A new report claims that the potential for successfully selling cars online has been greatly exaggerated and adds that while more car buyers will research their purchases online, the number actually buying a car without seeing it first will remain relatively small.
The report, "Automotive Retailing in the New Millennium," was released Wednesday by the Economist Intelligence Unit (EIU), the market research wing of the UK-based Economist Magazine.
The new study claims that while online car sales have been growing steadily, especially in the United States, some car-selling startups are spending as much as 100 percent of a new car's value on marketing to Internet consumers. "The expected lower-cost world is still in the future," says the report.
Growing Pains
"The report shows people using the Internet to gather information and intelligence on prices, but to conclude the deal they are still searching for the reassurance of that traditional [in-person] handshake," said Ian Robertson, director of EIU's automotive group and author of the report.
EIU's study appears to support the research of Consumer Reports magazine showing that despite huge investments and a rapid growth in the number of competing automotive Web sites, the online auto industry faces a long road to true sales success. In a survey released in March, the magazine found that many car buyers were unable to get quotes and specific information on new cars from most car dealer Web sites.
Additionally, JD Power and Associates found that while twice as many car dealers had a Web presence in early 2000 as compared to the year before, only about four percent of new car buys are done purely online.
Many analysts still believe, however, that online car sales will continue to grow steadily. Forrester Research says that as many as eight million households will use the Internet to shop for a new car by 2003 and that within five years, at least half of all new car purchases will be influenced by the Web. Forrester predicts that $16.6 billion (US$) worth of cars will be sold online in 2004.
A host of online car sales outlets have sprung up hoping to take advantage of the growing demand, including Autobytel, Carbuyer.com and Microsoft's (Nasdaq: MSFT) 
CarPoint.com. Last month, CarsDirect.com said it is planning an initial public offering of stock to raise as much as $100 million to boost its Web activities.
Several car manufacturers are also entering cyberspace in an attempt to sell directly to consumers. Both General Motors, which has partnered with America Online, and Ford, which signed a deal with Yahoo!, are planning to use the Internet to sell new cars.
In Flux
Still, the EIU report points to a continuing rash of mergers and partnerships as proof that the online car selling industry is still in flux. "What is clear is that experimentation will continue; what is not yet clear is which models will win," the report argues.
The report acknowledges that there is a potential for automakers to use the Internet successfully when selling directly to consumers. It points out, however, that this new sales model may take as long as 10 years to become financially lucrative for auto retailers.
"There is little doubt that the Internet car retailing code will be broken, and probably in the near future," says Robertson. "There are growing doubts about whether Internet-based car retailing will have become dominant or just be another channel in the mix."
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