> Dealers say laws passed over the decades to prevent car makers from selling directly to consumers are justified because without them auto makers could use their economic clout to sell vehicles for less than their independent franchisees.
To rephrase: Auto dealers increase the price of cars without producing value, therefore they must be protected by law or they would cease to exist.
Well, they do produce value. Ford couldn't possibly service every municipality in the country and thus relies on dealers. So, the dealers take the risk and do the market research, but Ford is always able to undercut them on price. But Ford probably still can't service all these locations, so they'll only undercut dealers in the most profitable centers and kick dealers out to pick up scraps. Understandably, many won't bother, and so now purchasing a vehicle becomes much harder. Since most dealerships now are full service centers and they have a monopoly on the diagnostic equipment necessary for servicing modern vehicles in some jurisdictions, this also means servicing a vehicle becomes much harder.
Makes sense -- that's why Tesla is so eager to sign up dealers, because it's totally worth the money they charge!
(That was sarcasm, btw. A tiny car maker like Tesla will never get anything like a fair deal from dealers, especially if state law gives dealers a monopoly. It's a disfunctional marketplace.)
I had a similar thought two years ago when I bought my car. I test drove about 6 differen't cars in total, if it was not for the fact that the dealer at the showroom was a complete dick, constantly trying to sell me a loan scheme which I did not want, I might have bought it from the dealer.
Instead I used an online broker firm. As a result I got about £5,000 off the list price of a £20,000 car. The joke is two years later someone offered me £14,000 for it last month, this is due to the lack of cars which qualify for exemption from Londons Congestion Charging Zone.
Now whilst I would hands down recommend the sales service I recieved from the broker, I still value the fact I was able to try so many differen't cars.
I think that we could potentially see a new system for doing test drives, either as Tesla has, the manufacturer pays for booths, which will often lack local knowledge (dealers know what sells in their patch better than some top down management).
Or, and this could be the interesting one, some form of part time demonstraiters. People who get a heavily discounted lease or similar (who would want a stranger to ruin their own gearbox, lease would be the only option) with the agreement to be available for 10 hours a week of test drives or similar. Given a £30k car leases normally for about £400 pcm, 40 hours a month of demotime would be a fair trade, for what is ultimately a fairly un-skilled job.
That's a different business and they could definitely sign up as third party servicers with Tesla (ie to charge Tesla for any warranty services they provide), but they just want to hold onto the dealership fees on top. Not that I can blame them, but this isn't an area where regulation benefits consumers.
I think the problem that he was stating is that Ford is essentially a monopoly on all Ford cars, which has especially damning implications for the car service market. The first casualty in a monopoly-dominated market is often the low-end consumer.
Whether that warrants the dealer protection laws, or whether they are effective at combating this problem by essentially creating another monopoly, is very debatable.
So? They are not a monopoly in cars in general - if Ford was not competitive people would switch.
And people don't go to dealers all that much for service, except when the car is new and you have no choice. They don't call them stealerships for nothing.
> people don't go to dealers all that much for service
What evidence do you have to support this contention? Every car dealer I've ever been to has had a very busy service center, often to the point of requiring a week's notice to obtain an appointment. And in CA, at least, state law forbids manufacturers from requiring cars be serviced at a dealership as a condition of honoring the warranty.
> And in CA, at least, state law forbids manufacturers from requiring cars be serviced at a dealership as a condition of honoring the warranty.
People assume it's better there, and since it's free (i.e. warranty), they go.
My evidence is reading car forums. It's not evidence to you since I can't share it, but it is for me. On top of that, to the best of my memory, I do not personally know of a single person (in my entire life) who has ever gone to a dealer for service except when they had no choice (i.e. warranty or dealer only part purchase). (And yes, I know that's not evidence either - especially since you know nothing about me.)
Someone I know once mentioned that someone they know went to a dealer for service and we thought that was the most bizarre thing ever. (i.e. We wondered why are they wasting their money.)
You clearly have been to car dealer service centers - is that for warranty work, or by choice?
One way in which this tension been resolved (often to the consumer's detriment) is with MAP (minimum advertised pricing) agreements. Such agreements, as an example, permit Apple and other electronic stores such as Best Buy to peacefully co-exist in markets in which they both have presence. Both parties agree not to undercut the other, and both share the burdens and benefits of sales.
With respect to dealerships' monopoly on repair knowledge, at least one state (Massachusetts) has passed a "Right to Repair" act, and car makers have largely made it easier for independent mechanics to obtain service and diagnostic information, so this issue is basically moot now. See, e.g., http://en.wikipedia.org/wiki/Motor_Vehicle_Owners'_Right_to_...
This doesn't explain why we need laws to fix anything. Your logic says that Ford's actions will make buying or servicing a Ford vehicle much harder. This directly affects Ford's sales, and thus their profit. There is healthy competition between vehicle manufacturers. So why would they behave this way, and why is it necessary to have a law that distorts the market?
