Auto Dealer Veteran Tells How It Is – and Was

My point-by-point reply to FTC bloggers.

David Ruggles

January 15, 2016

10 Min Read
Auto Dealer Veteran Tells How It Is – and Was

On the Federal Trade Commission’s website, Tara Isa Koslov and James Frost wrote a blog entitled “The FTC Opens the Hood on Automobile Distribution.”

I wrote a rebuttal. But the FTC chose not to publish my comments. Here’s what Koslov and Frost say in their piece, and here are my point-by-point replies.

They say: “While the retail landscape has changed dramatically in the last 50 years, the system of auto sales in the U.S. has stayed mostly the same. Are consumers benefitting from the current distribution system for automobiles or are changes needed?”

My response: One wonders if they realize that buying a vehicle involves trade-ins with negative equity, complex financing issues based on a myriad of credit scores and the associated “tiering,” debt-to-income ratios, loan-to-value issues, state inspection and registration issues that impact state sales tax issues, not to mention service after the sale issues. 

One can’t exactly package up a new car and mail it back to the factory to get a window leak repaired.  

If people start paying for the new vehicles with credit cards, the cost of using the card will be passed on to them. In many cases, the credit card fees are more than the financing interest and it would be paid up front. 

Maybe they are unaware of this or think it is a small deal. I recently ordered a new printer from Amazon. There were no financing issues. I paid for it by credit card.  There was no trade in because they don’t accept trade-ins. Besides, the cost to ship my old printer back exceeds its value. No tax was collected.  I confess I might be tempted to get a new vehicle by mail order if I could avoid paying sales tax on it, but I might have a difficult time getting my state to issue me license plates if I haven’t first paid sales tax. 

There are many issues to be considered and one wonders if these two authors have any real understanding of the good reasons things are the way they are and aren’t outmoded at all.  But there’s more, so we’ll proceed on.

They say: “A time-traveling shopper from 1965 would be shocked at how easily one can now browse an almost unlimited selection of merchandise online, purchase it instantly, and arrange for it to be gift-wrapped and shipped virtually anywhere in the world – all without even getting off the couch. In contrast, purchasing a new automobile today works pretty much the same way it did in 1965.”

My response: As a practical matter, it is technically possible to order a new vehicle without getting off the couch. In fact, it used to be commonplace for auto buyers to be on a yearly or bi-yearly trade cycle. All they had to do was pick their colors and equipment. 

So what complicated things over the years? A higher number of consumers today have much more complex financing issues than back in the day. The advent of rebates and incentives have further complicated things along with the current lack of consumer loyalty caused by a plethora of reasons led by the fact that today the options available to consumers are mind boggling. 

They say: “Most consumers still buy new cars through franchised, independent automobile dealers. During an in-person transaction, they haggle over the price of the car, the value of a trade-in, and other terms of sale.”

My response: Except there are many more vehicles to choose from. Financing terms have gone from 12 to 36 months then to 60 to 94 months now. The credit system is much more complex. There is much more negative equity. That’s just the beginning of the list. 

Then, as now, consumers want to haggle. They absolutely want to “play the game.”  Then, as now, they want to be guaranteed a “win” when they buy a car, just as they do when they buy a house, boat, or piece of furniture.

Off the Rails 

They say: “In every state in the union, the relationship between the dealer who sells the car and the manufacturer who made it is extensively regulated. State legislators and regulators determine whether a manufacturer can add new dealers or terminate under-performing dealers, and even whether a dealer can move to a new location. In many states, only independent, franchised dealers are legally allowed to sell new vehicles.”

My response: Now here is where the FTC authors really go off the rails. Yes, the relationship between the auto OEM and the dealer is extensively regulated. There are very good reasons for this.

From the beginning, OEMs needed the capital, expertise, and local relationships of business people to create a distribution network. The capital itself to accomplish this is daunting, to say the least. That was the beginning of it.

It is frankly impossible for an OEM to muster the resources to stay ahead of the design and technology curve while directing cash reserves toward buying expensive commercial property and trying to operate retail sales and service points.  The FTC authors fail to mention it was the need on the part of the OEMs to establish retail networks that caused them to recruit local business people and set them up as dealers. 

This was done using a document commonly referred to as the Sales and Service Agreement, or “Franchise Agreement.” After all, what rational business person would make a significant investment without some guarantees from their supplier?  For example, they might want a protected sales territory. 

Imagine an OEM saying, “We want you to build us a really nice facility on a major thoroughfare using your money while we reserve the right to sell directly to consumers in your area, thereby cutting you out.  We also reserve the right to place another dealer in the same area to sell to the same market.”

Only idiots would invest money under such circumstances. So the OEMs freely offered terms that would get a local business person to invest in a dealership. State government had nothing to do with this. 

But OEMs still abused the relationship. Henry Ford, who thought investors and dealers were “parasites,” led the pack.  As a consequence, dealers banded together in trade associations to allow them to effectively fight abuses perpetrated by the OEMs. 

