what it is like to buy a new car. We travel to the distributorship for the car
we like - usually in an unpleasant part of town. As we enter the showroom a
salesperson attaches to us, and stays with us. He (normally) will make the effort to
separate us - the female partner is sidelined, while sales pressure is applied to the
male partner. We explain what we want - this is a waste of time because the
salesperson clearly is not interested in what we think, only closing the deal and
selling as many add-ons to the product as possible.
By now we are talking about the car the salesperson wants to sell, not the one we
came in to see. Of course, we have to make our minds up quickly - for there are
many others who want "our car" - usually not in evidence in the showroom, or
probably outside the salesperson's imagination.
Our objections to the vehicle being sold are systematically and skilfully overcome,
our attempts to negotiate on price lead to a meeting with a senior salesperson who is
even ruder and more aggressive than the first and who squashes our pathetic
attempts to get a good discount on the list price.
Our attempts to get a good trade-in price on our current car are met with barely
disguised derision, and we are grudgingly offered a trade-in value several hundred
pounds lower than the list price, because of the numerous faults instantly discovered
in our vehicle and the "impossibility" for the dealer of selling it on.
Finally, we sign the contract, and commit ourselves to the expenditure.
Somehow our salesperson loses interest at about this point, and we end up with a
clerical worker, who explains about the two-month waiting list for the new car, and
the £800 charge for number plates and delivery (which is mandatory because we are
not allowed to supply our own number plates or collect the car from the
manufacturer's plant even if we want to), and the charge for the extras we agreed to,
and the cost of the road fund licence, and so it goes on.
When we finally get the vehicle it has faults, so we take it back. Now we deal with the
"service" people whose main aim is to "prove" that there is nothing wrong with the
car, and if there is - it is our fault - and 'no' we cannot have a lift to work while they
look at it ......

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The evidence from countless customer surveys suggests that this is what feels like
buying a car (whatever people in the trade say) – and customers hate it. It is not like
this at all, if you buy from Daewoo. Daewoo is a South Korean corporation which has
entered the UK car market with a highly successful launch - selling 35,000 vehicles
in less than two years - which is continuing to change many of the basic rules of how
car companies compete and how they deal with their customers. Following its market
entry in 1995, by mid-1996 Daewoo announced an investment of £700 millions in
setting up a car factory in Britain. The new plant is expected to be preceded by large-
scale investment by Daewoo in design, development, and marketing and sales.
Daewoo was a name unfamiliar in the UK until the mid-1990s - although owners of
Nokia mobile telephones and Nike trainers were already customers of Daewoo
companies. Starting as a textile company in 1967, Daewoo's product range is vast -
including aircraft, banking, shipbuilding, petrochemicals, textiles, construction, heavy
industry, computing, and automotive manufacture. Daewoo, for example, produces
wing assemblies for British Aerospace, Lockheed and Boeing.
Initially, in preparing for the car launch, the company promoted itself in Britain as 'the
biggest car company you've never heard of'. In fact, businesses now owned by
Daewoo have produced cars for some 60 years and has eleven car plants in nine
different countries, but Daewoo was blocked from operating in the European car
market until 1992 by a joint-venture agreement with General Motors. Daewoo is
Korea's second biggest car maker and the world's 33rd largest business group. In
common with other Pacific-Rim country corporations Daewoo has an aggressive
plan for expansion and globalisation.
Patrick Farrell, recruited from Rover as Marketing Director, came from a background
in market research and advertising, and joined Daewoo when it was effectively a
"virtual car company". Farrell drove the pre-launch publicity to establish the Daewoo
presence, and a marketing strategy that involved taking control of the distribution
chain by dealing direct with customers - eliminating dealers from the channel.
Farrell's unique selling proposition for Daewoo was to be the most customer-focused
brand in the car market. This thinking was based on a large-scale market research

