100 Leading Women: Honors night
Few would disagree with the premise that the U.S. automobile industry is the envy of the world. Its volume is the largest and it has a top level of sophistication. Other nations emulate the manufacturing and distribution system in the United States. Yet it is the franchise system that sets the United States apart from other markets.
A 100-year partnership between automakers and auto dealers has made the franchise system the dominant way that cars and trucks are sold in the United States. This special issue of Automotive News examines the franchise system - its history and its growth, its current issues and its future prospects.
To find a car dealer at the turn of the 20th century, you might have looked for the local blacksmith or farm equipment salesman. Or the dealer may have doubled as proprietor of a wagon shop, tire shop, livery stable or hardware store. Vehicle distribution evolved fairly quickly in the industry's first few decades.
From the dawn of the 20th century through World War I, Ford Motor Co. dominated the nascent auto industry. But although Henry Ford was an engineering genius, he was no salesman. His company's earliest sales achievements can be traced to one car, the Model T, and to two men - one of them, Norval Hawkins, a convicted embezzler.
The heart of the franchise system is the selling agreement - the document that defines the mutual rights and responsibilities of the automaker and the dealer. many dealers insist that there is nothing mutual about the arrangement. They argue it's a case of the factory's rights and the dealer's responsibilities.
Before there was a General Motors, company founder Billy Durant knew the importance of a skilled and aggressive dealer network. Durant laid the foundation for the GM franchise system and its growth in 1905, when he was certain he had a hit on his hands with Buick but needed a way to attract investors and move the metal in a hurry.
Among business executives of the 1950s, General Motors President Harlow Curtice was a superstar. Curtice rose through the ranks from bookkeeper at a GM parts subsidiary to chief of the world's largest and most powerful corporation.
Like the wristwatches in old Timex commercials, the franchise system takes a licking and keeps on ticking. The last significant test from Washington came in 2002.
As Europe regained its footing after the war, its crippled manufacturing base turned to auto production. But because few Europeans could afford a new car, automakers on the Continent began to export their vehicles to the rich U.S. market.
In the years after World War II, Carl Hahn was a rising star at Volkswagen. He progressed from working as an assistant to Chairman Heinrich Nordhoff to heading sales promotion for VW's export department. But little could have prepared him for the assignment of making Volkswagen a mass-market brand in the United States.
It was a big deal when CarMax Inc. opened a used-vehicle superstore in Atlanta in 1995. How big? Cutting the ribbon at the dealership was U.S. House Speaker Newt Gingrich, who had won national attention a few months earlier by engineering the Republican takeover of Congress.
As dealership groups grew over the past decade, they became bigger targets for trial lawyers, government regulators and media exposes.
Franchised dealerships have long demanded bigger payments from automakers for the parts they use to fix vehicles covered by factory warranties. Over the past two years, dealerships have won three key victories.
Dealers enjoy the advantage over automakers - for now - in their long struggle over binding-arbitration clauses in franchise agreements.
Throughout its nearly century-long history, General Motors' franchise system has pioneered dealer-factory practices that the entire industry came to embrace. GM says its franchise system remains one of the company's strengths, even as the system evolves - and shrinks.
George Jetson is buying a brand-new '56 model - 2056, that is. The auto dealership he's visiting is a lot different from the stores where vehicle buyers shopped way back in 2006.
Ask auto industry leaders what the dealer franchise system in the United States will look like in 50 years, and a consensus starts to emerge. There will be fewer dealerships. More dealers will hold several franchises. Fewer family-owned stores will pass from one generation to the next.
The "different kind of car company" called Saturn is still part of a much larger company, General Motors. But many of the features that initially set Saturn apart from other GM brands remain intact, despite some dark years of slow sales and aging vehicles.
Alan Starling's Oldsmobile franchise in central Florida had been in his family for 38 years. Oldsmobile itself had been around, in one form or another, since 1897. So Starling was stunned when a reporter called him on Dec. 12, 2000.
After enduring a rocky patch with its dealers over the past decade, Ford Motor Co. executives have worked to steer the relationship back on track. The company has changed its leadership and vowed to listen to the retailers who are Ford's public face.
Two automotive titans bookend the history of Chrysler Corp.: Walter Chrysler and Lee Iacocca. Both executives possessed a keen understanding of the importance of dealers to their business.
Veteran Chrysler dealer Hoot McInerney vividly recalls the impression that Lee Iacocca made on Congress in 1979, when the Chrysler Corp. chairman sought federal loan guarantees that would help bail out the struggling automaker.
Auto retailing in Europe is more about national cultures, customs and practices than any coherent continentwide structure. Compared with the United States, Europe has more factory-owned dealerships.
In the mid-1990s, Daewoo built a wholly owned distribution channel in the United Kingdom, with no franchised dealers. I was part of that launch.
Nissan Motor Co. has spent the past decade restructuring its dealer network in Japan. It's still not done.
In 2004, a Japanese magazine published an expose of Eiji Iwakuni, then Mitsubishi Motors Corp.'s head of domestic marketing. The article expressed outrage at his lavish lifestyle - including a pricey Tokyo condominium and membership in a tony sports club - at a time when Mitsubishi was struggling.