A lot of the dealer abuse issues took place at the regional levels. I recall once being placed on a “list” because I refused to but a $2,000 brochure rack along with special signs for the restrooms. 

The dealership I operated sold four brands. Imagine having four signs on the men’s room to satisfy facility requirements of all my brands. 

It was rough back then. Imagine a regional executive has a buddy who wants your store.  The executive starves a dealer of product, driving him or her out of business so his buddy can pick up the pieces for a song.  The list of abuses is long.  Dealers don’t have to be concerned about these things anywhere near as much as they once did. 

Other state laws came about to protect good dealers from bad dealers as well as to protect consumers. 

Back in the day, there were no real dealership facility requirements. New-car dealerships might be a trailer on a gravel lot. When I was in college, the local Saab dealer was a fellow student selling Saab Sonnets out of his dorm room. 

Here-today-gone-tomorrow new-car dealers didn’t make consumers happy. A real dealer with a real facility wasn’t happy to have to compete against someone operating out of the trailer on a gravel lot. Hence, state regulation. 

The premise that consumers are prevented from buying new vehicles directly from an OEM because of dealer lobbying at the state level is blatantly false. 

Tesla Eventually Will Learn

They say: “Some industry stakeholders maintain that the traditional distribution model benefits not just incumbent dealers, but ultimately the car buying public as well. They note the benefits of placing inventory close to the consuming public and the ability to obtain high-quality warranty service as key benefits of the existing distribution model. Other stakeholders, however, urge greater scrutiny of potentially outdated regulations that may, over time, make it more difficult for car manufacturers to experiment with alternative distribution methods that do not rely entirely on dealers.”

My response: Ford famously attempted to operate its own sales points through its failed “Ford Collection.” Ford bought up sales points in Tulsa, OK, Salt Lake City, UT, Indianapolis, IN, and San Diego, CA.

It operated these dealerships according to how consumers answered survey questions as to what they wanted in the new-vehicle purchasing process. 

The prices were fixed because the same owner owned all of the sales points in the market. This was the reason the FTC gave for giving the Ford Collection, and later Saturn, a pass on “price fixing,” something not tolerated when individual auto dealers might get together to fix prices. Consumers still felt put upon because the trade-ins still had to be “haggled” as did finance terms. The Internet hasn’t changed that. 

Ask yourself what might happen if an OEM bought up all of its sales points in a particular market, then started selling directly to consumers, delivering new vehicles all over the country. 

In theory, it could be done from a single factory-owned store as long as that store could get licensed as a dealer in a particular state.  Would that OEM not be violating its own sales and service agreements? This would have nothing to do with state franchise laws. 

Imagine the auto exec who started such an initiative. Imagine the dealer upheaval.  Imagine the lawsuits based on the violation of the sales and service agreements.  Imagine the drop off in sales.  Imagine that executive’s head rolling on the floor.  Recall Jacque Nasser. 

Now let’s get to Tesla. It is unimaginable to me the FTC is suggesting auto OEMs violate their own sales and service agreements. Perhaps the FTC is suggesting Tesla be allowed to distribute its cars however it wants to. Actually, except for a few states, it is. 

And I’m fine with that except when state law mandates a dealership sales point also include a service department. If the state wants to change that law for all dealers, not just for Tesla, I’m also fine with that. 

If Tesla discovers the “inventory buffering” and “production smoothing” that other auto OEMS find helpful is also a benefit to it, Tesla will need to convert to the traditional sales model. 

In such a case, it is doubtful that Tesla could raise money from business people without assurances to those business people such as those included in a rather standard sales and service agreement. 

At this point in time, Tesla has managed to balance the equilibrium between supply and demand quite well.  That won’t last forever. We’ll know it’s a real car company the first time it has to deal with less supply than demand and it faces shutting down assembly and sending home employees as well as trying to figure out what to do with the incoming parts it ordered. Tesla will get a quick lesson in what it costs to start and stop assembly lines. Or it will continue to build cars and stack them someplace waiting for demand to return, a loser move if there ever was one. 

Having a dealer body to sell those cars to would come in handy. That’s when Tesla will figure out who its real customers are. So far it has been end users. For traditional OEMs, customers are dealers who pay for vehicles right after they roll off the assembly line. Rest assured, Tesla will learn those lessons at some point and I’m happy to see the market sort that out.

They say: “On January 19, the FTC will convene a one-day workshop where a large group of seasoned experts will discuss these issues in greater detail. Workshop participants will explore how state-based laws and regulations governing automobile distribution may affect consumers and competition, whether and to what extent the policy justifications that motivated these laws continue to be of concern, and whether less restrictive alternatives to the current system of extensive state regulation might satisfy legitimate policy goals while promoting greater competition and innovation.”

My response: I’ll be there. I wouldn’t miss it for the world. I have a few questions to ask.

David Ruggles is an automotive consultant and former dealership general manager. He can be reached at [email protected].   

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