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programme analysing car buyers' attitudes and a highly effective creative partnership
with Duckworth Finn.
Daewoo launched its car operations into the UK market on April 1,1995, on the back
of a £150 million investment and an award-winning £11 million advertising campaign
produced by Duckworth,Finn,Grubb,Waters. Right from the start, Daewoo told
consumers that there were no commission-earning salespeople and no distributors,
and that is why the value of the car was so high. In short, Daewoo's market
positioning is based on an innovative packaging of benefits and services around the
car, a totally new approach to distribution and the customer's purchasing experience,
and an emphasis on customer service.
Daewoo set an ambitious target of achieving a 1% share of the UK new car market
by the end of 1997, but performance has greatly exceeded this target. In fact, the
company sold 10,000 vehicles in the first six months of the campaign and achieved a
0.9% share of the market in 8 months from launch.
Daewoo's launch was the most successful new marque launch ever in the UK
market, beating Proton's record of 10 years standing, and becoming the 27th largest
car firm in the UK ahead of companies like Chrysler and Subaru (and perhaps more
importantly ahead of Hyundai, the market leader in the Korean home market). In
spite of some industry scepticism, achieving 1% of the UK car market can be put into
context as follows:
Brand Years in the UK Market Market Share
Volvo 38 years 1.7%
Mazda 25 years 1.2%
Hyundai 14 years 0.9%
Proton 7 years 0.5%
Kia 5 years 0.2%

The Market
The UK car market is fiercely competitive, is experiencing little growth and has over-
supply from local production and strong import brands with more than 40 competing
firms. However, standards of customer service are low in many areas. For example,

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Patrick Farrell, Daewoo's Marketing Director, writes in 1996 that "the direct response
campaign we ran in January this year generated more than 125,000 responses and
more than 50,000 stories of recent maltreatment by the motor trade, many of which
were almost beyond belief ... a significant proportion of the trade still lags behind the
standards set by retailers in other industries".
Pre-launch research by Daewoo with 200,000 motorists found that traditional motor
dealers did not make customer feel welcome. Some 63% of motorists found car
showrooms to be intimidating places, a similar proportion believed that the salesman
usually "wins", and 86% said they would be prepared to travel up to 50 miles for a
better buying experience, and people generally disliked haggling over prices and the
whole purchase experience in the traditional dealer's showroom.
There is some basis for this mistrust on the part of car buyers. Recent surveys show
that on a £12000-£13000 new car, the customer who haggles can get a price
reduction of up to £1600, while the customer who does not haggle pays the list price
for the same car. In both cases, the unwary are likely to pay over the odds for the
financing deal as well. Similarly, research from the agency Foote, Cone and Belding
suggests women car buyers (who account for more than one third of new car
purchases) feel particularly intimidated and patronised by traditional car dealers and
salespeople, as well as insulted by conventional "toys for boys" car advertising.
In spite of these signs of market opportunity, the company recognised that launching
a new brand in the mature UK car market was going to be hard. Nissan and Toyota
succeeded in market entry by building better cars, but the other larger players have
already largely closed the quality gap. Companies like Lada attacked the market with
low prices and corresponding status. Mid-market launches by Hyundai and Proton,
adopting conventional market strategies, had failed to achieve what Daewoo wanted
- 1% of the market within 3 years. Brain-storming sessions by Daewoo's UK
management, culminating in summer 1994 at the Tylney Hotel near Daewoo's
Rickmansworth headquarters, have effectively rewritten the "rule-book" for the motor
trade in Britain.
The company's market position does not rest on product quality, low price, a "life-
style"-based brand image or any conventional platform. It is based on customer

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service and value in the customer's terms. Delivering these promises is based on
direct selling, not conventional car distributorships, and highly innovative advertising
to build and sustain the image of value and customer service.

