A dentist’s office, a car dealership, an elevator that’s too crowded and hot. These are some of the worst places in the world. Why can’t car manufacturers sell directly to us? Why are we always forced to deal with shady car salespeople?
Every car manufacturer has to play by certain rules when it comes to selling their vehicles. There are a number of laws that strictly prohibit a manufacturer from selling directly to their consumers. It is highly illegal for Ford to sell you a car and drop it off in your driveway. The only exception is Tesla, but that’s because they’re using a loophole (more on that later).
In this piece, I’ll explore this question and answer it. You might be surprised to learn that dealerships are banding together to force us to deal with them.
How Do We Typically Buy Cars?
If you haven’t bought a car before or worked with a dealership, give me a second to explain it. The premise seems really screwy but it’s something that we just accept.
We buy cars through dealerships that buy the car from the manufacturer. The dealership determines everything, and the manufacturer is in on it.
To explain things, let me make up a case study and walk you through it.
Fake Case Study: Buying a Mustang
You made up your mind, you want to buy a Mustang GT Premium Convertible. Gorgeous car with unbelievable power.
In a warehouse somewhere in Michigan, Ford puts together a beautiful Mustang. Between marketing, labor, parts, and R&D, let’s say Ford dumps in $32,000 per Mustang GT Premium Convertible they make.
They manufacturer a few hundred and sell them to dealerships in the area. A dealership might pay them about $35,200 per car and get a nice fleet deal.
The dealership polishes the cars, puts them in a row, and slaps on stickers that say, “$45,785”. This is Ford’s MSRP, after all.
You go in, pick the exterior and interior color you like, choose the one that has the right options, and start talking to the salesperson. You go back and forth and shake hands over a $42,000 price.
You just wasted 10 grand and a full Saturday morning.
Determining What the Manufacturer Spent Manufacturing a Car
This isn’t an exact science, but it will get you pretty close. If you look at Ford North America’s financial statements, you’ll see that they have about a 10% markup on all the vehicles they sell.
A “markup” is the money they add so they make a profit. An item that costs $10 to make and is sold for $11 has a 10% markup.
The dealerships are a little tougher to gauge when it comes to markups. They could sell a car for a 200% markup if they found the right sucker.
Let’s just pretend that they have the same markup (although I can almost guarantee it’s higher than 10%).
Every time the car passes from one set of hands to the next, the price goes up. You, the unlucky final pair of hands that gets the car, have now just spent 20% in just markups.
20% on that $10 item isn’t a big deal, you can just break open your piggy bank. That same 20% markup on a $30,000 item is a whopping 6 grand. Not chump change at all. The worst part is that it serves no purpose other than being a pure profit for Ford and the dealership.
Ford is smart and they know that customers are going to do their homework. For that reason, they’ll put out a Manufacturer’s Suggested Retail Price (MSRP) that’s wildly inflated beyond just a dealership’s markups.
For instance, they might say their $30,000 car has an MSRP of $42,000, a whole 40% markup. After all, it’s just a suggestion so there’s nothing legally binding about it.
You might think you’re getting a rad deal on their car, but you’re just getting scammed.
So, if you want a general rule of thumb, multiply the MSRP by 0.7 and that’s roughly what it cost the manufacturer to make it.
Why Can’t Car Manufacturers Direct Sell to Consumers?
You’ll notice that I say “can’t”, and not “won’t”. This is a big distinction. The reason is that there are several laws that flat-out ban direct sales to consumers.
Not only that, but it’s also illegal for any manufacturer to open up their own dealership. All dealerships have to be completely private and unrelated to the car’s manufacturer.
When you shop with Sunshine Ford, you won’t see an assembly line in their backroom. They are buying vehicles directly from a Ford manufacturing site and selling them to you.
It’s also important to point out another distinction. It isn’t illegal for you to buy directly from the manufacturer, it’s illegal for them to sell to consumers. Otherwise, you would have groups of outlaws cutting corners and illegally buying from manufacturers, and saving a ton of money.
It’s Just in America
A loophole is that you can technically buy a car directly from a manufacturer overseas and then have the car imported.
As a consumer, this isn’t a financially wise decision. By the time you work out all the international fees and shipping woes, you’ll spend more than if you just got it at a dealership.