Your supposition is that I said we need laws for this. I claimed dealers add value. You're arguing the wrong point with me.
That aside, your notion of competition implies all dealers have like models, which is incorrect. Sure, they all have sedans, but I've yet to find a Honda I feel comfortable driving in. There's plenty of other factors, too. Locations, maintenance schedules, manufacturing origin. It's not all that dissimilar from there being different laptop manufacturers.
So, if I really want a Ford (which was the example here), it's nice to have competition between Ford dealers. Otherwise, Ford could just become complacent. Likewise, I'd hate to see fiefdoms form where you really only can realistically buy one or two manufacturers because the third one determines moving in wouldn't be profitable enough.
This happens in other market and is not an issue. e.g.: 80% McDonald's are franchises [1], they tend to operate directly in area where higher profit is available (city centers, denser population).
It's not that they literally would not be capable in a logistical sense. It's that they would probably do a worse job of it than the independent dealers would. At least with independent dealers there's a lot of oversight; the people that own dealerships generally own a few, the biggest players maybe a few dozen.
Right now dealers aren't that great, they're the Mom & Pop bookstores. Having Ford sell directly would give us a Barnes & Noble experience. I personally think that might be worse.
I dislike dealers for sure and prefer to work on my car myself. I have the feeling I would dislike them even more if they were all run by Ford.
And if the protections were relaxed, manufacturer-certified repair centers would go the way of the dodo? That they're attached to the people who would want to sell you a replacement car if something goes wrong seems like a conflict of interest.
Yes, I'm aware that dealers sprung up as a sales channel for cash-strapped automakers. They didn't have the money for a nationwide retail campaign so dealers sprung up to do it for them, and to earn some profits in the process.
Let me know how that test drive on the Internet goes. I'm sure the 8 photos taken at the perfect angle will tell you everything. And shipping a single vehicle is probably going to be super cost-effective.
The people that live there probably do. There is an entire country outside of SF, NYC, and Cambridge and their suburbs. I could just be as glib and ask who really cares about Tesla and their battle with dealerships.
When the auto industry was conceived, the independent dealers were integral to their success. The auto companies were startups and couldn't afford the cap ex of retail operations. So after the industry matured the manufacturers became huge they were a threat to the dealers that helped them succeed. However, Tesla doesn't have any legacy relationships with dealers. Public opinion is on Tesla's side. The dealership's days are numbered. Ordering online allows custom cars, and reduces inventory and storage costs for manufacturers.
Dealers are still integral to the makers (faux) success.
The manufacturers take revenue on shipments to the dealer, not the sell-thru to the end consumer. This allows them to stuff the channel to hit their numbers. Of course, this becomes unsustainable once the effectiveness of discounts & incentives hits the wall and they can't clear the inventory in time for the next stuff job. See 2008 Big-3 explosion, the dealer channel had YEARS worth of inventory of some makes/models.
It's very fair to assume this is a fundamental reason the manufacturers will defend the dealer network to the death. Without it, sales numbers would, by necessity, become a reflection of true demand... Short-term thinking for sure, but very hard to unwind.
At the same time, giving Tesla the privilege to sell directly because of their absent legacy relationshops would give them a unfair advantage. I like Tesla, but they shouldn't gain this advantage.
Society could simply allocate its resources more efficiently if the law is dropped for all manufacturers. Protecting the status quo at the cost of inefficient allocation can not be justified.
This isn't "giving" a privilege. It is a matter of not burdening them with something that is completely unnecessary.
These other companies signed away their point of sale long, long ago. Then everyone gets laws passed which demand that anyone in the future add middle men so they will be equally inefficient.
Of course the argument always comes up, "it's the law, they should abide by it." This argument is always paired with the implied notion that they shouldn't even challenge the law. They should just go along with the law that their competitors wrote to prevent competition. It's a bad law, it needs changing. If it gets changed then everyone can enjoy the same "privilege".
Tesla wants to make something and sell it. This shouldn't require government "privilege" to accomplish. The notion of government planning of industry needs to be squashed.
Preventing Tesla from breaking up the weird dysfunctional system is not the way to get it dropped for all manufacturers. It's the way to enshrine it even more firmly than it already is.
Manufacturers make their profits on selling new cars. Dealers can't sell new cars at a profit without assistance from the manufacturer. But a dealer makes more on servicing and used car sales than on selling new cars. Manufacturers have no advantage there.
The fear is that if the manufacturer was the dealer, they would have strong incentives to push everyone to buy replacement cars rather than be in the lower margin service and used car businesses. I personally don't think that this fact should be allowed to drive the local laws. But that's the reasoning behind it.
so a manufacturer which is providing lifetime service and updates would be ok? this actually sounds like a fantastic way to break the new car incentive model..
saas style car-as-a-service.. or aaas for the yanks
btilly mentioned the effect incentives have on the dealership model, I was trying to suggest if the car manufacturing business had a vested (client based) interest in the full lifetime of the car they may design for longevity and upgradeability rather than simply sales and parts.
