Will Chevy Follow Ford’s Lead to Direct Sales?

Holeydonut said:

Write your local politicians then... by and large they have been against the Detroit automakers buying out dealerships and trying to make the sales channel a "build to order". Find your local reps that are in favor of updating state franchise laws and vote for them.

It's not like this realization is new. Here's a DOJ analysis from 2009. And I personally am aware (since I worked on one of the failed efforts) of several attempts going back to the mid 2000s for the automakers to go direct to consumer.

Economic Effects Of State Bans On Direct Manufacturer Sales To Car Buyers

www.justice.gov

Since I know people online hate reading lots of text... here's the DOJ TLDR conclusion. Bold emphasis added by me.


J.T. Battenberg, the former chief executive of auto parts supplier Delphi Corporation, has put forth the view that "Build-to-order is the key. That's the game changer in the industry."(23) That statement was made in early 2000. Since then, GM has launched a build-to-order, direct manufacturer sales model for an economy car in Brazil. Yet there still are no direct manufacturer sales in the United States. Although, among others, there are issues in the United States relating to union acceptance of modular assembly techniques, such issues are difficult to address effectively as long as there continue to be "stubborn state franchise laws that prevent manufacturers from selling cars directly to customers."(24)

Private challenges to state franchise laws thus far have not been successful in the courts. One case involved an Arizona law that, in part, prohibited manufacturers from marketing directly to consumers.(25) In another, Ford challenged a Texas statute that banned it from selling used cars from its website because Ford wasn't a dealership.(26) One observer familiar with state auto franchise laws said several years ago that "No matter how strong franchise laws look today, I think they are one rider away from being a non-factor."(27) Whether that prediction comes to pass will be determined by the political process, of which taxpayer-financed TARP funding is now a part. As a matter of economics, arguments for state bans on manufacturer direct sales of autos based on holdup and free-rider problems are not persuasive because competition among auto manufacturers gives each manufacturer the incentive to refrain from opportunistic behavior and to work with its dealers to resolve any free-rider problems. Just as Dell has altered its distribution model in the personal computer industry to better meet evolving consumer preferences, car customers would benefit from elimination of state bans on auto manufacturers' making direct sales to consumers.

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Holeydonut said:

Ok, but do me a favor and put it in your head that just because I'm answering your question; does not mean I actually am in favor of the Additional Dealer Markup (ADM). I feel like since I understand the dealers, that you somehow think I am in favor of the dealers. I want to be clear; I am not endorsing the following:

1) "Extortion"

ADM by definition is not extortion because (when done legally) it is just a line item of a price negotiation. Before COVID and the supply chain issues, The average purchase used MSRP as the high point and negotiated down. But now, with MSRP as a starting/low point, the ADM is just the reverse of the pricing conversation. Nobody has ever said that if a customer goes to a showroom and wants a discount; such request is "extortion". So the reverse is not "extortion" since nobody is under duress to make a deal.

Where the mark-up starts to go on the wrong side of the law is when the ADM is masked and disguised.
FTC may ban some car dealer tactics

In the examples provided by the FTC, some dealers were adding in "no-value-add option" to juice the price. So they'd charge $20,000 for waxing the car; which is not in the spirit of a fair negotiation. Or, they were hiding fees in the fine print without expressly describing the pricing action. And, some dealers were creating artificial constructs in the financing.

But taken at face value, if a car buyer is told "you need to pay $10,000 ADM over MSRP to buy this car", that is not "extortion." It is a pricing conversation. Such ADM may violate the franchise agreement with the automaker though.

Where ADM starts to feel like "extortion" is when someone puts a reservation for the privilege of purchasing an EV to be built in 30 months. At some point in time, the reservation becomes a pricing conversation. Some people (I'm going to go out on a limb and assume you're one of them) think the reservation committed to MSRP pricing. However, nowhere in the fine print for the Mach-E, F150 Lightning, EV6, Jag EPACE, ID4, whatever reservation forms mentioned that the pricing was locked in at MSRP.

Lucid, Rivian, Tesla, etc do not charge ADM, so those customers get their vehicles purchased at the prevailing manufacturer price at the time. But, just because Tesla does one thing and Ford does another, does not make Ford's dealer practice "extortion." It feels bad to the consumer (I previously discussed pinch points) because repeatedly pinching a customer has proven to be profitable to the dealer and not the customer. But the dealer pinches are usually legal, and politicians continue to fight to ensure the pinches continue.


