Car dealers have been a retail outlet for car manufacturers for over 100 years.
Manufacturers needed dealers to grow as fast as they did, starting with Henry Ford and the Model T.
Ford’s invention of the assembly line allowed him to build far more cars than he could sell from his production facilities, hence the dealership franchise.
When Ford, General Motors, and Chrysler established dealer networks throughout the United States, they had complete control over their dealers.
Car dealers could sell cars only under short-term contracts, which were called franchises. These contracts were very one-sided, in favor of the producers. Manufacturers could terminate a dealer contract for almost any reason, and dealers had virtually no legal recourse. Manufacturers could add as many dealerships as they wanted in each geographic region. Dealers were given unrealistically high quotas of the number of cars they had to sell each month. If they didn’t meet their quota, their franchise was revoked and they went out of business, in most cases going bankrupt.
But dealers fought back by forming dealer associations and lobbying state legislatures to pass laws protecting them from manufacturers. Auto dealers in every state have become some of the largest employers and taxpayers. State politicians understood that this meant that they needed the support of car dealers to get re-elected. Slowly, laws were passed in all 50 states that made it impossible for automakers to cancel the franchise contracts of their dealers.
Initially, dealer franchises lasted one year. This evolved to two years, then six years, and today is mostly indefinite. Manufacturers cannot tell a dealer how to advertise, price their cars or services, or what shady sales tactics to use to sell cars. If the dealer decides to sell their franchise to someone else, the manufacturer has little say in who that might be.
However, manufacturers retain one significant amount of power over their dealers. Because manufacturers build cars, they can build and offer as many as they want to all their dealers. Each of the dealers has no choice but to accept and buy whatever cars are “offered” to them. If a dealer refuses to accept and buy all the new vehicles requested by the manufacturer, their competitors selling the same make will accept them. Due to the large number of models, colors and options for each make of car, the dealer with the smallest selection will lose sales to his competitor with a larger inventory.
This artificial state of overstocking should be good for you. In fact, it is for the educated, savvy consumer who can see through and overcome the aggressive and deceptive sales and advertising practices of auto dealers. However, for the average buyer, this situation of artificial over-inventory, orchestrated by the manufacturers, forces car dealers to do everything they can to sell the excess supply of cars. “Whatever it takes” unfortunately means what you know car dealers are guilty of today – bait and switch advertising, dishonest and deceptive sales practices. Evidence of this is Gallup’s annual survey on professional integrity and ethics, which has been conducted every year since 1977. For each of those 45 years, auto dealers ranked last or next to last among all companies.
The last 2 1/2 years and the advent of the COVID pandemic have dramatically reduced the artificially inflated standard of car inventory. Today, auto dealers are virtually out of inventory, and prices have soared to all-time highs along with auto dealer profits. The law of supply and demand worked perfectly. Average auto dealer profit per vehicle has increased from approximately $1,500 per vehicle to approximately $10,000 per vehicle. New car production fell slightly, but the jump in profits more than made up for it. Manufacturers also raised prices for their dealers, effectively eliminating dealer cash incentives as well as customer incentives. Don’t think that automakers and dealers aren’t looking at the COVID pandemic as an economic boon in disguise. You can be sure they are thinking about how they can maintain the obscenely high profits per car they enjoy today.
The explosion of knowledge and science combined with the COVID pandemic has pushed the world toward accelerated change unprecedented in human history. The automotive, manufacturing and retail industries are at the peak of these changes. Vehicles and how they transport us in 20 years will look little like today. Will GM, Toyota, Honda, Ford and other manufacturers sell directly to us like Tesla does today? Will car dealers disappear?
In my opinion, dealers may be a better answer than buying direct from the factory. This will probably surprise many of my regular readers who know what I think of today’s car dealerships. I spoke highly of Tesla and its factory direct sales policy. I only feel this because of the lack of honesty and transparency of most car dealers. I have enjoyed the experience of buying a Tesla (I bought one for my wife, Nancy and myself) and almost all Tesla buyers praise the smooth and transparent purchase with no haggling.
What most people don’t know is that Tesla prices their cars above their cost far more than any other automaker. They can do this because they have very little competition. They dominate the electric car market, and if you want the best electric car and a great buying experience, there’s no one else you can buy from. Tesla has practically no competition. Competition is usually a buyer’s best friend.
It should be the same with car dealers, because they are extremely competitive. The reason that competition between car dealers is NOT a car buyer’s best friend is because car dealers are unregulated and unsupervised, and that they are somewhat forced into this model by their manufacturers, forcing them to buy more inventory than they can sell in a completely transparent manner. system. and honest business. Again, this is a normal time, pre-covid and hopefully post-covid.
My recommended solution to the problem is to require our regulators to enforce laws against unfair and deceptive trade practices, and for our federal and state legislators to pass any additional laws necessary to protect car buyers from predatory car dealers . This solution gives car buyers all the benefits of strong competition, keeping car prices low without fear of high pressure, dishonesty and lack of transparency. ¦