Still, it’s weird that this is just a law pertaining to American-made cars selling to American customers. We’re supposed to be a free market, but we can’t even buy a product from the person who made it. It’s like McDonald’s selling their burgers to another store that sells them to you. Weird and unnecessarily expensive.
Okay, I’ll get off my soapbox now.
But, What About Tesla?
Some people might be a little confused if they have a Model 3 in their driveway. You didn’t go to a Tesla dealership to get the car.
A common misconception people have is that it’s illegal for Tesla to have a dealership. The truth is that the brains over in Tesla just decided to go for direct-to-consumer sales using a little loophole.
Wait a minute, how does that make any sense? I just spent all this time talking about how illegal it is for a dealership to sell directly to a consumer.
To cut consumer costs and have better control over their product, Tesla made it their model to sell directly to you by using an international importer.
You’ll go into a Tesla Gallery or use their site to look at their cars and build the perfect option. In their Gallery, everyone you see is working directly for Tesla, not a third party.
When you sign the paperwork and write a check, Tesla pings one of their international warehouses to send the car overseas directly to you.
Since you’re buying from a non-American company, these direct-to-consumer laws don’t pertain to you.
As of today, Tesla is the only American-based car manufacturer that offers direct-to-consumer sales. Obviously, dealerships aren’t too happy about that. They have lobbied against Tesla and even took them to court on multiple occasions.
As a result, 10 states completely ban Tesla sales within their border. Another 8 states have a single-digit limit as to how many Tesla Galleries can exist in their state. Another 12 states have nearly unrestricted direct sales, and the remaining 20 are in a gray area.
If Tesla is willing to fight court case after court case to avoid using dealerships, something must be deeply wrong with dealerships.
What’s So Bad About Dealerships?
The dealership is a four-letter word in a lot of households. Personally, I hate going to a dealership. It’s nothing against the individuals working there, it’s all about the whole premise.
They’re marking up a product 30% or higher for no reason at all. If we could vote on the matter, I’m willing to bet most people would vote to destroy dealerships and work directly with manufacturers, instead.
Dealerships use old-school and shady sales tactics to rob you. They’ll slap a sticker on a car with a price that’s inflated to whatever they choose. A $20,000 car could have a $50,000 sticker on it and there’s no real penalty.
From there, they can pretend they’re being very generous and take off $10,000 since you’re a special customer. Now you’re only paying $40,000 for a $20,000 car. Outrageous, right?
There’s nothing dictating the prices that dealerships use. If the finance guy wakes up on the wrong side of the bed, every customer leaving the lot could be getting ripped off.
Actually, I take that back. Whenever we leave a car lot we’re getting ripped off. Even after negotiating a great price for a used car, you’re still wildly overpaying since you’re working with a middleman and not directly with Honda.
It’s All a Numbers Game
The more digging you do, the more obvious it becomes — it’s just a matter of money and numbers. Dealerships are making huge profits by simply taking a manufacturer’s car and selling it to us, the consumers.
The fact that dealerships even exist is proof positive about the money up for grabs.
How do these laws stick around? Well, dealerships funnel massive amounts of money to politicians and legislators to keep it that way. There are state-level laws that prohibit manufacturers from selling directly to consumers. The only option left is to go through a dealership.
The Manufacturer Sees the Money Either Way
This is so obviously predatory, so why don’t manufacturers do anything about it? Why should they? They see the money either way.
Dealerships are paying manufacturers for their cars, so there’s no reason for Ford to fight against dealerships. If someone was paying you $100 for a chair you made, then they sell it to someone else for $150, why would you care?
It’s the same reason why Nike doesn’t care about their shoes getting sold aftermarket to Hypebeasts.
The money is still stacking up in their pocket, regardless of who is paying them.
The Potential Future of Car Sales
Maybe I’m a little hopeful, but I think there’s a potential in the future for this model to change. The best option would be if self-driving cars took off, so we won’t even need to own a vehicle. You could just summon one and have it pick you up.
Still, I think consumers should challenge this idea of being forced to work through dealerships. I love what Tesla has done so far and I’m hoping to see more manufacturers step up and follow their lead.
As I just explained, buying a car directly from a manufacturer is illegal for some dumb reason. When there’s this much money at stake, middle-class Americans get sold out in the name of more money in the pockets of dealerships across the country.
Do you find this topic as frustrating as I do? Let me know in the comments. For more car questions answered, look at the rest of my blog. I also have some products that I highly recommend for car owners.