Pub. 2 Issue 3

9 FALL 2014 In the U.S., virtually every new car or light truck is purchased through an independently owned and operated franchised automobile dealership. The automotive original equipment manufacturer (OEM) makes no investment in these retail outlets. Dealerships are financed completely independently by owners and operators who combined have invested tens of bil- lions 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 owner- ship 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) independent franchised dealers. All three meth- ods 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 funda- mentally 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, par- ticularly 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  Auto Retailing — continued on page 10