At Konggang Motion Center in the north China city of Tianjin, you can see a movie, get a massage, have dinner - and look at the latest Chevrolets and Buicks.
From employee training to service after the sale, operating an auto dealership in China demands attention to detail.
Anyone who knew Hank Marshall knew he got a raw deal. Marshall, a veteran car dealer in Reading, Pa., surely was too smart to fail. Yet after 25 years in the business, first as a General Motors field manager, then as a Chevrolet-Volvo-Honda dealer, he closed his doors in 1982.
Automakers, dealers and industry consultants agree that there are too many dealerships east of the Mississippi River. But explosive population growth in Sun Belt communities has stimulated a fierce debate over how many dealerships those areas need.
Enid, Okla., has about 50,000 residents, an additional 25,000 people in its suburbs - and six Chevrolet dealerships. Leonard Northcutt owns one of them. It's hard enough competing with the Ford dealer down the street, Northcutt says.
Auto advertisers, like boxers, rely on a combination of punches to wear down resistance. The first punch - Tier 1 advertising, in industry parlance - comes from the automaker in the form of national advertising. That's reinforced by Tier 2 advertising by regional dealer advertising associations. Finally, there is Tier 3 local advertising by individual dealers.
In the summer of 2005, the Detroit 3's employee-discount pricing programs altered the traditional advertising roles of automaker and franchised dealer.
Car buyers who visit Zimmerman Bros. Inc., a Buick, Pontiac and GMC dealership in Pittsfield, Ill., see the same brick and sandstone facade that graced the showroom when it opened in 1915.
The service departments of franchised dealerships are in a fight for customers' dollars. Independent repair shops and body shops are capturing more business, as harried drivers look for ways to speed up maintenance.
In July 1963, a month before Martin Luther King Jr. would deliver his "I Have a Dream" speech in front of the Lincoln Memorial, a black journalist asked Chrysler Corp. President Lynn Townsend why his company had no "Negro dealers." "There's no reason why," Townsend replied. "We're looking for dealers, and we don't care who they are, so long as they're qualified."
A generation ago, Porsche tried to replace its U.S. dealerships with a new distribution network. To the company's surprise, the dealers' legal muscle prevailed.
If one phrase is guaranteed a place in business school case studies of failure, it's "business as usual." Words that were once comfortingly reassuring now strike fear in the hearts of investors - as they should.
In 1992, Lexus was just 3 years old. But it faced a longtime industry dilemma: how to keep resale values high when thousands of cars were coming off leases and flooding the used-vehicle market.
In 100 years, that's what has been the backbone of the auto business -- the franchise system.
The automobile franchise system we enjoy in this country has evolved over time into simply the most efficient, most effective and most competitive system imaginable for the distribution of cars and trucks.
(The franchise system has persisted) because of the strength of the individual entrepreneur and his commitment to selling vehicles and satisfying customers and, obviously, making money.
The franchise system is a strong one. It has been proved throughout time that the best way to retail vehicles is through a downstream partner like the auto retailers.
State (franchise) laws, state regulations are always going to make it difficult for manufacturers to alter the way they do business.
The franchise system appears to be the superior way to bring satisfaction to consumers over the long-term ownership of a new car. That means in the sales experience and in the longer relationship, which is the service experience.
Look at how much dealers make on cars - 1, 2, 3 percent margins. That's extremely efficient.
The franchise system continues to evolve and is going to continue to get stronger. The training, the constant capitalization we do, are going to have to be done with the manufacturer.
In my vision, looking forward even 50 years, I still think the franchise system will exist very much as it is today. It's pretty much the dominant way cars are sold all over the world. There is no better way.
What is the alternative? What would work better? To show vehicles, demonstrate them, provide an appraisal for trade-ins, don't you go to a dealership?
(The franchise agreement) provides a level of protection and insurance to the dealer, and puts down in writing some agreements about what the brand stands for and what the expectations are.
For a very long time, dealers have done a tremendous job to help get manufacturers' production into the marketplace, to take care of the customer and to be a very important pillar in their communities.
The franchise dealership is the way to distribute cars, not just in America but throughout the world.
The franchise system is the dominant model in China because it is less risky. The dealership business is an entrepreneurial business. It can't be run as a big corporation.
Manufacturers are focused on making things in big quantities, but people buy cars one at a time. The dealer is the interface.
In the 1950s and '60s, there was an adversarial relationship between dealers and manufacturers. We had close to 30,000 auto dealerships in the U.S. We were way overdealered, so dealers wanted to protect themselves.
It takes motivation on an individual's part to have the desire to market and trade for cars and do the service it takes to satisfy customers. There is no cookie-cutter approach. It takes entrepreneurial skill.
The distribution system they came up with was a beautiful idea. The manufacturer started making cars and then figured out that it had to have a vehicle to sell them.
The early history was that cars were service-intensive and needed a lot of dealerships to keep them on the road. (Automakers) didn't have to invest capital. None of that is valid anymore.
I defy you to find another retail industry that is as effective and as efficient as this model. When a customer buys a vehicle for $29,000, 7 percent of that cost is a retail distribution cost. That's our gross profit - 7.2 percent. I've got to pay all my costs out of that.