How does running a car dealership work? Do some actually own their stock outright? Or, are some on loan from the factory, perhaps? What other options are there, or does the OME force the local dealership to take all the risk?
The new car dealers have background deals with the factory that make “this is our invoice” a sham/scam. The used car dealers probably do own the cars. Google knows everything; put this kind of info into it and read.
IIRC some news article about this - the dealers get paid extra for certain quota levels of sales they make. This explains the “clearing our lot” sales they tend to have. They can sell at alleged invoice prices, but the manufacturer will pay them $X extra if they sell Y cars, so the invoice means little.
Good question - in the event of a dealer bankruptcy, who actually owns the cars? The dealer or the manufacturer?
The little used lots are usually owned by the lot or one of the dealers working there. Sometimes those places have “consigned” vehicles, usually bank repos they work with a bank or some entity.
With floor plan financing, the mfr. “sells” the cars to the dealer, but uses them as collateral for the floor plan loan. You pay the dealer, who uses the proceeds to pay off the loan, then pockets whatever profit comes from the sale.
We’ve had a few dealer bankruptcies here. The car companies came to the lot, took back all the new cars and, I suppose, distrubted them to other dealerships.
Well my dad owned a ford dealership so I can give you some first hand knowledge. You get a huge line of credit from the bank to pay for the new cars. You pay the factory when they leave the line NOT when they arrive at your business. Same with the used, you need either to have the cash or a line of credit. So yes the risk is all on the dealer.
As far as profit goes there is very little money in new cars sales. I was the most disappointed guy ever when I found out that I couldnt buy a new car from him for half price or anything like that. Average profit was $1000 to $1500. Sometimes there was a rebate from Ford. I never saw a car where it was close to 10%. The money was in the add-ons, parts, used cars and financing. If you get a used car for $2000 and sell it for $5000 then its pretty good. By add-ons I mean undercoating, 3m protectant etc. If you ever wonder why they push that stuff its cause thats where the money is.
As in all bankruptcy’s whoever owns the paper. Typically the bank who loaned the money is first in line. In the cases I have seen first hand the bank is the primary lien-holder. Its interesting to note that the secured creditors and the government are paid first then unsecured creditors like employee’s. In many cases there is no money left for wages owed and the workers never do get paid.
…You really mean they rob Peter to pay Paul, right?
The story my father told me is 80 years old and may no longer represent the current practice. At the beginning of the depression, car dealers and manufacturers were in trouble. Ford shipped cars, unordered, to dealers and the delivery drivers demanded immediate payment. Dealers who were able to take, and pay for, delivery were later hugely rewarded, but the ones who couldn’t lost their franchises and went out of business. It was crude but it allowed Ford to shed dealerships, keeping the best, while raising money to continue manufacturing.
Floorplanning is basically the dealer’s credit card. They are paying interest on every car on the lot. The perfect car, from the dealer’s point of view, is one that rolls off the truck and into someone’s garage. The nightmare is the fancy expensive car the company wants you to push, but that no one ever buys (Prowlers, Thunderbirds, etc.). They just sit around and charge up interest.
The good about this is that it the dealers to make a lot more money on volume, allows them to have a far greater inventory, meaning it is mmore likely they will have a car you want. The bad thing is that when people stop buying cars the bank keeps charging interest.
This is one of the many things dealers take into account when you make an offer on a car. Since every car on the lot is a ticking timebomb of interest payments the dealer can be very motivated to sell. A late model accord is going to move without too much help. But that fancy Corvette that has sat on the floorplan report for the last eight months, gouging away an aveo’s worth of profit each and every time? Make an offer.*
*My car knowledge is not specific to these brands, and in most cases the cars cited are just best guesses based on what I see mucking up the lots on the way home. But the principle is pretty much universal to leveraged car sellers.
So I see the dealership pays the manufacturer for the vehicle. There’s not much profit, but who pays the taxes? It seems sale tax would be accrued in the state the vehicle was made in. For example, if a vehicle is manufactured in SC and than sold in NJ, does the manufacturer pay the sales tax in NJ or SC?
Sales tax happens only when the vehicle is sold to the final consumer. A factory in SC selling a car to a dealer in NJ is not a sales tax event in either state.
A dealer in NJ selling a car to a consumer in NJ will collect & remit NJ sales tax.
Because vehicles are expensive, many adjacent states have very different sales taxes, and many metro areas are near or straddle state borders, all 50+ motor vehicle registration divisions are wise to the idea of consumers trying to buy a car in a low tax state and take it home to their own high tax state.
As such, sales taxes are closely ted to the registration process, which is different from sales tax on furniture or whatever where there is no registering authority. Ultimately, the buyer will end up paying tax to the state in which the car is registered. Whether that happens when they register it with the government agency or at the dealership when they buy it varies by state.
This seems really really inefficient. A model where the dealer just keeps a few floor models provided by the manufacturer around and a repair shop (no vast inventory) seems like it would be better. The floor models would have every possible option, and so once the buyer decides what they want, they just configure it using some computer kiosks at the dealer (there could be a walk around preview of how it would look using VR headsets!) and the factory would make that exact model. Factory could in principle have lots of vehicles near the factory acting as a buffer, and a process where if you ask for an options package the closest match vehicle in that lot doesn’t have, it goes back through a section of the factory and gets that option applied.
