Commentary

Rick Haglund: Electric vehicles could upend auto dealer franchise laws

March 1, 2022 6:43 am

Signage at the Ford Motor Co. Rouge Electric Vehicle Center in Dearborn touts the electric F-150 Lightning pickup truck, which will be produced at the factory. (Andrew Roth | Michigan Advance)

Critical shortages of computer chips used in cars and trucks are fueling a rift between automakers and their dealers, and the divide is likely to grow deeper as automakers make a radical shift to electric vehicles.

Michigan will be ground zero in the fight to determine who will sell these cars and trucks. New automakers and business models could threaten the livelihood of dealers, whose operations have long been protected by stringent state franchise laws.

The shortage of semiconductors, used in everything from engines to heated seats, has severely cut vehicle production by automakers and left many dealer lots nearly empty.

Faced with fewer vehicles to sell and high demand for the ones they have available, dealers have done what you might expect these independent business owners to do in a free-market economy: raise prices above the sticker prices suggested by automakers.

A record 82.2% of new-vehicle buyers paid more than the manufacturers’ suggested retail price in January, according to Edmunds.com. That compares to just 2.8% of buyers who paid above sticker price in January 2021.

Automakers are not pleased. They believe that dealers trying to profit by jacking up prices during a supply chain crisis will do long-term damage to the reputation of dealers and automakers. 

Ford and General Motors have warned dealers to stop the practice or risk not getting popular new models in the future, including electric vehicles. 

Some dealers are taking reservations for Ford’s much ballyhooed upcoming Lightning electric pickup trucks at $10,000 above the sticker price. Those dealers might be punished by getting their allocations of the highly anticipated truck slashed, Ford CEO Jim Farley said.

Farley also has made some cryptic statements recently that have led some analysts to believe that Ford is considering separating its electric vehicle business from the rest of the company and selling those vehicles directly to consumers. Ford has denied it has such ambitions.

“The customers are different; we think the go-to-market is going to have to be different,” Farley said in an earnings call with analysts earlier this month. 

Automakers and dealers have had their differences over the years, including the latest dustup over dealer pricing. But automakers have generally defended the franchise dealership model as the best way to move the metal. 

And healthy automaker profits, even during the product-restrained COVID pandemic, support that view. Ford, GM and Stellantis (formerly Fiat Chrysler) earned a combined $43 billion last year. GM’s pretax profit of $14.3 billion was a company record.

But younger consumers, who are comfortable buying just about anything with a few mouse clicks, could upend that model.

“The public is screaming for it. Let’s be clear on that,” said Carla Bailo, president of the Center for Automotive Research in a recent CAR podcast. “The public would love to have other ways of buying cars rather than going to a dealer.” 

Tesla, which sells its vehicles directly to consumers, dominates the electric vehicle market. Farley recently praised Tesla as a model for the Dearborn automaker in an internal company meeting with executives. He cited Tesla’s direct sales system as one element of its success.

Tesla store in Santa Monica, Calif. | Susan J. Demas

Auto dealers aren’t exactly beloved by consumers, but they play an important role in local and state economies. Dealers contribute to local charities, support youth sports teams and provide tens of thousands of good-paying jobs.

Michigan auto dealers employ about 34,000 workers, compared to the 44,600 workers who build cars and trucks in the state. 

Dealership employees in Michigan earned an average weekly wage of $1,269 in 2020, according to the latest data from the National Automobile Dealers Association. That’s nearly as much as the $1,275 average weekly wage for Michigan hourly autoworkers that year.

For now, the dealership business model is protected by strict state franchise laws that traditional automakers, which all operate under that model, have supported. Auto dealers ensure those laws are maintained with a significant lobbying presence in Lansing.

In 2014, then-Gov. Rick Snyder signed a bill that strengthens the state’s dealer franchise law and prohibits automakers from dictating what fees dealers can charge customers.

The law was clearly aimed at Tesla, which subsequently sued the state. The automaker and state officials reached a settlement in 2020 that allows Tesla to sell directly to Michigan consumers. But the agreement applies only to Tesla.

Pressure to loosen dealer franchise laws could come as startup electric automakers, all intent on selling directly to consumers, enter the market. Among them is Rivian, an electric truck maker that has significant operations in metro Detroit.

In signing Michigan’s bulked-up dealer franchise law, Snyder said “lawmakers can and should discuss the current business model soon to determine if it is best for the state’s consumers.”

That never happened, of course. Lawmakers are more concerned with protecting the future of dealers and Michigan-headquartered automakers than they are with doing what’s best for consumers.

But that could change if automaker and consumer interests become more aligned. Farley’s comments that electric vehicles change everything suggest a reckoning is coming.

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Rick Haglund
Rick Haglund

Rick Haglund writes the "Micheconomy" column for the Michigan Advance. He's a former reporter and business columnist for Booth Newspapers, now the MLive Media Group, with extensive experience covering Michigan’s economy and the auto industry. He now works as a freelance writer based in Southeast Michigan.

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