When you ask a car owner where they got their car from, they will likely say at a dealership. When you ponder about buying a car, you also probably consider which dealership to buy from. But a dealership is sort of a middleman between you and the manufacturer. Why, then, do people not buy the car directly from the people that make them?
You cannot buy a car directly from the manufacturer as it is illegal to do so in most states. The state’s franchise laws strictly prohibit car manufacturers from opening their own shops. Plus, selling through dealers is more profitable. The one notable exception to this rule is the Tesla company.
In this article, we take a closer look at the long-established co-existence of car manufacturers and dealers. We also examine some exceptions to this standard.
Car Dealerships vs Car Manufacturers: What is the Difference?
To put it simply, manufacturers make the product and the dealership will sell that product to customers. It is a symbiotic relationship that exists in many industries, not just the automobile market. Let’s look at this relationship in a bit more detail.
Take the Ford Motor Company for example, which is one of the largest automobile manufacturers in the world. Every year they produce millions of vehicles within their factories that span the globe. All they need to do now is sell these cars to the general people and they will make millions of dollars in profit.
Now, many companies in other industries will have retail stores of their own. And they sell their products through these stores as well as partnering with other retailers such as Walmart. But in the automotive industry, the original manufacturer is inhibited by the law to establish any private store.
So, Ford has to find a third party to sell their car. And that is where the dealerships come into play. They will take temporary custody of the vehicles, display the items in various showrooms, and try to appeal to potential buyers. If someone likes one of the cars, the dealer will mediate the transaction of the car for money.
The dealership will order a certain number of cars from Ford. This is called inventory. The dealership can choose to pay the manufacturer’s fee upfront or through financing. Afterward, the dealer tries to sell the car to a customer. Thus, both the parties involved make a profit and someone has a brand-new car to cherish.
This is how the automotive industry has been working for decades now. In essence, the original manufacturer or OEM has only one customer – the dealership. But the dealership has numerous customers. When the dealer acquires the vehicles, they need to sell them to pay off the loan and make a profit on top of that.
There is also a difference when it comes to car servicing. For general car repair and maintenance, you need to go to the dealership from where you bought the car. Because after the OEM (original equipment manufacturer) has handed over the item, the dealer is responsible for the customer servicing.
But if there were severe problems with the car or the customer wanted to initiate the Lemon Law, they would need to contact the original manufacturer directly. The dealership has no say in this matter.
Why Do Manufacturers Use Dealerships to Sell Their Cars?
There are several reasons as to why selling cars through a dealership is the standard. Let’s discuss some of them.
At any given time, a car dealership will have multiple items in stock. This is because they purchase the cars from the manufacturer in bulk most of the time. Plus, they will have more variety in their category as a single store can house cars from multiple brands.
Now, if ordered directly from the manufacturer, you could customize it to your exact preference. But that will end up taking too much time. And it would also not be very profitable for the manufacturer.
Car manufacturers make cars. That is what they excel at. But convincing customers to actually buy your car takes a different set of skills. And people that work for a dealership excel at those particular skills.
This is a big reason why big companies such Ford, Toyota, Audi will partner up with dealerships. Because they know how to sell cars, how to make them appealing to the onlooker at a showroom. Customer service is essential for any brand trying to stay competitive in any market. The automotive industry is no different.
If Nissan wanted to sell their product under their own outlet, they would need to invest a significant amount of time and money to set everything up. They would then need to hire and/or train technicians in the art of selling.
So, they enlist the help of third parties to do this for them instead. This helps the OEMs to focus on a particular aspect of the industry, without having to spend on a different avenue.
Almost all the cars in a dealership will come with a warranty. The exact extent and conditions of each warranty will vary, of course. But this is another aspect that makes buying from a dealership more alluring. This will draw in more customers and make more profit.
One might think that if you want to repair any parts, it is best to get it straight from the OEM. But chances are, the manufacturers would rather be producing new vehicles than repairing old ones.
Is There Any Manufacturer That Directly Sells Their Cars?
Tesla is an American car company that specializes in making eco-friendly, electric cars. One thing that sets them apart is that they do business directly with their customers. They do not cater to any third-party dealership.
In states where such practices are banned, Tesla has set up galleries that showcase their various models. And any transaction is done via the internet.
The manufacturer-dealership model has been the foundation of the automotive industry for years and with great success. And specialized companies such as Tesla are exceptions rather than the standard.