Between world wars, GM set franchise pace
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Many dealers insist that there is nothing mutual about the arrangement. They argue it's a case of the factory's rights and the dealer's responsibilities.
The development of franchise agreements - and of the wider world of auto retailing - was shaped by World War I, the Great Depression, World War II and the postwar economic boom. There were important changes in selling agreements during that period, but no major overhaul.
From the 1920s through the 1940s, General Motors was the catalyst for change in dealer relations. GM wasn't the sales leader in all those years; Ford Motor Co. was.
But GM had something no other manufacturer could claim: The guy who ran GM was a "dealer man." Alfred Sloan recognized the importance of his company's dealer organization and was determined to nurture it.
Personal touch
What other CEO, then or now, visits dealerships to get a personal view of the sales climate? Who else fits out a private railroad car - it would be a private jet today - to haul himself and a few of his top executives to those meetings?
Sloan's 1963 autobiography, My Years with General Motors, details many of GM's franchise changes between the world wars. Despite its 472-page heft and sober tone, the book spent weeks atop the best-seller lists.
World War I was not especially upsetting for the auto industry. GM built aircraft engines for the U.S. Army, but, Sloan wrote: "No serious effort was made to mobilize the corporation during the war. We produced automobiles without interruption, and it was possible to regard our military work as sort of a temporary sideline."
GM's military production in World War I amounted to about $35 million. In World War II it exceeded $12 billion - nearly 350 times as much.
Boom and recession
Car and truck sales declined during World War I, of course. When you take a few million young men out of the civilian population and put them in olive drab or navy blue, you're going to lose a lot of sales, no matter what the product.
New-vehicle sales dipped 27.4 percent in 1918 from the previous year. But in 1919, with the troops back home, sales soared by 46.5 percent and topped 2 million units for the first time.
GM and the industry suffered in the recession of 1920-22. But industry sales more than doubled during the next seven years, despite a 1927 dip when Ford was sidelined while it switched from production of the Model T to the Model A.
Before 1920, the franchise system consisted mainly of distributors, who were sort of secondary wholesalers. They bought cars and trucks from the manufacturer - the primary wholesaler- and sold them to the dealers under their jurisdiction, for which they got an extra percentage point or two of dealer discount.
Eventually, the factory took over the entire wholesaling process. But the distributor setup died hard in some quarters. As late as the 1960s, Cadillac still had a flock of distributors as well as several factory branches. Cadillac dealer contracts were labeled "direct dealer" or "dealer under distributor."
But generally, Sloan explained, the industry adopted the franchise system in the 1920s because "automakers could not, without great difficulty, have undertaken to merchandise their own product."
Put that question today to Rick Wagoner, Bill Ford, Tom LaSorda or Jim Press, and you'll get the same answer.
Ford's tough love
In a 1927 speech, Sloan declared that "it is absolutely against the policy of General Motors to require dealers to take cars in excess of what they properly should take."
Compare that with Ford's "crossroads policy" of the early 1920s. In the winter of 1920-21, Ford began cramming cars down dealers' throats. If Ford felt a dealer was not ordering as many cars as the company expected, it set up another Ford store across the street.
Authors Allan Nevins and Frank Ernest Hill wrote in their 1962 book, Ford, Decline and Rebirth, 1933-1962: "By 1931, Ford Motor Co. had a dubious reputation in its relations with its dealers, for it had always ridden them hard."
By contrast, they said: "GM had the most liberal attitude, using a little less pressure and paying more attention to dealer complaints."
Sloan called a strong dealer organization "a necessary condition for the progress and stability of an enterprise in this industry."
Other automakers did not see it that way. They felt that all elements of distribution were up to the factory. But Sloan believed that "the franchise system of distribution makes sense only if you have a group of sound, prosperous dealers as business associates."
Standard accounting system
Sloan realized that GM couldn't do much to help dealers unless the company knew how they managed their businesses. So GM set up Motors Accounting Co. in 1927, creating a standardized accounting system for all of its dealers. Ford did not have a similar cost accounting system until Lewis Crusoe came to the company from Fisher Body via Bendix in 1944.
Although it wasn't part of the franchise system, selling cars on credit became a major way for factories to help dealers. GM established General Motors Acceptance Corp. in 1919. Chrysler Corp. began using the independent Commercial Credit Co. in 1926, soon after the auto company was founded.
Again, Ford trailed. It formed its first captive finance company, Universal Credit Co., in 1928.
In 1930, GM wrote the carryover rebate into its franchise policies. The company paid dealers for unsold new cars and trucks from the previous model year that remained in inventory when new models were introduced.
