Pub. 4 2014 Issue 4

17 Overview “The prejudices of some political writers against shopkeepers and tradesman are altogether without foundation. So far from it being necessary to tax them or to reduce their number, they can never be multiplied so as to hurt the public though they may be so as to hurt one another.” (Adam Smith, TheWealth of Nations) These words remain as true today as when Adam Smith wrote them 200 years ago: retailers compete fiercely for customers, and that competition is good for everyone, not just consumers. There are few industries with as aggressive or economical a retail model as the automotive franchise system. Far from being mere “middlemen,” franchised dealers provide a wide range of services that are essential to the effective and efficient distribution of motor vehicles and, in support of those services, invest millions of dollars of pri- vate capital into retail outlets. Most of these retail out lets are privately owned, represent- ing not large corpora tions but individual, family-run businesses that are locally based. In the U.S., virtually every new car or light truck is purchased through an inde- pendently owned and operated franchised automobile dealership. The automotive origi- nal equipment manufacturer (OEM) makes no investment in these retail outlets. Dealerships are financed completely independently by owners and op- erators who combined have invested tens of billions of dollars into thousands of independent retail locations. In addition, dealers employ more than 1 million workers in some of the highest-paying retail jobs available. Moreover, the lion’s share of the 17,663 individual franchised retail automotive outlets are locally owned, atypical given the rapid consolidation in the retail sector. Indeed, private ownership accounts for 95.6 percent of the dealerships in the U.S. Evolution of the dealer model This fragmented ownership structure is not the result of mar- ket inefficiency or regulation, as some would claim. Far from being a burden on the public, the sales and service process that dealers provide is a natural evolution of the marketplace that has continued to serve customers for over 100 years. While the earliest automobile dealerships existed before 1900, the modern system of franchised dealerships developed gradu- ally. In the earliest days of the horseless carriage, there simply was no need for a dealer. Customer demand for vehicles was so high that there were often waiting lists for companies that had yet to produce a single vehicle. This was a customer-pull model, where demand exceeded supply and companies were virtually assured of selling out their production runs. This system changed rapidly with Ford’s introduction of the mass-produced Model T. By the 1920s, three separate systems existed: (1) a branch system with automotive OEMs owning stores (2) independent distributors under contract with an OEM and (3) indepen- dent franchised dealers. All three methods were used to sell directly to consumers, but the factory-owned outlet was quickly being eliminated, out-competed by independent dealers. OEMs learned early on that “. . .even a man who makes a ‘fair to middling dealer’ lies down and quits completely when put in charge of a factory branch–where the urge of actual personal incentive is less strong.” (Epstein, 1928). This was particularly important as the market for motor vehicles fundamentally changed. Most significantly, by the 1920s an OEM could no longer count on its cars selling out a production run. The intensity of competition had increased dramatically, particularly between Ford and General Motors. Motor cars had changed from being a toy of the wealthy to a mass- produced household utility. The change meant that consumers now required financing and service. Just as the market for selling vehicles became more difficult for OEMs, the methods of manufacturing cars also became more capital-intensive. In 1910, a plant would employ 500 to 600 workers and manufacture a few thousand cars a year. But by 1930, Ford’s Rouge River complex inMichigan employed tens of thousands of people and produced hundreds of thousands of We need people in the individual communities to serve those customers. We couldn’t do that from a central location. And so our dealers are the embodiment of Ford Motor Company in their local communities–both in how they sell and service our vehicles to the consumers … The system works well because there are entrepreneurs– dealer principals–investing in the facilities and the people locally, to serve customers. And it’s served us well for over 110 years and will continue to serve us well in the future. JOE HINRICHS, FORD MOTOR CO. VICE PRESIDENT AND PRESIDENT OF THE AMERICAS n Franchise System — continued n Franchise System — continued on page 19