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Why car shopping is so bizarre in the United States

Why car shopping is so bizarre in the United States

But if you want to buy a new car, you have to go to different stores for different brands. However, the Ford store is not owned by Ford and the Toyota store is not owned by Toyota. They are owned by other companies, some large and some small, but very rarely are they owned by the company that has its name above the front door.

What’s even more bizarre, if a new car company wants to open its own store and sell directly to customers, it’s illegal in many US states to do so. If an established automaker wants to start doing that, it’s illegal pretty much anywhere in America.

But how did it come to be? Why is this system so resistant to change?

The reasons have to do with the complexity of the transaction (buying a car is more complicated than buying a refrigerator or pants), but also with the explosive growth of the industry in the early years.

A specific solution to a specific problem at a specific time

To understand why we buy and sell cars as opposed to other goods in America, look back to the crazy and often brutal early days of the American auto industry.

In the late 1800s and early 1900s you might see a car parked outside the shop and the clerk inside would be happy to take your order.

Around Mannheim, Germany, Bertha Benz drove her husband Karl’s invention, the Benz Patent Motorcar — considered the world’s first combustion engine car — to follow orders from curious passersby. For a while, Sears has sold the Sears Motor Buggy through the mail order catalog.

Some companies even sold cars on credit. Customers ordered one or a few parts at a time for mail delivery and were able to assemble their own car over the months.

Some enterprising businessmen became full-time car dealers. William Metzger, who began selling electric and steam-powered cars of various makes in Detroit in 1898, is commonly regarded as the first car dealer.

“That was one of the big problems in the first 10, 15 years of the American auto industry,” said Matt Anderson, transportation curator at the Henry Ford Museum. “What’s the best model for selling cars to the public? And all kinds of different things have been tried.”

Bertha Benz drove around in her husband Karl's creation, the Benz Patent Motorwagen, at the order of curious onlookers.  (This print shows a slightly later model of the Patent Motorwagen driven by a man.)

In those early days, car companies popped up everywhere, although many quickly went bankrupt. But with the few who succeeded, car production skyrocketed. U.S. auto production went from 4,000 units in 1900 to 1.9 million in 1920, according to a 1985 article by Thomas Marx in Business History Review magazine.

One company in particular made so many cars that even more innovations were needed to handle all the sales. That company was Ford Motor Co. and the car was the Model N.

Manufactured from 1906 to 1908, Ford made 6,000 Model Ns in one year, an astonishing number at the time. (The Model N. was a forerunner of the much more famous Ford Model T.)

While Ford hadn’t used a moving assembly line yet, it still built and sold so many cars—including other letters of the alphabet—that the company began recruiting a network of dealers to handle it all.

While Henry Ford oversaw the engineering and production of automobiles, his famously irascible business partner James Couzens handled finance and sales. He recruited independent dealers in the belief that a person would work hardest if he worked for himself.

But he didn’t make it easy for them.

Henry Ford (right) and David Gray, a Ford Motor Co. board member, in a Ford Model N outside the factory on Piquette Ave.Henry Ford (right) and David Gray, a Ford Motor Co. board member, in a Ford Model N outside the factory on Piquette Ave.

According to Douglas Brinkley’s “Wheels for the World” book, dealers were required to pay 50% of a car’s value upfront when ordering for their inventory and the other half when it was delivered to them. (Other automakers offered lenient terms.) He also demanded that the dealers sell only Fords, said Ford Motor Co. historian Ted Ryan.

Henry Ford himself required dealers to have a stock of parts on hand for immediate servicing of Ford vehicles when needed, as well as to keep Ford dealers representative and clean.

Given the money to be made, dealers happily jumped in and sold only Fords. Like canals dug to receive water, these sales channels were largely in place just as the Model T, which would be made in the millions, began to flood the U.S. market.

According to James Flink’s book “The Automobile Age,” there were 253 active automakers in the United States in 1908, the year the Model T went on sale. In 1929 there were only 44. Even with 44 automakers, 80% of all cars sold in the US that year were made by just three companies, Ford, General Motors and Chrysler. They all followed Ford’s example of selling through franchised dealers who sold only their brands. The continued demand for cars and their relatively high costs made this feasible.