The Daewoo Market Strategy

The Daewoo product strategy is far from sensational in itself. Designs appear old-
fashioned, and are, in fact, based on old General Motors models. In fact, Daewoo's
entry level car, the Nexia was the previous model of the Vauxhall Astra (though
coming into the market at a price £2000 below the basic Astra), and was sold in
other parts of the GM world as the Opel Kadette, or the Pontiac Le Mans. However,
a first difference is that from launch Daewoo delivered the car without the
"traditional" hidden extras: the car is delivered without charge, with number plates, a
year's tax, and a full tank of petrol. (These charges have traditionally meant an
additional charge to the customer of £400-600, on top of the list price.) Perhaps most
significant of all to the budget-conscious consumer, nervous about running costs as
well as purchase price - the sticker price of the Daewoo car includes three years free
servicing, covering everything except the tyres. This alone breaks the fundamental
rules of how business is done in this market. Then add to this the fact that the
Daewoo vehicle also has a 3 year/60,000 mile warranty, 3 years AA breakdown
cover, security registration, and a mobile phone, with no additional charges. Also the
vehicle will be collected for servicing and a courtesy car will always be provided, with
no additional charge to the owner, and possibly the bewilderment of competitors is
quite understandable. (In fact, new Daewoo models including a supermini, executive,
and "people carrier" vehicles are to be launched). Further industry confusion was
created when Daewoo added three years fully comprehensive insurance to the
package for the 1997 campaign. Indeed, dated mechanicals or not, it is the first time
in history that a car company has made a "Buy One, Get One Free" offer - the first
1000 buyers in April 1995 were promised a replacement N-registration car in August
that year.
In pricing, the new car buyer's nightmare that someone else will buy the same car at
the same time for a better price does not exist for Daewoo buyers. Daewoo operates

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a fixed price strategy with no haggling. However, the Daewoo value strategy in
services and product benefits is outstanding. The trade dislikes this approach, but
customers appear to prefer it and to choose fixed prices rather than endure the
stress of bargaining. The main source of competitive differentiation for Daewoo cars
is not the product offer or the price deal, but the way in which the cars are sold and
distributed.
The buying experience for the Daewoo customer has been described as "a car
browsing environment with the hassle factor removed", where customers are
welcomed, given "permission" to explore, and left alone by staff unless help is
requested. A company executive said at the time of launch "Customers will be
treated as if they are in Harrods ... They will receive the utmost courtesy and
attention when they require it. There will be no sales pressure, just perfection in
attention to detail ... Our philosophy is not short-term gain, but long-term customer
satisfaction ... We will demonstrate honesty openly and will make car buying a
delightful experience". The Daewoo strategy for delivering those promises is
revolutionary. First, Daewoo has side-stepped the traditional distribution channel and
does not employ a franchised dealer network. Distribution is through a wholly-owned
network of "Motor Shows", i.e. roomy, friendly car shops mostly in retail park
locations, and smaller "Car Centres". The company view is that dealing direct strips
out a profit tier of 30-35% of the price of the vehicle. This saving is reinforced by the
use of flexible employment terms, for example zero-hours contracts for distribution
staff (paid only when needed for work). Daewoo's launch goals were: high coverage
of the country, total control of the sales operation, and lowest possible risk to capital.
Direct distribution and partnerships achieve these goals, but also sidestep the costs
for the manufacturer of promoting vehicles to distributors and the inefficiencies of
independent car distributorships with no economies of scale in their operations.
Second, the Daewoo distribution outlets are blatantly designed to react directly to
specific points of customer dissatisfaction with traditional car dealers. There are no
traditionally aggressive car showroom salespeople chasing commission - Daewoo's
salespeople are paid salaries and are not allowed to approach a visitor to the store
unless invited. Touch-screen computers allow prospective buyers to investigate

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choices and finance options (not competing for the computer with their children who
have their own touch-screen computers to design their own cars in the supervised
creche and playroom area). The aisles are wide enough to accommodate a double-
buggy, and the floors are soft enough so that high-heels do not clip and draw
attention. A coffee bar provides the facility to sit and think. Test drives can be
arranged to and from the home, not the showroom, and refunds/exchanges can be
made in the first month by the buyer who remains unsure about his/her purchase.
Daewoo's strategy also recognizes that there are three important elements to the car
business: new car sales, service support, and used car sales. Because each of
these has very different requirements, Daewoo has "unbundled" them. New car
purchases are made infrequently and for most consumers are a major investment -
buyers do not look at new cars often, but when they do they will travel some distance
to see the cars they want to see.
Daewoo relies on a small number of flagship sites to pull in buyers to see the cars,
reducing investment in the network. Used car sales are important, but are fitted into
the network wherever this does not detract from market positioning of the new cars.
The major problem is servicing, where the market requirements are almost opposite
to those for new car showrooms – there need to be many sites because customers
do not want to travel far for service and repair, but they need to be small because of
operational efficiencies in servicing modern cars. The strategy here is based on
partnership.
Servicing and maintenance for Daewoo cars is provided through a collaborative deal
with Halfords, the motoring superstore chain owned by Boots, and visited by 30
million people a year. Thirty of Halfords superstores will include Daewoo car
salesrooms by the end of 1996, and all 136 branches will provide service for Daewoo
cars - early in 1997 the Halfords' outlets were already providing 20% of Daewoo's
retail sales volume. Halfords does not earn commission for car sales - its income
comes from service and repair and increased customer traffic. The Halfords
mechanics are Daewoo-trained, and Daewoo staff will be present in the Halfords
stores to ensure staff receive the customer service promised. Unsurprisingly,

