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GM Backs Business as Usual... For Now

By Paul Commins (TMF Buster)
May 19, 2000

In what will surely go down as one of history's most befuddling business revolutions, big-three automaker General Motors (NYSE: GM) has fired the latest salvo, formally warning its U.S. dealerships not to collaborate with certain types of car-selling websites. According to a story from CNET News, GM sent a letter to dealers reminding them that websites acting as brokers -- those actually purchasing vehicles from GM dealerships (and booking them as costs) and selling them to consumers (and booking these sales as revenues) -- are acting in violation of GM-wide dealer-franchise agreements that prohibit sales via "third-party resellers."

Two privately held Internet sites, CarsDirect.com and CarOrder.com, appear to be the specific targets of the GM warning, as well as an earlier warning along the same lines from Ford Motor (NYSE: F) to its dealers. Specifically excluded from the GM warning are Internet sites Autobytel (Nasdaq: ABTL) and Autoweb (Nasdaq: AWEB) , which merely provide information to consumers and referrals to dealers without ever taking possession of the vehicle.

On the surface, this story could be construed as a small victory for independent automobile dealers who have been fighting for their lives in recent years to stave off multiple threats -- from Internet sites (both portals and e-commerce sites), aggressive dealer-franchise consolidator AutoNation (NYSE: AN) , and even the very automobile manufacturers that they rely on for their product. If you dig a little deeper, however, you'll discover that CarsDirect.com, one of the outlawed sites, is actually backed, in part, by some automobile dealership groups.

And this is just the tip of the iceberg. The more you dig, the harder it is to figure out who is actually warning whom.

Industry experts mince no words. They claim that automakers now regard their powerfully organized, independent franchise dealerships as old-world impediments to developing the kind of super-light, Dell-style business model that every business seems to covet these days. Ford and GM have even made open attempts in recent years to buy and control some of their dealerships in early efforts to re-orient the traditional auto distribution model (from industry push to consumer pull). Why, then, would the automakers suddenly go to bat for these same dealerships?

Well, it could be that the true impetus for these recent warnings was not dealer protection at all but growing fear over losing a battle in the pivotal consumer relationship war. While the crowded auto retail field is today's news, the true prize for the automakers is not low-margin car selling (why do you think they gave it away in the first place?) but control of the customer relationship.

Strong brand recognition and superior customer service have always been keys to success for auto manufacturers. But the newest piece of the puzzle is the potential for build-to-order manufacturing, and the Internet is supposed to deliver the customer information that makes this possible. For these reasons -- old and new -- the automakers aren't about to give up any part of the customer relationship without a struggle. The timing of this GM swagger, then -- with a CarsDirect.com IPO on the near-term horizon -- may not be a coincidence.

Even if you're a zealot for the power of the Web to change the world, there is no clear leader in the race to capture auto retailing. In addition to the Internet players and business models mentioned above, you have to consider the eventual role of major automaker websites, individual dealership websites, DriversSeat.com (a future website from the National Automobile Dealers Association), AutoNationDirect.com, priceline.com (Nasdaq: PCLN) , Microsoft (Nasdaq: MSFT) Network's CarPoint.com -- and Yahoo! (Nasdaq: YHOO) and America Online (NYSE: AOL) , who have already formed partnerships and alliances with websites, automakers, and dealerships too numerous to list in this small space.

The bottom line is that with all these players and their shifting alliances -- and not much total profit to divide up in the first place -- auto retailing is probably not a good arena for the average Fool to dive into. However, there is one way in which we Fools stand to benefit handsomely, even without an equity investment -- as consumers.

When all is said and done, automakers should be leveraging the power of the Web to cut costs across the board -- from supply to manufacturing to distribution. Consumers hold the key to determining how much of these savings ends up in our pockets and how much in the hands of auto-related businesses. The retailers will eventually go where we take them, so we want to be sure that we lead them to an eventual solution that provides the freest competition possible.

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