Someday (Maybe), You’ll Buy Cars on the Web

The promise of the Internet, from a business perspective, is the promise of a frictionless economy, in which buyers and sellers are able to meet without mediation. And since perhaps the most disliked mediators out there are car dealers, they would seem to be natural and inevitable casualties of consumers’ migration to the Internet. Very few people like bargaining with car dealers. Auto companies don’t like their now-almost-required reliance on rebates to move cars. And the whole phenomenon of the huge dealership, with acres of cars, each depreciating by the minute, seems like an archaic way of handling distribution (and, since someone has to make all those cars, production).

At the same time, the smartest auto manufacturers, like Ford and Toyota, are already working hard at integrating the Internet into their operations and developing build-to-order systems. Eventually, you should be able to communicate directly with Ford, pick out the car you want with the options you want, and have it delivered to your door, just like a Dell PC. Ford won’t have to make cars it’s not going to be able to sell, and you won’t have to haggle with some dealer. (This was what I was imagining at the end of the last Moneybox, when I wrote about GM truly becoming an Internet company.)

The only problem with this picture of the future is that it’s currently against the law. Just about every state in the United States, in fact, has strong franchise laws that limit the size and scope of dealerships, effectively regulate the allocation of vehicles to dealers, bar large-volume discounts, and prevent dealers from selling across state lines. Needless to say, actually buying a car on the Internet is therefore impossible, which is why all the car-buying services on the Net are actually local filtering devices, allowing you to comparison-shop. That’s an obvious advance over the old days, but it’s still a long way from a real Internet market.

In essence, local car dealers have been able to create and maintain geographic oligopolies through the use of franchise laws. That’s one reason why the category-killer approach to car-selling, exemplified by AutoNation (which just announced it was closing its used-car superstores), has floundered so badly. If Wal-Mart weren’t able to offer lower prices in its stores because it was barred from getting volume discounts from its suppliers, it would hardly be a powerhouse retailer. Economics of scale come into play only if things get cheaper the bigger you get. Otherwise you’ve just got more overhead.

But while the demise of the car superstore should probably be lamented, the really nefarious impact of the state franchise laws is unquestionably on the not-yet-existing Net market. Those laws are in part a product of older concerns about vertical integration, so that they served the function of keeping the auto-makers from selling direct to consumers. And they also allow states to keep a tight grip on the tax revenue from auto sales. But they are almost textbook examples of bad regulation, which accomplish nothing but putting lots of money in dealers’ pockets.

Even if Congress, say, were to pass a law permitting the direct sale of cars, that wouldn’t mean that auto-makers would embrace direct selling immediately. An article in the new Fast Company, for instance, suggests that Toyota’s management was hesitant to Web-ify the company precisely because it was afraid that would lead to direct sales, which would alienate dealers (and break the law). And it’s plausible that a car is such a big purchase that many people are going to be uncomfortable buying one online, sight unseen. But as an alternative, one can easily imagine something like what Gateway does now with its Country Stores, where you can test-drive a PC and then order it immediately online. There will, of course, be auto manufacturers that even a decade from now are still working through the traditional dealer system. But if you look at the PC industry, and the difference between the success of direct-selling Dell and Gateway and the struggles of dealer-centric Compaq and IBM, the idea that those auto manufacturers who stay tied to dealers will flourish seems dubious indeed.

Of course, first all those laws have to be changed.