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Halfords customers with other brands of car now find Daewoo literature discreetly
placed in their vehicles when they are collected from servicing or repair.
More recently, in 1996 Daewoo has started a joint venture with the supermarket
group Sainsbury's Savacentre group, to locate Daewoo showrooms in Savacentre's
food and clothing sites. The pilot outlet at Colney sold 200 cars within its first 12
months of operation.
The resulting Daewoo network has three tiers designed around customer needs:
* the Daewoo Motor Shows, the flagship new car sales outlets based on retail parks,
with high traffic and large catchment areas;
* the Daewoo Car Centres, smaller to gain market coverage and providing some
servicing as well as new and used car sales; and
* the Daewoo Support Centres, which concentrate on servicing, based in Halfords'
sites, but which have also proved successful in selling vehicles and developing into
additional showrooms.
Driving the launch was the Daewoo branding and advertising strategy. Daewoo
faced the twin problems of the company's credibility as an import brand with no
customer awareness in Britain, and customer cynicism about motor trade promises
of customer service. With a mix of direct response advertising - to actually listen to
customers in the "Daewoo Dialogue", TV and press spots using the types of
messages in the ads shown in the case, Daewoo took prompted awareness of the
brand from 4% in September 1994 to 50% by the end of December that year, and
customer perceptions of a new customer focus were growing. Indeed, in the launch,
Daewoo's advertising awareness by November 1995 was 77% on the back of an £11
millions spend, compared to the highest spending car firm's 64% from a £64 millions
spend. The "four pillars" of the brand proposition developed by
Duckworth,Finn,Grubb,Waters with Daewoo were:
• DIRECT - treating customers differently;
• HASSLE-FREE - clear communication with the company for customers and no
sales pressure and haggling;
• PEACE OF MIND - the features that worry customers, and are traditionally
expensive "extras", are permanently available with every Daewoo (and Daewoo

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stays in touch with the buyer throughout purchase and use in the "Daewoo Contact
Wheel" with members of the "Daewoo family"); and
• COURTESY - by openly respecting customer needs and preferences throughout
the purchase and use process.

Industry Reactions
As the extent of Daewoo's impact on the market has become apparent, the reactions
of competitors have evolved along the following lines. Initially, industry views were
that the Daewoo strategy would not work - after-sales service would be too
expensive to fund, customers would reject the lack of independent franchised
dealers, and independent servicing would not work.
Initial industry surprise and skepticism about Daewoo's strategy developed into
criticisms of the company for being too aggressive and arrogant, accompanied by
rumours in the motor press that car buyers would lose because trade-in prices would
be depressed (perhaps deliberately devalued by dealers). One industry analyst
commented: "Daewoo - huh, that's "Lada With Attitude"!' Most recently, Daewoo has
been subject to a variety of "dirty tricks" and attacks: being banned from one local
motorshow and threatened with exclusion from others as a response to the Daewoo
advertising campaign, and attempts to discourage national newspapers from running
Daewoo advertisements. Daewoo was forced to withdraw advertising that exposed
"overcharging" by dealers and underlining a 35% price advantage for Daewoo over
rival cars. In Scotland complaints to the national trade association led to the
withdrawal of Daewoo ads showing a car being sliced by an electric saw with the
caption "The dealer's slice ...".
Competitors' denial has evolved into bewilderment and now hostility, but with little
sign of a coherent strategic response. This may be because Daewoo is in the
process of smashing an industry structure which has developed largely unchanged
over 100 years. Certainly by mid-1996, Volkswagen and Rover followed Saab in
scrapping hidden "delivery charges" and incorporated these in list prices - one of the
Daewoo strategies which competitors had criticised from the outset. By 1997,
industry analysts were saying that conventional franchised dealers were doomed to

