Automakers' Woes Blamed On Dealerships

For all the talk of restructuring the American auto industry, there has been very little said about car dealers.

For almost 100 years, dealerships have worked pretty much the same way: They buy the cars from the factory and then bring them to the lot to resell to the public. Some say it's an outdated system and has made carmakers less responsive to consumers.

Moving Iron

Chris Olson runs Seaview Auto in Lynnwood, Wash.

"My father and I built this place selling Chevrolets, and we got Buick, Pontiac and GMC Truck about four years ago," he says.

Dealers run in Olson's family.

"I compete with my brother who's six miles down the street," Olson says.

When asked if his brother has the same brands, Olson laughs and says: "He does — but we offer the better deals."

The key to this business, Olson says, is to keep moving inventory, or "moving iron," as he puts it. Right now, his lot contains iron that isn't going anywhere.

"When gas hit $4 a gallon, we went to GM and said, 'Lookit, we want a bunch of Aveos. They're 35-36 gallon vehicles.' So we finally got our Aveos after three months, but by then gas is down below $3 a gallon. You think I'm selling Aveos?" he asks.

He says he has 25 Aveos lined up and sells about two a month.

Those tiny Aveos aren't GM's problem anymore; Olson has already paid for them. When a dealer misjudges consumer demand, he must find a way to unload the cars even if it means taking a loss.

Franchise Law

Robert Atkinson, president of the Information Technology and Innovation Foundation, says there must be a better way.

Lately, he has been thinking about how to streamline the sales of new cars. He says car companies should imitate computer makers, which often let buyers order — and customize — new computers online.

"You could envision, certainly, cars being made that way," Atkinson says. "You put an order in online, customize it, you get your bill, you just pay it and it's delivered to your house two weeks later."

Not only would this cut down on inventory expenses; the carmakers would get a more real-time sense of consumer demand. The big problem with this idea is that it is illegal.

"Every single state prohibits any automobile producer from selling a car directly themselves, including selling it directly online," Atkinson says.

Atkinson is talking about franchise law. Over the past century, car dealers have secured a complex web of state laws that protect them from being undercut — by the carmakers themselves, and more recently, by people trying to sell new cars online.

Consumer Choice

Scott Painter was one of those people during the dot-com boom.

"We had actually purchased a delivery truck and we were delivering cars with a bow on the hood and our drivers did all the paperwork," Painter says.

But the law barred Painter from making the sales himself. What his company was really doing was helping his customers locate the cars they wanted on the lots of traditional dealers. The experience taught him a lot about what he calls the mismatch between supply and demand.

"The consumer choices or preference would only match what was in inventory about 20 percent of the time," Painter says. "So what was being manufactured was just not the right fit for the market. And the only way that you sell something that isn't what the customer wants is you incentivize them to compromise."

The auto dealer associations reject the notion that they are a drag on American carmakers. They say the companies need them to buy inventory upfront, making the manufacturing process more predictable. They say customers need them, too, for service and to take trade-ins.

At Seaview Auto, Chris Olson says that despite his backlog of Aveos, he doesn't think there's an alternative to dealerships with lots full of new cars.

"People still want to look and touch and smell and drive the vehicle they're thinking about buying," he says.

If he's right, that means 30 years from now, there may be a fifth generation of Olson dealers still worried about moving iron.

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