Pub. 4 2014 Issue 3

21 T he Model T Ford, which sold for 19 years starting in 1908, had an initial price tag of $950. It was sold later on for as little as $280. Almost 15,500,000 Model T Fords were sold in the U.S.; as more and more people began driving them, it marked the beginning of the Motor Age. The business of building a car, it turned out, was something that needed specific ingredients in order to thrive. Geography mattered— so did access to materials, innovators, and businesses that could act as subcontractors. As a result, a tremendous amount of synergy was generated in two places that had all the right re- sources, Ohio and Michigan, and all the pieces came together for the creation of a new industry. Since Henry Ford lived inMichigan, along with other notable people like Ransom Olds, Ohio’s early involvement decreased over time and Detroit became the capital of automobile manufac- turing in the U.S. Although more than 200 different companies got involved in the car business during its first 15 years, only three companies eventually dominated the market, and all three companies had their headquarters in the area around Detroit, Michigan. Those companies, of course, were Chrysler, Ford, and General Motors. That created an obvious problem. If cars are being built in one or two geographical areas, how do you sell them to all the people who live somewhere else? Developing a franchise system was the logical solution. Some dealerships developed naturally. A blacksmith was an obvious choice; so was any store that sold goods such as farm equipment, horse supplies, tools, or tires. Car manufacturers soon realized that there was a real benefit to this arrangement. They concentrated on making the cars and let someone else sell them. They saw dealerships as a way to give themselves access to a network of potential customers without necessarily having to take on the risk that would have been involved if they’d built the network themselves. Dealers gave the manufacturers large deposits and agreed to accept the cars that were built on a regular schedule. This provided car manufacturers with the much-needed cash they had to have in order to continue growing and innovating, but it also put the dealerships in the position of being investors, along with the as- sociated risks that come with giving someone else a big chunk of cash without having any guarantees of making a profit. It worked because when people came in and saw the cars that were for sale, they wanted them. But it was still a tremendous financial risk that mostly benefited the car manufacturers. The first franchised dealerships signed agreements with the companies that were manufacturing cars, establishing a pattern that continues today. In exchange for exclusive distribution rights within a large geographical area for about a year, the dealers agreed to do the following: • Create and maintain a showroom and a repair shop • Keep a reasonable amount of cars on the lot • Sell within the specified geographical area These requirements still exist in current franchise agreements. By 1910, the car manufacturers began to require that dealers create subdealers within their geographical area. The result was a large number of independent franchisees. However, as the car manufacturers became more powerful than the many dealerships, The first practical car was built by a German mechanical engineer named Karl Benz in 1885. Nobody could have foreseen what was going to happen next. Henry Ford, who started the Ford Motor Company in October 1903 when he was 40 years old, wanted to build cars for “the great multitude,” and that is exactly what he did. The Franchise System n Franchise System — continued on page 22