By the mid-20th century, car dealers had real political clout, helping to pass laws protecting their independent businesses from infringement by major automakers.  Here, a salesman shows off the engine of a 1937 Chevrolet Master.By the mid-20th century, car dealers had real political clout, helping to pass laws protecting their independent businesses from infringement by major automakers.  Here, a salesman shows off the engine of a 1937 Chevrolet Master.

“They had the power to demand brand exclusivity, in part because a dealer could survive with just one brand,” said Brian Allen, a longtime auto retailer and now president of Hyrecar, a company that serves rideshare drivers. “That’s very doable compared to other types of products.”

The complexity of the auto sales transaction, which includes trade-in, resale of the owner’s used model, and ongoing service, also lends itself to reliance on an outside specialist firm, as famed former GM CEO Alfred Sloan, Jr., explained in his book ” My Years with General Motors.”

“Organizing and overseeing the necessary thousands of complex trade institutions would have been difficult for the manufacturer,” he wrote in his memoir published in 1963.

The power of dealers

For a long time, car dealers were largely at the mercy of car manufacturers. A car company could decide pretty much on a whim to open another store that sells its cars just down the street from an existing location. Or the automaker may simply decide to shut down a dealership from new stock.

But after a few decades, car dealerships began to take advantage of their own strength, said Anderson of The Henry Ford.

A car dealership was usually one of the largest local businesses in its area. Car dealers paid taxes, they sponsored local events like the Little League team and the Fourth of July Parade. And they contributed to political campaigns and the owners even ran to the office himself. Before long, state legislators across the country passed laws to protect them from abuse by those big auto companies.

“In the 1940s and 1950s you had these kind of mom-and-pop car dealers complaining that they were being abused by the ‘Big Three’ [Detroit automakers]said Daniel Crane, a professor at the University of Michigan Law School. “And so it led to this series of laws protecting dealers.”

GM was America's largest automaker for nearly a century.  It was just dethroned by ToyotaGM was America's largest automaker for nearly a century.  It was just dethroned by Toyota

These corresponding financial and political forces have created a kind of mutual attraction that has linked car dealers and car companies for many decades.

It has also kept others out.

These laws were intended to prevent major automakers, such as General Motors and Ford, from opening their own stores. In many states, the laws are interpreted to prevent startups like Tesla, Rivian and Lucid from opening their own stores as well, Crane said, even though they wouldn’t compete with already established franchise dealers.

Some say there are very good reasons to protect traditional franchise dealers. Car dealerships remain important economic pillars in their communities, said Erin Kerrigan, president of Kerrigan Partners, a financial firm that advises car dealership owners. All those things about sponsoring the local Little League team and other community events hold true.

And car dealerships, especially those with contract sales staff, offer some of the few jobs left where people can earn a comfortable middle-class income without earning higher degrees.

Breaking the Model

Some new car companies, such as Rivian, Tesla and Lucid, are working to change this system.

They sell online and open showrooms in shopping centers where customers can see the cars and use VR glasses to try out different interior designs.

Tesla has had some success and can now sell its cars directly to customers in many states. Other start-up automakers are now joining in, trying to break the hold that the entrenched franchise model has had on the industry for more than half a century.

Rivian sells directly to customers because, given the new electric vehicle technology for most Americans, the company wants to make sure consumers understand the product, said James Chen, vice president for public policy.

Lucid, another start-up EV car maker, takes a similar stance, also selling its cars directly to customers through showrooms, often through “studios” in shopping malls. Lucid customers can order the cars online in a manner similar to Tesla’s.

Meanwhile, the industry is also adapting to the internet age as even traditional automakers are rolling out websites to enable online ordering and even buying of cars. However, the delivery of the car to the customers still takes place through a traditional car dealer.

Adapting to change and incorporating it is the best way for auto dealers to fight back, Crane said. Instead of fighting the start-ups, they could work with them.

“There needs to be a big multi-stakeholder discussion that leads to some sort of framework for moving forward that allows for a lot more flexibility,” he said. “It also gives the dealers real hope to be able to participate in the future.”