Business and Economy
11:41 am
Tue April 23, 2013

Economic Tensions Fuel Disagreement Between Car Makers and Dealers

As competition in the auto industry heats up, car makers are tightening their image and branding campaigns. But car dealers -- who feel financially vulnerable despite soaring profits -- say manufacturers are expecting them to pay too much of the price.

In New Hampshire, dealer organizations are behind a bill that would protect them from what they see as exploitation by manufacturers. Manufacturers argue that government shouldn't interfere with their private business contracts. The bill won near-unanimous support in the Senate, and is now being considered by the House.  

But behind all the he-said she-said, there are changing forces in the automobile industry.

Scott Holloway has been selling cars for as long as he can remember.  His father Paul Holloway bought a dealership in the 1960s, they’ve been expanding across the state ever since.  While there have long been tensions between dealers and manufacturers, the Holloways say they have never seen anything like what’s happening now. 

“This is the thing that really made my skin crawl almost,” says Scott Holloway, pointing to some light fixtures at his Buick and GMC dealership in Portsmouth.  “We went to PSNH and did their green energy program, less than three years ago.” Holloway says he pulled out all the lights, and got energy saving lights put in.  Then, a couple years later, Holloway says, General Motors told him he had to replace the energy efficient lights with GM’s standard issue lights. If Holloway didn’t comply, GM would increase the cost he pays on every car.

A couple years later, Holloway says, General Motors told him he had to replace the energy efficient lights with GM's standard issue lights.

Maryann Keller, an auto industry consultant and former Wall St. analyst, says that most manufacturers have “image programs.” But, she says, in the last few years, these programs have gotten increasingly specific, “down to the brand and color of tile used on the floor, or the paint color on the walls.”

Now, lawmakers in NH are considering a bill that would update existing franchise laws on a number of fronts. One of the hotly contested sections would limit dealer facility upgrades to every 15 years, unless manufacturers pay for the upgrades in full.

New Hampshire Auto Dealers Association president Peter McNamara says as it goes now, dealers end up paying 96 percent of the costs for upgrades. While manufacturers say they subsidize the costs by offering vehicle discounts, dealers see the arrangement as “two-tier pricing,” which would be against the law.   

Dealers and manufacturers also disagree about whether or not the “image programs” actually increase sales.  “The key to a successful franchise model is conformity, uniformity, and brand identification,” says Dan Gage, a spokesman for the Alliance of Automobile Manufacturers.

But industry consultant Maryann Keller says while shabby showrooms are bad for business, there’s no evidence that car makers’ fastidious image programs improve sales. She says car makers obsess over cookie-cutter showrooms out of a kind of competitive desperation:

It’s harder and harder to gain competitive advantage in this business.  Cars today are almost uniformly high quality. There’s pretty good design across all manufacturers.

Competition is so tight, Keller says, once one manufacturer started mandating showroom upgrades down to their brand of office chairs – everybody started doing it. “It’s monkey see, monkey do,” she says.

But mandated facilities upgrades can cost dealers millions of dollars at a time. And, Keller says, despite record car sales over the last few years, car dealers are feeling financially vulnerable. 

In the last decade, manufacturers have generally adopted a policy where they raise the wholesale price to the dealer to a greater degree than they raise the retail price to the customer.

That means dealers are making less and less profit on each car. “Some cars? Some cars’ll make you scratch your head about why you’re even stocking ‘em,”  says Scott Holloway, the car dealer in Portsmouth, “once you factor in the cost of advertising.”

With today’s super-low interest rates, car dealers can get by with slim profit margins, by selling lots of cars.  But dealers worry.  What if the market slows down? What happens when interest rates rise?

But dealers worry. What if the market slows down? What happens when interest rates rise?

Dealers don’t want to be stuck paying back loans on a $1,000,000 showroom or façade upgrade.

But manufacturers -- like Nick Yaksich of the Association of Equipment Manufacturers –  says  “if we have a problem, let’s fix it outside of the legislative arena.”  Even Republican Senator Jeb Bradley, a cosponsor of the bill, frames his support with the disclaimer that “it is unfortunately appropriate to wade into what some are describing as a contract dispute.” 

And it’s true that franchisees in other industries don’t get as much attention from lawmakers as car dealers do.

One reason may be that while manufacturers have lobbyists in Washington, they have fewer at the state level. In the meantime, hundreds of car dealers in New Hampshire bring in 24 percent of the state’s total retail sales. They sponsor little leagues, and they support candidates from both parties. Scott Holloway says he gives to the legislators who support him, as well as to the NH Auto Dealers PAC. “Help me out, I’ll help you out, that’s how life works,” he says, adding that “all politics are local, so I figure the money is better spent here in NH.”

Whether that philosophy holds true in the House – we’ll see.  So far so good for the auto dealers, though, whose bill won near-unanimous support in the Senate.