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disappear - having lost control of service, parts, and finance and insurance, they will
next lose control of the provision of the vehicle. Currently, car dealers in Britain hold
£1.25 billions of surplus inventory - they have what is not selling in abundant supply.
By mid-1997, Rover announced a 25% reduction in its dealer network, and Ford was
looking at the same kind of overhaul.
The Future?
Daewoo's spectacular launch strategy has earned a number of prizes and accolades
for the company and its Marketing Director Patrick Farrell. By mid- 1997, Daewoo
had been rated number 4 in the top car makers list in a customer satisfaction survey
by BBC TV’s Top Gear programme and the US motor industry analysts J.D. Powers
- this achievement should be put in the context that Daewoo is a new supplier with
little product innovation in the market. Currently, the company’s customer satisfaction
scores are running at 3.8 on a 4-point scale. However, there is no sense of
complacency at Daewoo - executives know that this is only the beginning. Early in
1997, Farrell says "in a sense we are still in launch mode ... This year the marketing
effort will focus on growing the number of retail outlets, launching a new range of
cars, and injecting some 'emotion' into what is currently a very rational brand
proposition."
It remains to be seen what strategic responses will emerge from the other 42 car
manufacturers operating in the UK, and how the distribution channels for cars will
further develop.

Sources:
*This case has originally been prepared by Professor Nigel Piercy, WBS.
"Adding Drive to the Weekly Shop", Professional Engineering, June 19 1996.
"A Driving Force", Jane Simms, Marketing Business, February 1997.
“British Cars Limp Into the Lada League”, Daily Mail, April 10 1997.
"Buy A Car, Get One Free", The Times, April 1 1995.
“Car Dealers Must Adapt Or Die”, Sunday Business, April 13 1997.
“Daewoo Plans Flexible Contracts", Financial Times, August 29 1996.
“Daewoo Overtakes Other Importers", Financial Times, September 7 1995.

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“Daewoo Pronounces Death of the Salesman", The Observer, April 9 1995.
“Daewoo To Sell Through Halfords", The Independent, November 28 1995.
“Daewoo to Set Up Its Own Car Supermarkets", Financial Times, October 11 1994.
"Dealer System is Collapsing", Motortrader, February 24 1997.
“How A Car Buyer Can Go From 0 to £1600 In Eight Minutes”, Daily Mail, April 8
1997.
“Fantasy Fleet" Business Age, October 1 1995.
“Halfords Open Doors to Daewoo", Financial Times, November 28 1995.
“How to Woo the Daewoo Way", The Guardian,May 2 1995.
“Koreans Drive Hard for Market Share", The Independent on Sunday, July 16 1995.
“Koreans Offer A Creche Course in Customer Care",The Daily Mail, October 11
1994.
“Sacred Cows", Patrick Farrell, Marketing Business, May 1996.
“Westward Ho for Korean car Makers", The Observer, December 3 1995.

Questions
1. The dilemma facing the motor industry is - how can we respond positively and
effectively to the competitive challenge from Daewoo?
2. Of the innovations associated with the Daewoo launch, which have been the most
effective in achieving market share? What has Daewoo "sensed" about this market
that has been ignored by the established firms?
3. There is little in the Daewoo market research findings that has not been known for
years - why have the established car firms failed to innovate in a customer-focused
way?
4. What will Daewoo have to do to sustain its market performance - how many of its
competitive advantages are likely to be enduring?
5. If Daewoo can attack an industry as competitive as the car sector through a value
and customer service strategy - what other sectors may be open to an entry of this
kind (insurance? travel?)?
6. What are the brand extension possibilities for Daewoo associated with the
successful launch of the cars?

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