Future of auto dealer franchise law is up for debate

The evolution of the franchised dealership model is beginning to appear in state capitols across the country.

Some state dealer associations are proposing new language in franchise laws that outline the relationship between new-vehicle dealers and automakers to better address newer concepts in the industry such as over-the-air service updates and vehicle reservations. West Virginia adopted legislation this year after dealership and automaker representatives negotiated a compromise on such issues, following a similar effort last year in North Carolina.

Advocates for dealers aiming to preserve the franchise model say that system is under threat from multiple fronts. Startup electric vehicle manufacturers want to bypass dealerships and sell their cars directly to consumers. Legacy automakers have experimented with updating vehicles remotely, an approach that may not require people to take their vehicles to a dealership's service drive.

Automakers also are broadly speeding toward electrification, with some pledging full-electric lineups within the next two decades and hinting at new distribution methods for electrified vehicles while taking online preorder reservations for popular new models.

"The main reason for addressing all the issues is the fact that they have simply begun to exist," said Johnnie Brown, outside general counsel for the West Virginia Automobile Dealers Association.

"They seem to be occurring in a market which has drastically changed by its very nature in the last couple of years," Brown said.

The shift has heightened tensions between dealers and factories, namely around the nature of dealers' role going forward.

"Tesla's led the direct-sales initiative, but it seems like every manufacturer now is wanting to get on board and break off and have EVs be completely separate, and we don't quite know what they mean," said Bill Cole, president of Cole Automotive Group in Bluefield, W.Va., which has dealerships in West Virginia and Kentucky.

Changes are coming quickly for dealers and automakers, and both groups are trying to figure out what the future will look like for their respective business models, said Amy Brink, vice president of state affairs for the Alliance for Automotive Innovation, the trade association that represents most major automakers in the U.S.

At the heart of automakers' interest in over-the-air updates and vehicle reservations is providing a convenient, positive experience to customers, Brink said.

"Whatever we can do to put into place something that's going to keep our customers satisfied and happy and coming back, we're going to try to do that," she said. "The intention certainly is not to exclude dealers or their role in that relationship with the customer, but ultimately, the goal here is to make the customers happy so that they continue to buy vehicles."

Automakers generally have stood alongside dealers in statehouses in recent years to oppose legislation that would create exemptions for EV manufacturers such as Tesla and Rivian to sell directly to consumers. Several automakers have said they don't intend to circumvent the franchise system, a message Brink reiterated to Automotive News.

But some dealer advocates say automakers' recent steps — such as Ford's plans to split off its electric vehicle business and Volkswagen's as-yet-unclear plan to revive the Scout brand of electric trucks and operate it independently — send a different signal.

"There should be a national call to arms," said Len Bellavia of Bellavia Blatt PC in Mineola, N.Y., a law firm that represents dealers on franchise law issues. "Dealers are really being targeted, and manufacturers are moving ahead with these radical and revolutionary programs with impunity because the state statutes haven't really been amended in a way that addresses all that's been happening over the past few years."

Bellavia said the "entire future" of dealership earnings and longevity is at risk and said the need for action on behalf of dealers is more acute now than ever.

"Just read the headlines each week: There's a new headline that goes right to the heart of the franchise system," he added.

Dealers say preserving the franchise system is critical to protect their investments in real estate, technology and infrastructure to comply with automakers' requirements — investments that are broadening to include charging stations and tooling to sell and service the more than 100 electric models that established brands have said they will introduce in the next several years.

The arrival of more EVs also has some dealers concerned about the potential for less service revenue because EVs have fewer parts than gasoline-powered vehicles. Over-the-air adds another potential wrinkle to future service business.

West Virginia's bill requires dealerships be compensated should a customer seek a dealership's help with the remote update. That's similar to a bill adopted in Virginia this year.

Earlier language proposed by West Virginia's dealer association would have prohibited anyone but new-vehicle dealers from performing some warranty or recall work, "including post-sale software and hardware upgrades or changes to vehicle function and features."

When it comes to over-the-air updates, "customer convenience basically has won out," said Shawn Mercer, a lawyer with Bass Sox Mercer in Raleigh, N.C., who represents dealers on franchise law issues.

Most dealers don't have a major problem with over-the-air updates for a safety recall or repair, Mercer said. But he said he anticipates that some states, starting in 2023, might propose bill language to allow dealers to offer customers at the point of sale any add-on features that can be activated for a monthly fee, such as heated seats or extra horsepower. That would allow customers to roll those features into their upfront financing.

General Motors and Stellantis, for instance, have each said they anticipate generating revenue from such subscription options of nearly $25 billion by 2030.

Don Hall, CEO of the Virginia Automobile Dealers Association, said dealers can't defend requiring vehicle owners to come into a dealership service department for a fix that can be done at home, and the association didn't try to ban the practice.

"It is incredibly understandable why there is some fear and concern about being cut out of something that is a revenue stream for dealerships," Hall said.

Yet, "if we're going to survive another 100 years, it has to be all about the customer experience — how they buy the car, how the car is serviced — and that means utilizing technology to the nth degree," he said. "Anything we can do to make it a better, more enjoyable buying experience will allow our industry to thrive and survive for many, many years in the future. But we cannot hold on to the ways of yesteryear."

West Virginia's and North Carolina's revised laws allow automakers to take customer reservations for vehicles but require them to send those reservations to a dealership. They also prohibit automakers from interfering with price negotiations, the setting of trade-in values and the sale of vehicle protection products.

"That provision is rooted in the belief that car dealers should be involved in the sales transaction with their customers," said Robert Glaser, president of the North Carolina Automobile Dealers Association. "That doesn't mean the customer shouldn't have the option. If the customer wishes to buy direct online from Ford via the Mach-E program, they should be able to do that. But the dealer should at least have the option of being involved."

Legacy automakers are stretching as far as they can within the framework of existing laws but eventually will need flexibility similar to Tesla — which has inspired a generation of EV startups aiming to follow its direct-to-consumer sales model — to compete, said Daniel Crane, a University of Michigan Law School professor.

"It's my view that the dealership model as it's existed for 70 years is not going to survive," said Crane, who has called for changes to franchise laws that make room for new entrants and distribution strategies.

"It's not to say that dealers won't be able to provide value in the different kinds of changes that we're going to have, but it's not going to be the model of them buying inventory, displaying on a lot, selling it when you come in the door and then providing service at these high margins," he said. "They're going to have to find new ways to provide value in a very different world than that, and they will as long as possible use the existing laws and try to pass new ones to slow down a process of inevitable change."

Dealers push back on the idea that they are resistant to change, noting that they have adapted to multiple periods of disruption.

In a statement, National Automobile Dealers Association spokesman Jared Allen said the organization "has always, and will always, support efforts to enhance state franchise laws. As our business model evolves, dealers will continue to innovate and adapt, just like they have always done, and embrace new and emerging technologies and tools to help further improve the customer experience."

Brown, of West Virginia, said that is why the state's dealer association worked to reach agreement with the automotive alliance on its bill.

"The West Virginia process this year is exactly how the negotiations should happen," Brink said, adding that the alliance took a neutral position on the final bill after initially opposing it.

Cole, a former legislator and president of the West Virginia Senate, said the retail model will evolve at the behest of the consumer to become "the most effective way to deliver a product to the end user."

"Manufacturers are taking the steps that they believe necessary for their future profitability and viability," Cole said, "and I think dealers need to take those same exact steps to defend who they are and what they represent."