It is very hard to get downstream incentives to match the incentives on making the thing. Here are some made up numbers. Suppose that a car costs $25k new. Then manufacture might cost $15k, amortized R&D might be $5k, and profit $5k. After 3 years the car might be worth $15k and the projected lifetime value of being able to try to resell that used, fix, etc might be $5k. Using these made up numbers, profits and lifetime value are about balanced. Unfortunately for the car owner, resource allocation decisions are entirely based on marginal costs. R&D is not a marginal cost - it is a sunk one. Thus selling a new car adds 2x as much to the bottom line as the lifetime value of maintaining it longer. Guess what gets discarded?
Remember, this is the industry which inspired the term "built-in obsolescence". It is also the industry which found it profitable to buy regional transit companies, and run them to the ground to encourage people to buy new cars instead. There is a certain level of distrust backed by history here.
Yeah, all good points. I don't think this should stop tesla trying, or rather, it would be a shame if they were prevented from trying.
i believe it is a matter of restructuring both risks and incentives to make the downstream match the upstream, as you say.. for example, with the saas approach, for say 5k a year, your 5k profit over 5 years per user (add 5k for R&D and 5k for a facelift) turns into 20k profit over 10 years.. and the user gets a guaranteed service - the user and manuf. interests align..
The bigger issue I think, in terms of turning around the current approach, is actually a cultural one in which a car is a personal 'fetish' object rather than the cumulative efforts of a supply chain bundled into a personal transport service.
What you're suggesting here is a mandatory car disposal/recycling fee that must be paid for by the car manufacturer along with an additional parts tax/fee to incentivize improving longevity of the original parts.
I did say saas for cars, i wasn't totally clear, hence the extra note.. not trying to be antagonistic. a couple of big reasons saas took off so quickly..
1.major cost of delivering a big product with little or no involvement / feedback from customer.
2.customer gets to pay for only the useful life of the service
That is.. saas is a method for sharing risk and aligning usage goals. i am quite definitely not talking about any mandatory structure.
SAAS has grown quickly, but is simply the age old concept of renting applied to software, with businesses simply trying to make more money, and that's it.
Any incentives due to this 'new' pricing model are incidental.
> I was trying to suggest if the car manufacturing business had a vested (client based) interest in the full lifetime of the car they may design for longevity and upgradeability rather than simply sales and parts.
Structure it how you will, manufacturer's need a financial incentive before optimizing for longer rather than shorter lifetimes. They sell more if cars have shorter lifetimes - 'planned obsolescence' as noted by btilly.
Charging companies directly and creating the financial incentives is one way of causing businesses to have a vested interest in the long-term viability of a product. It may not be what you intended when you wrote it, but a mandatory fee structure is absolutely one way to aligning usage goals.
If there's a pragmatic way to incentivize increasing car and parts duration that doesn't involve some mandatory fee structure and somehow mimics SAAS, for cars, I haven't come up with it.
Culturally, the fetishization of cars is simply a larger symptom of excessive consumerism which isn't something likely to change any time soon (nor will it be easy to change).
Thanks for the response - it's clear we have a difference of opinion on the implications of SAAS, among other things, though I think we can both agree that Tesla shaking up the industry is a good thing. :)
- Local dealerships were originally founded because in the 1920s, cars were big/expensive and hard to move around the country. Cars needed a lot of repairs, so local dealers to service them made sense.
- During the Great Depression, car manufacturers continued to make cars despite no one buying them. So they forced dealerships to purchase cars, or else get banned from selling their brand ever again (effectively terminating the business, obviously bad if you have loans and other capital investments). This was before overseas competition from Japanese/Korean manufacturers existed, so losing your contract to Ford meant you were pretty sunk.
- Dealerships fought back by getting legislation passed to protect them legally, slowly granting more power to the dealerships over time. Now the balance of power is far, far on the side of dealers - manufacturers cannot shut down dealerships, cannot control who runs them, must provide cars to dealers even if they are in poorly profitable areas, cannot tell the dealers what to sell, no real way to incentive dealers to not be "car salesmen" assholes, etc etc.
May be because wsj is playing smart here. When go to the article for the first time they are putting a cookie on your browser, so even when you visit through a search engine it is still able to detect you as a previous visitor and showing you a paywall. Use a different browser to do the search or clear the cookies before doing the search or block all cookies form wsj. That's what I did with experts-exchange.com long back and it worked.
" ... about the often-vilified middleman--someone who buys cheap, sells dear and does nothing to improve the product. Munger explains the economic function of arbitrage using a classic article about how prices emerged in a POW camp during World War II. "
> Dealers say laws passed over the decades to prevent car makers from selling directly to consumers are justified because without them auto makers could use their economic clout to sell vehicles for less than their independent franchisees.
To rephrase: Auto dealers increase the price of cars without producing value, therefore they must be protected by law or they would cease to exist.