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Tesla is wrong; franchise system is better

August 1, 2014
By John McElroy
The biggest irony of the automotive industry is that the companies that make cars and trucks don’t know how to sell them.
Would car buyers be better off if the dealer franchise system was dismantled? The public seems to think so. Most consumers believe dealers are unnecessary middlemen who drive up the cost of vehicles. They’re enamored with Tesla’s way of selling cars in its own stores. 
But the franchise system actually is tilted in the consumer’s favor. The public believes Tesla’s approach is better, but they are unaware of how the system actually works. 
Car buyers are under the misperception that dealers make hefty profit margins. But the average dealer actually made only a 2.2 percent pre-tax profit last year. Top dealers make about 5 percent.
Dealers will happily take your used car as a trade-in, no matter what brand it is. What’s more, dealers are consumer advocates when it comes to doing warranty and recall work because they get paid by the factory to do it. Do you think factory-owned stores would be so consumer-friendly? Of course not. 
Warranty and recalls would represent higher cost, not more revenue. Speaking of company stores, over in Europe they have a kind of hybrid retail system, where factory stores are allowed to compete against the independent franchisees. It’s not working. 
That’s the biggest irony of the automotive industry. The companies that make cars and trucks don’t know how to sell them. 
But the real danger is when Chinese automakers finally start selling cars in the American market. They could easily decide to side-step franchise laws because Tesla has set the precedent. 
That could really wreak havoc in the car market, which would not be good for automakers or franchisees. But most important, it would not be good for consumers. Let’s hope the public wakes up before it’s too late.
Editor’s note: John McElroy is editorial director of Blue Sky Productions and producer of the "Autoline" PBS television show and "Autoline Daily," the online video newscast.