Why dealership is a bad business model for automobile makers

Why dealership is a bad business model for automobile makers

As a car owner, I hate going to car dealers. Whether it is buying my car or having my car served, I feel like being a sheep walking into a cave of hungry wolves.

However, today I would like to make a case to Tesla that the dealership business model has significant downside for automobile makers too.

1. Misalignment of interests between dealers and car makers

It is in the interest of car makers to produce cars that are highly reliable and require very few repairs. However, the opposite is true for the dealers who make most of their profits from repairing the cars.

2. No full control over end-to-end user experience

The car owner has to interact with the dealers regularly over the duration of his ownership for maintenance and repairs. Thus, interaction with dealers becomes a big part of the owner experience. Since the dealer is a third party, the car maker has no full control over that user experience.

Apple's success can be linked its focus on delivering the best end-to-end user experiences: from software design, hardware design to training and serving end-users. I took my iPad and iPod to Apple store for questions and repair. Even though some of my Apple devices were purchased from a third party retailer, I always go to Apple stores for support. Why? Because Apple store employees focus on solving customer's problems, not selling more devices. I never feel that the Apple store employees try to leverage their product knowledges to rip me off.

Reader's Digest 1990 investigative report: only 27% of auto repair shops in Canada were competent and honest.

So I certainly hope that Tesla's customers will always have the option to buy directly from Tesla, and have their cars served directly by Tesla. My fear is that when Tesla becomes a volume car maker, it may adopt the dealership model.

What do you think?

Red Sage ca us | 07. September 2014

Here are some things that you may want to read through:

U.S. Department of Justice - Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers

"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."

Federal Trade Commission - Who decides how consumers should shop?

"Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated. We hope lawmakers will recognize efforts by auto dealers and others to bar new sources of competition for what they are—expressions of a lack of confidence in the competitive process that can only make consumers worse off."

FTC Comes Out In Favor Of Tesla Direct Sales, Against Dealer-Backed Bans

FTC officials: Ban on Tesla's direct sales 'bad policy'

Fan_of_Tesla | 07. September 2014

There is little doubt that dealership is not consumer's best friend.

What I would argue is that dealership is NOT car maker's best friend either.

centralvalley | 07. September 2014

I believe that one of the motivations for automobile manufacturers to sell their cars (and parts) through dealers is that a sale is recognized when a car is loaded onto the delivery vehicle. Most sales are Free On Board Selling Point, which permits the seller to record the sale when the car leaves the plant, not when it arrives at the dealer or when sold by the dealer to the consumer. The dealer is responsible for transportation charges, and legal title passes upon departure from the manufacturing plant or storage facility.

Since all automobile manufacturers are investor-owned, this permits some manipulation of sales if they can load the truck up and ship inventory to retail establishments towards the end of an accounting period.

The dealership model also provides a layer of insulation between end user and manufacturer. Any warranty issues or defects are handled by the dealer and not by the manufacturer. It is likely cheaper for the manufacturer to pay dealers a contractual rate for warranty repairs and recalls than it would be to maintain an in-house repair force.

Dwdnjck@ca | 07. September 2014

I bought a new Jaguar XK8 when they first came out. I took it back to the dealer six times for a "check engine" light. On one occasion, I didn't make it off the lot before the light came back on. When Jaguar finally learned of my problem, they immediately offered to replace the car and stated that the dealer should have notified them sooner. I don't think the dealer was protecting my interests, at all.

antonanton50 | 07. September 2014

I have a friend who has a 2011 V8 M3.

His engine blew and they replaced it (took two months for a new one to come from germany $25,000 Canadian) on warranty.

After they installed it he started getting transmission problems (it was a DCT transmission not a manual) where the car would get out of gear and not go back in without multiple tries.

Brought it back to dealer and dealer said its his transmission. They ordered and installed a new transmission ($19,000 canadian) and was in shop 2 weeks.

After receiving it back with new transmission the same problem came back ... short story they changed 3 transmissions before they figured out that it was a software issue and not a transmission problem.

The dealer model sucks...

Fan_of_Tesla | 08. September 2014

My 2009 Toyota RAV4 backup camera has stopped working a few months ago. I took it to the dealer in Toronto to have it checked. The dealer said they don't know exactly what the problem is, but they recommended to replace it with a new camera at cost of over $500.

I said it is possible that the wire to the camera is broken. The dealer said that they can have a skilled mechanic to check it on a weekday at a cost of $150 (just for his time), because it is not an easy job to figure out the cause of the camera problem.

The dealer model sucks!

Ponyotoro | 15. September 2014

My last dealership experience was the worst ever in all of the six brand new vehicles I have purchased at dealerships(most of the same brand). Looking back at it all, I can surmise that either dealership customer service have deteriorated over higher profit margins or I simply just got smarter with every purchase and became more attentive of their devious practices. Needless to say, I plan to never dance the dealership tango again as long as I can help it. And if you haven't removed that awful dealership decal from the back of your vehicle yet shame on you. You're "proudly" advertising their business everytime you drive without them paying you for it. Of course, unless you're actually are OK with that. I told the last three dealerships to remove it before I buy or they can pay me or discount the purchase price to keep it on. First one took the decal off. The last two refused all the above. I removed the dealer decals myself as last resort. Tesla is the only brand I have had a positive (almost religious and life changing) experience in dealing with vehicle purchase and service. I really hope that the dealership model either goes away eventually or be forced to change their practices to match Tesla's example in becoming more consumer friendly. I have known of too many young and inexperienced buyers get exploited by dealerships for far too long. Eventually, as Elon Musk and company become more politically empowered, dealership associations will have less power and influence in slowing the inevitable; Competition, innovation, and progress of humanity.