Here we go again. Another manufacturer threatening to sell vehicles directly to the consumer. This time it is BMW who has stated publicly that it is considering selling its i series electric vehicles over the Internet. It is being reported that BMW expects to begin producing the i series vehicles for sale in late 2013. BMW announced that it has opened its first showroom for the display of the i series vehicles in London and has chosen 45 of its approximately 200 dealers in Germany to distribute the i series vehicles. BMW states that it was in the process of nailing down the details of how it intends to consummate the sale and delivery of the i series vehicles around the world. So, where does all of this leave BMW dealers in the U.S.? Will BMW dealers be replaced by the Internet in the sale of the i series electric vehicles in the U.S.?
Lessons learned from the past
BMW is not the first manufacturer to attempt to use the worldwide web to sell vehicles directly to the public. Back in the early 1990s, Ford Motor Company put a program in place to sell vehicles directly to the consumer over the Internet. Ford planned to designate a handful of dealers to act as delivery points for vehicles sold over the Internet. The program failed miserably proving once again that dealers know best how to market vehicles to the consumers in their communities. The independent men and women who own and operate new vehicle dealerships are the ones who have the relationships with residents of their communities and can bring potential purchasers into their showrooms, not a faceless entity manufacturing vehicles.
The Ford direct sales debacle also left us a very good motor vehicle franchise law legacy. When Ford announced its plans to sell direct to customers, BSM and other dealer advocates worked with state dealer associations to implement new franchise laws which would require manufacturers to distribute and sell vehicles strictly through their existing franchisees. In the right circumstances, these laws should again serve to protect dealers from competing against their own manufacturers in the sale of vehicles to the general public.
State franchise protections
The focus of the state franchise law protections put into place in the 1990s in response to Ford’s plan to bypass dealers was to require a manufacturer to utilize its existing franchisees for the sale of all of the vehicles produced by the manufacturer under that brand name. Using those laws, dealers would be able to prevent the factory from separating out certain model vehicles for sale directly to customers or having to compete with the manufacturer’s online sales of the same vehicles sold at the dealership.
Fast-forward to today and the states with franchise laws prohibiting a manufacturer from bypassing its dealers in selling direct to consumers will serve to protect dealers against BMW selling its electric vehicles depending upon the specifics of BMW’s plan. If BMW plans to sell the i series vehicles under the BMW brand name, then dealers will have a very strong argument that the existing franchise laws prohibit BMW from selling the i series vehicles over the Internet beyond the customary referral of customers to their local dealer via the manufacturer’s website.
However, we know from Mercedes-Benz’ sale of vehicles through the Smart brand or the various other “sub-brands” offered by manufacturers, that a savvy manufacturer can avoid selling a new model or models of vehicles through its established franchise system. In recent years, manufacturers have set up sub-brands in an effort to sell vehicles through a smaller number, or different set, of dealers than the franchisees selling the primary brand offered by the manufacturer. In those situations, dealers complained that they should be the ones selling those vehicles, but their complaints fell on deaf ears and the manufacturers proceeded with selling through a different franchise network. The only relatively recent exception to this rule was the eventual award of a Scion franchise to almost every Toyota dealer.
The strategy of an existing manufacturer merely setting up a sub-brand is not in and of itself enough to avoid the requirements of the state franchise laws. As soon as the manufacturer awards the new brand to a dealer and issues a franchise agreement, in the vast majority of states the manufacturer will be prohibited from selling direct to the consumer in competition with that dealer. In the past 12 months or so, we have seen a different tactic to avoid the franchise law protections. Two small volume electric car manufacturers have thus far successfully bypassed state franchise law protections by not selling their vehicles through a dealer network to begin with. In those cases, the manufacturers argued that they could not be in violation of the franchise laws if they had no dealers to compete against and were going to sell their vehicles direct to the consumer. In some cases, these manufacturers were actually required to obtain a dealer license themselves. At least one of these manufacturers is utilizing a handful of existing dealerships which sells unrelated brands to “process” the sales paperwork, to deliver the vehicle and to perform repair work. The “service-providers” (i.e. not “dealers” or “franchisees”) operate under a limited vendor contract which expressly states that the contract is not intended to convey any right to sell the manufacturer’s vehicles.
Combining these past strategies, BMW may attempt to avoid franchise law protections by establishing the i series as its own brand and then not designating any franchisees in the United States for the sale of those vehicles. Instead, BMW could utilize either BMW dealers or non-BMW dealers as “distribution centers” and “service points” in an effort to avoid being considered to have awarded a franchise for the sale of the i series vehicles.
Response from BMW dealers
Based on history, BMW dealers have several different avenues of relief depending upon how BMW intends to roll-out the sale of its i series vehicles in the United States. First, every dealer needs to understand exactly what his or her franchise laws say about a manufacturer selling vehicles directly to customers within their state. If the laws make it clear that a manufacturer may not sell directly to residents of the state under any circumstances, regardless of whether they have franchised dealers in the state, then BMW dealers in that state should remind BMW of the state law and request that they be provided with the I-series vehicles as part of the vehicles they are authorized to sell for BMW.
If the state franchise laws do not make it clear that BMW cannot sell direct to consumers then dealers should consider joining together in a two-prong approach. First, speak with one voice to BMW in demanding that BMW honor existing franchise agreements by providing dealers the i series vehicles to sell as part of the BMW line of vehicles. Second, support your dealer association in amending your franchise laws to prohibit the sale of vehicles at retail by the entity, or a related company of the entity, that manufacturers the vehicle.
Passing laws which protect the integrity of the motor vehicle franchise system not only benefits the owners and operators of those dealerships, but insures an employment opportunity for thousands of citizens of the state, insures a steady stream of sales tax revenue that may be jeopardized if sales are made over the internet and insures that there will be a financially viable network of dealerships across the state at which customers can obtain the highest quality service for their vehicles.
The single most important thing that BMW dealers can do is to immediately voice their concerns letting BMW know that they will not stand for anything short of being provided with ALL vehicles manufactured by BMW. Dealers need to be aggressive on this issue early in the process before BMW sets a plan in motion that attempts to bypass dealers. Once that proverbial horse is out of the barn it will be much more difficult to bring it back in.