GM set up Motors Holding Corp. in 1929 to finance the purchase of dealerships by entrepreneurs who lacked the financial means to buy stores on their own. Motors Holding became a division in 1936. It has advanced more than $1 billion to help about 4,000 GM dealers acquire their stores.
Ford Motor followed with Dealer Development in 1950; Chrysler Corp., with Dealer Enterprise in 1954.
Complaint mechanism
In 1934, Sloan set up the General Motors Dealer Council, which consisted of 48 dealers he handpicked. Its purpose, Sloan said, was "to help develop policies on which an equitable dealer selling agreement could be based."
Four years later, the Dealer Relations Board was established, with Sloan as chairman. The review body enabled a dealer with a complaint to appeal directly to top officers of GM. The board required GM's vehicle divisions to be sure they had a good case for their actions because the division as well as the dealer was subject to executive review.
Motors Holding, the dealer council and the Dealer Relations Board were not part of the selling agreement itself. But they were and are important adjuncts to the franchise system.
GM's 1934 selling agreement allowed the factory to terminate a dealership without cause, on 90 days' notice. GM agreed to repurchase new cars, signs, special tools and parts from terminated dealers. It also agreed to help settle leases on canceled dealers' premises.
"It seemed desirable to have a definite liberal policy to protect the dealer from capital losses in case of cancellation," Sloan remarked, "even if the cancellation was due to his inefficiency."
Longer term
GM changed the term of its franchise agreement in 1944. It was set at two years when production resumed after World War II. It later reverted to one year but became five years in 1956 when GM and other automakers rewrote the document to include many more advantages for dealers.
On Dec. 7, 1941, the Japanese bombed Pearl Harbor. Car output ended less than two months later. The U.S. auto industry went out of business for 3½ years.
Auto plants became war plants. Detroit was the Arsenal of Democracy. At the helm was Lt. Gen. William Knudsen, who used his experience at Ford and GM to direct the nation's war production.
Like other retailers of consumer goods, auto dealers were odd men out. There were no new cars to sell. Some dealers became mini war contractors. They bought equipment and worked as subcontractors to companies with government work.
Because used cars also were scarce, service was the name of the game. A Ford advertising jingle summed it up:
But the Ford in your past
Is the Ford you have now,
So you'd better make it last!
Thousands of dealerships didn't survive the war. GM's total fell from 17,360 in June 1941 to 13,791 in February 1944, a decline of 20.6 percent. Dealers who stuck it out got a special allotment of new cars for two years after production resumed.
Black mark for dealers
The U.S. economy boomed after World War II, and the auto business boomed along with it. Dealers sold everything they could get their hands on. But amid their success, they suffered a public relations disaster that dogs them to this day.
At the time, there was no price sticker law. Cars cost what the dealer said they cost. Few customers argued; they were desperate for wheels.
Dealerships had waiting lists. If you were No. 200 on the list, some well-placed cash might move you up to No. 15 or No. 25.
Customers didn't forget. The dealers who indulged in such practices probably are long gone, but the black mark against their occupation has not been erased.
There were few franchise changes in the years immediately after World War II. In the early 1950s, factories wanted to act against bootlegging - the sale of new cars to used-car dealers for resale. But they could not do so because they feared antitrust repercussions.
Automakers also could not fight price packing - the practice by some dealers of offering huge over-allowances on trade-ins, with corresponding increases in new-car prices. Since there was no price-sticker law, nobody knew the exact price of a new car except the factory and the dealer. Neither was about to disclose it.
The result: The price-packed patron got bragging rights about the slick deal he had cut on his trade-in. The buyer didn't get a better deal; he just thought he did - and salesmen of all types of goods have long been aware of the value of massaging the customer's ego.
Sloan sums it up
As factories tightened their nooses on dealers, the dealers became more vocal. The retail auto business was a mess. The pot boiled and bubbled until 1955, when Sen. Joseph O'Mahoney, D-Wyo., and his Antitrust and Monopoly Subcommittee looked into auto distribution practices.
How would the franchise system evolve? Sloan addressed that question in his autobiography more than four decades ago. His words are just as meaningful today.
"Problems exist which, if allowed to continue unsolved, could well mean the end of the franchise system as we know it," Sloan said.
"But what are the alternatives? There are only two that I know of: either manufacturer-owned, manager-operated dealerships or the selling of cars by anyone and everyone, as cigarettes are sold - with the manufacturer maintaining a system of service agencies.
"I look askance at either of those changes. I believe that the franchise system, which has long prevailed in the automobile industry, is the best one for manufacturers, dealers and consumers."
You may e-mail John K. Teahen Jr. at jteahen@crain.com
You can reach John K. Teahen Jr. at autonews@crain.com.
