The automotive industry is undergoing massive changes, largely sparked by the growing capabilities, popularity, and prevalence of electric vehicles (EVs). Most automakers have committed to producing substantially more EVs, even to the extent that they anticipate a completely electric product line within the next few decades. Now that car companies are rethinking what they can do—who would have ever imagined an electric Ford F-150?—it appears their creativity is spreading to other considerations too, such as the traditional model that they’ve been using to get vehicles into customers’ hands.

The dealership model gave franchisees strong incentives to build vast, sprawling locations that customers could visit to interact in person with the latest models. They maintained hundreds or thousands of cars and trucks on their lots, so customers who arrived, cash in hand and ready to drive away with their preferred car that same day, had various options in terms of model, color, amenities, and so on. For the dealerships, the benefits of this model include the ability to control the final price (often above the manufacturer’s suggested retail price, or MSRP), upsell with profitable upgrades and features, and a means to build long-lasting relationships with customers. In addition to future sales, those relationships often encouraged customers to revisit the sites to receive regular maintenance and service on their cars, and for the dealers, the service departments often are much more profitable than the sales floors.

For many years, automakers liked this model too, because it moved much of the sales risk to the dealerships. The manufacturer got the cars to the dealership and received payment for the entire shipment. Then it was up to the dealer to convince consumers to pay the final retail price.

Just as the manufacturing and designs of EVs have changed practices though, the sales model is being challenged. In particular, the most expensive, risky, and physically heavy part in any EV is its lithium battery. Moving thousands of pricey batteries, and the cars that house them, to dealerships without guaranteed orders in hand is inefficient in various ways. Notably, it is expensive to ship the vehicles, which require added protections to keep the batteries safe. In addition, it remains difficult to procure sufficient quantities of lithium batteries, so a just-in-time–style arrangement, in which manufacturers only make the vehicles at the moment they are purchased, can help make their sourcing efforts more efficient. Finally, in efforts to keep the prices of EVs reasonable, many manufacturers are developing relatively fewer versions of their electric models, so there is less need to display a huge range of cars. There are only so many choices available.

Accordingly, many manufacturers are strongly encouraging consumers to place orders for new EVs online, through brand websites, in a version of a direct-to-consumer sales channel. Such processes eliminate the participation of the dealerships altogether, a development that the dealers are understandably worried to encounter. In some states, the legal regulations surrounding dealerships as franchises prohibit the manufacturers from selling directly to consumers. But most of those states already have made exceptions to allow Tesla, Rivian, and Lucid to sell their EVs without establishing a dealership model, so an argument exists for allowing Ford, VW, and General Motors to do the same.

Ford has hinted at what it hopes the new sales model will look like: Customers will place orders for vehicles, at a preset price (i.e., the MSRP) and without any room for haggling. Dealerships will then receive the ordered EVs and provide a location for customers to come collect the model they ordered when it is ready. In addition, Ford hopes the dealerships will install charging stations, as part of the effort to make recharging easier and thus encourage even wider adoption of EVs. The benefits or payments to dealerships for offering such services are unclear though, especially considering the expenses they will incur to install the charging stations and expand their capabilities to service the EVs, if they maintain a service department. 

For customers, an online ordering process likely is appealing. It enables them to avoid the hassle of negotiating the best price, the fear of paying too much, and the possibility that their precisely preferred model will not be in stock. But experienced dealers and salespeople also caution that many car consumers simply are not willing to wait the weeks or months it might take for a manufacturer to build a car they have ordered sight unseen; they want to interact with the car in person, and then they want to drive off the lot with their new car that very day.

Exhibiting their confidence in their own staying power, many large, nation-wide dealership networks, such as AutoNation or Asbury Automotive Group, are purchasing smaller or family-owned dealerships that find the prospect of costly upgrades and potentially being squeezed out of the market by manufacturers too intimidating. Consolidation in dealer networks is thus prevalent, leading one observer to predict that, rather than disappearing, the number of dealerships would remain about the same, even if each individual location might shrink in size. Thus large conglomerates would operate smaller stores, at a lower cost, and still reap the benefits of interacting closely with consumers. 

It makes for an exciting market. Innovation is everywhere; new products are being introduced seemingly every day. And while it might be less visible to consumers, the potential for radical changes in the supply chain are just as rife.

Discussion Questions:

  1. What are some arguments for maintaining some version of the dealership model for selling electric vehicles? What are its disadvantages?
  2. What are some advantages of switching to a more direct-to-consumer sales model for electric vehicles? What are its disadvantages?

SOURCE: Mike Colias, “Tesla Set the Model for Selling EVs; Ford, VW, and Others Want to Follow,” The Wall Street Journal, March 11, 2022; Steve Tengler, “2022 Is a Critical Year for Auto Dealerships,” Forbes, March 2, 2022; Joseph White, “Big U.S. Auto Dealers Bet Billions Against the Death of the Dealership,” Reuters, March 2, 2022