2) Explain how ADM helps the customer?

It helps the customer have a discrete line item to negotiate price.

As you're aware, contracts are an agreement between the seller and buyer. Since auto transactions historically have involved MSRP as a starting point, the ADM provides a clear line item pricing adjustment to increase the price. Way back in the day, dealers simply just put a price tag on a car and asked a customer to negotiate everything. This led to a lot of deceptive practices, You can read up about the Monroney Sticker (window label) about why having a clearly printed line item price and MSRP was favorable to achieving a good deal. Nowhere on the legislation does it say "it is illegal to go over MSRP".

I agree with you, a higher price does not "help the customer." But a line item description to assist in a pricing conversation (one that allows the pricing action to be clearly seen and understood) does help the customer. Because maybe the customer is like you, and if they see a ADM, they walk away. So the ADM helps you learn when to walk away.


3) Explain the value add of ADM (in the modern age of online ordering)

I think there's broad consensus that except for the dealers themselves, the other parties do not see value in paying the ADM. Obviously the buyer of a vehicle receives a negative value (in the form of paying more $$$ if they agree to the terms). And, the automaker experiences negative value because disappointed/angry customers have a negative experience with a manufacturer's brand. Without going too deep into marketing; achieving a conquest sale from another automobile brand is harder than to lose a loyal customer who likes your brand. GM, Ford, Stellantis, Toyota, Honda, etc are indirectly harmed when someone in their dealer network creates a bad experience while flying those corporate banners.

As I mentioned above, even the DOJ found that consumers by and large were better off with direct-ordering practices, which presumably would remove pricing negotiations (both up with ADM and down). The only groups that seem to want each purchase to be a negotiation are the dealers themselves. They see the value, and they will continue to lobby to maintain the value add for themselves.

The "American Way" is to get as much benefit for yourself as possible in a free market. There are a massive number of hurdles to overcome for the government to get behind egalitarian pricing for all. Manufacturers like Lucid, Rivian, Tesla, etc think egalitarian pricing is in their own best interest, and it's their own prerogative to operate that way. But for now, the dealers are entrenched as the status quo, and they think ADM is both legitimate and in the industry's best interest. This PV is debatable or course, but the POV for the most part is legal.

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If you disagree with the above, start finding ways to make a difference; because posting about it on this forum isn't very effective at changing policy. Sure, you can vote with your dollars; but if you want to see big change, you'll have to do more than that. Yes, over time, if everyone votes with their dollars to stop buying from Ford and GM dealers, the problem will resolve itself. But that'll take decades.

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Holeydonut said:

Lol I want to believe what you're saying... but I'll believe it when I see it hah.

The arguments against this flat pricing being forced on the dealers is that when times are bad, the dealers say their margins get squeezed hard and they get killed with inventory carrying fees and the automakers cramming crap-metal down their throats. When times are good (for the dealers), they get to take a lot of pricing and get fat profits. Since the industry is cyclical, they need the good to offset the bad (at least in theory).

Such firm pricing would cap their upside when its good, but leave them exposed when times are rough since GM won't subvent their operations when a recession hits. When unemployment hits 10%, and sub-prime repos hit 20%, you won't see many customers clamoring to pay MSRP on some flat E-Price. So I don't know how GM is going to get the dealers on board with fixed pricing during a boom, unless GM can also get the dealers fixed pricing when there's a bust.

IMO, what consumers call "predatory pricing" is just first-degree price discrimination. Not in the woke definition of discrimination; this is just the economic practice of pricing something to be exactly what a customer will pay. Traditional dealers, Ticketmaster, Ebay, and many others all use this approach to maximize their income. Such price discrimination is totally legal, and asking businesses to abandon the practice has a significant economic impact to their model.

As long as the dealer network persists as an independent body from the automakers, all these rules, policies, e-pricing, whatever are just Band-Aids that fall apart during the next economic downturn.

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EVTrucking said:

With online ordering and fixed pricing dealers will carry much less inventory. In good economic times they sell in volume. In a down turn further reduce inventory and stream line.

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