Since before your grandfather was born, new cars in America have been sold by licensed dealers. There are a number of reasons for this, not the least of which is that dealers helped insulate manufacturers from damage claims by customers. The automakers argued they had no contractual relationship with owners, so if they got injured by some defect in an automobile, their only legal remedy was to sue the dealer who sold the car.
Donald MacPherson Makes History
That worked until Donald MacPherson was injured when one of the wooden wheels of his 1909 Buick broke. In a landmark decision penned by Judge (later Supreme Court Justice) Benjamin Cardozo, the old rules were swept away and MacDonald was allowed to sue Buick directly. MacPherson Vs. Buick Motor Car Co. went on to help establish what has now become a multi-billion dollar personal injury industry. (See John Grisham’s The King Of Torts for more on this topic.)
But as often happens, the car companies decided to press their advantage over dealers after WWII. If a dealer displeased a manufacturer, it merely set up a competing dealership across the street, one which could sell cars for less because it got more favorable terms from the company. The blowback that resulted from the auto companies’ greed resulted in dealer franchise laws designed to protect the dealers from unfair competition by the factories. Today, those dealer franchise laws have a new purpose — preventing manufacturers like Tesla from selling directly to the public.
Tesla Charts A New Course
Tesla has been battling dealer franchise laws in several states for years, but has never been able to score a knockout blow against them. A few years ago, it sued the state of Michigan in federal court, claiming its dealer franchise law was contrary to several provisions of the US Constitution. In the end, both Tesla and Michigan grew afraid of what might happen if a ruling in that suit went against them, so they pulled in their horns and reached an agreement that allows Tesla to open a few stores in the Wolverine State but still leaves its dealer franchise law intact.
But a funny thing happened on the road to the EV revolution. The coronavirus pandemic has upended the traditional relationship between car dealers and customers. Contactless deliveries are gaining in popularity. Customers prefer to do their shopping online rather than spending the afternoon arm wrestling with a salesperson and a long line of sales managers and F&I people pushing financing, warranties, paint sealant, alarm systems, and a shopping list of other high profit extras customers may or may not need. (For more on paint sealant, spend some time rewatching the opening scenes of the Coen Brothers’ movie Fargo.)
Volkswagen Creates New Sales Model In Germany
While shoppers are enjoying the joys of spending less time in dealer showrooms, more companies — most of them makers of electric vehicles — are tinkering with the franchise dealer model for their own purposes. In Germany, Volkswagen has instituted a new business model for sales of its ID. branded electric cars. While it is true that German dealers typically have a lot less power than US dealers, the new arrangement means Volkswagen will have primary responsibility for sales, marketing, and financing, while dealers will be re-positioned as agents for the company.
“The agency model lays the contractual foundation for integrating online business and showroom-based business,” Volkswagen says. Customers order ID. branded vehicles directly from Volkswagen. “At the same time, they select their preferred dealer for personalized customer care and local services.” The proposition that underlies VW’s new electric offering is that the customer doesn’t start at the dealer or even the dealer’s website. Instead, it starts at Volkswagen’s website, and from there flows the most important decisions.
The dealer’s job is to “look after acquisition, sales consultation, organizing test drives, transaction processing and vehicle handover in coordination with Volkswagen,” the company explains. The dealer “receives the same commission and bonus as in showroom business, even if the vehicle is purchased online direct from Volkswagen.”
In Germany, the electric car’s price is no longer the dealer’s to negotiate. It’s set by Volkswagen. Options like leather trim and battery size aren’t chosen from among the cars on the dealer’s lot. Instead, they’re configured online in only 10 mouse clicks. In fact, the dealership doesn’t enter the picture until the customer chooses a dealer to be handed off to. Volkswagen finances the purchase and owns all the inventory.
That last bit could have an enormous impact on local cities and towns in the US, many of which levy property taxes on the acres and acres of cars dealers have in inventory. If there is little to no inventory, there will be no cars to tax. Volkswagen declined to clarify for E&E News when, if ever, its new relationship with dealers in Germany might come to America.
“I think it’s really creative,” said Chris Sutton, the vice president of automotive retail at J.D. Power, tells E&E News. “My first take was, it’ll be very interesting to see that model and whether it’s adopted in the U.S.
Lucid, Rivian, & Polestar Get On Board
Lucid, Rivian, and Polestar are transitioning to an online direct sales model, according to E&E News. These strategies are “the thin edge of the spear,” says Karl Brauer, executive publisher of Cox Automotive. “They are trying to establish this new system, and they are using EVs to do it. It’s an indicator of where non-EV retailing will eventually get to. What’s been going on the last few months have only accelerated this process,” Brauer says.
Drivers seem open to a different dealership experience. A recent survey of 2,000 people by Cox Automotive found that just one-third are “very satisfied” with how dealerships work these days and that solid majorities want more online shopping, fewer salespeople, and a different kind of showroom. Automakers are tying electric car sales to new retail platforms that are online-friendly, offer flat prices, and make low-key pitches. They also want to establish a close digital connection with their customers.
A Two-Way Digital Relationship
Zak Edson, the director of retail operations for Lucid, says direct sales will help his company keep its finger on the pulse of its customers. “Over time, the automotive companies have lost their connection, and it means you can’t have the same rapid customer reaction response. You don’t know what the customer is looking for.”
Rivian also plans to use over-the-air updates to connect with customers. Those contracts aren’t possible with a third-party dealer in the way. “With our customers’ permission, we will be able to connect to those vehicles and monitor those vehicles in real time,” James Chen, Rivian’s policy chief, testified to Washington state lawmakers in February. “All that data is valuable to us for the optimization of those vehicles.”
“The retailing process they’re talking about is a full acknowledgment that there’s another way to sell a car than the one that’s been used for 100 years,” says Brauer of Cox Automotive. Big Auto so far has been successful at fending off challenges to the franchise dealer model, but for how long? COVID-19 and the EV revolution are forcing changes on the industry that can’t be ignored much longer. Most car buyers won’t shed any tears if the franchise dealer model collapses, and the sooner the better.