Since the “dealers” would just be employees of the automaker, there’s no price negotiation, automaker decides the prices.
It’s an interesting idea. It’s exactly what Tesla wants to do.
It won’t work for most automakers. They signed contracts with their independent dealers, in some cases decades ago, that said the dealers get to sell the cars. The dealers paid the manufacturers money for those rights and the manufacturers got cash to finance production. Generally, the dealers or a distributor got the right to be the only dealer in a particular territory. Dealers invested in dealerships, service departments, and inventory. Dealers have built up loyal customers, reputations (good or ill), and innovative processes to improve car sales (or not). To cancel the dealerships’ right to sell the cars, the automaker would have to break their contracts, either by negotiating termination or by unilaterally breaking the deal and paying damages to the dealerships. Car makers can’t afford this.
Even this wouldn’t necessarily work. Even if manufacturers wanted to cancel the contracts and take over retail sales, most states’ franchise laws say that manufacturers can’t set up dealer networks that circumvent the independent dealerships. In some states, these laws say manufacturers can’t set up dealerships at all. Essentially, the states have laws prohibiting manufacturers from screwing local dealerships by withholding inventory and setting up unfair competition. Dealers are local businesses and car factories are (mostly) far away. Those local businesses have lots of lobbying power in state government, and generally much more lobbying power than the factories. Tesla is fighting these laws, which, in my opinion, should not really apply when the manufacturer has not already sold distribution rights to its products, but Tesla is facing a long slow fight with dealers who don’t want to compete with new manufacturers or allow others to establish a distribution model that cuts dealers out of the loop.
It would also be really expensive for automakers to build their own dealer networks from the ground up. That’s a lot of capital that would be tied up in dealerships and inventory that would not be going to build new factories or conduct R&D. I’m not sure most carmakers really want this.
Finally, the idea that you could have just a couple of cars on the lot to represent every configuration is wildly unrealistic. I might want to test drive the model with the manual transmission, big engine, sport suspension, basic stereo, summer tires, no sunroof and crank windows. If each of those options can be selected independently, the number of representative cars is 2^7, or 128 examples. I recall reading that the Ford Escort at one time offered several million buildable configurations, most of which no customer would ever order.
Dealers learn what actually sells, try to order the cars that they can sell quickly, and carry an inventory that covers the vast majority of the market. If the particular car you hope to test drive isn’t on the lot it’s either because it sells so fast it can’t be kept on the lot or because the dealer doesn’t think anyone is likely to buy that configuration. Dealers take the risk of unsold cars.
This is very similar to what Tesla is doing now. They do not have “dealerships,” only “showrooms.” You can visit, see a few models and test drive. If you want to buy one, the employee will direct you to a bank of computers where you can choose to order online. The car is custom built for you and delivered.
State dealer associations are having a fit over this as it throws a wrench in their business model.
Issues to deal with.
- Automotive dealers are independent businesses, not retail stores for the manufacturers. If you want to custom order a vehicle with specific options, the dealer will be happy to locate one at another dealer or order one from the factory for you (at full MSRP, no discounts.)
1A. If you make all the dealers company stores it doesn’t matter where the units are stored, except that if inventory is centralized, buyers have to wait for delivery.
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Assembly plants do not sit around waiting for orders. A plant may run sedans for a month, then change over to SUV’s. If you want a sedan then, they’re out of production. Which leads to. . .
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Someone, either the dealer or the manufacturer, has to carry a bunch of unsold cars in their inventory. Lee Iacocca’s book talks about how Chrysler used to set manufacturing goals without firm dealer commitments. They ended up with thousands and thousands of unsold cars. At the end of each month, the factory people ended up calling the dealers begging them to take the cars. Some dealers played a game of not ordering anything until the manufacturer called and offered a huge discount. Chrysler ended up losing money because of unsold inventory, then losing more because they had to cut prices. It was one of the factors behind Chrysler’s brush with extinction in the early '80s.
In the past I’ve bought some new cars from dealerships and I have also bought a Tesla. Having experienced both sales models, the Tesla experience is vastly superior (at least for the consumer). I hope to newer having to set foot at a dealership again.
With Tesla there was zero sales pressure. No up-sell. No ‘you need to buy the extended warranty TODAY’. Just friendly employees that seemed genuinely interested in making me happy.
The fact that so few people step in and custom order a car even though there’s nothing stopping them from doing so seems to indicate that customers like the model where you can buy a car and immediately drive it off the lot. Now that there’s a trend to a couple of trim levels instead of dozens of different separate options, it’s more likely the car you want, or something close, will be in stock or in stock at a dealership close by. My stepfather has a small used lot. If a customer doesn’t find what s/he wants, he’ll offer to get a car like they want within a week, but they never take him up on the offer and go to his competition.
As far as who owns the cars, in his case he owns most of them, but he’ll take the occasional lot on consignment from people that buy and sell cars for a living but don’t have a physical lot.
Kind of amusing that people act like this, since they won’t be done paying for a new car for years typically. Not something you should buy on a whim…