The Pebble and the Avalanche

Fri, 2007-Feb-09, 07:17

US Automakers and the Dealership Reservoir

Although the Big Three automobile manufacturers in the US continue to struggle, they do have one terrific advantage: the network of car dealerships. The automakers manufacture cars and then send them to the dealerships, who arrange financing for the cars and absorb the output. This disaggregation between manufacturing and end-user sales is a very common arrangement in any industry, but in the case of automobile manufacturing, the system has failed for lack of feedback.

The automakers use this system to insulate themselves from market realities. They pressure dealerships to accept the automobiles they produce, and since the dealerships bear the cost of unsold vehicles, the automakers are insulated from marketplace signals about how well their vehicles are selling. Unlike a Wal-Mart or a Target, the dealerships cannot go to dozens of competing suppliers; the US has only three "domestic" automobile manufacturers. If the automaker sends a car in an unpopular configuration, such an unpopular size of wheels or an engine that is too large or too small, the car sits in the dealer's lot for months on end.

In essence, the dealership system acts as a reservoir for the automobile makers where automakers dump their unsold cars. The problem is that this reservoir is expensive to operate — for the dealerships — and the dealerships are starting to revolt against the system.

But with the rise of dealership chains, this reservoir system is about to end. AutoNation, which owns many stores across the US, has decided to take the automakers to task and is starting to demand that automobile manufacturers send it cars that are popular with AutoNation's customers [WSJ, subscription] instead of whatever cars are easiest for the automakers to produce. AutoNation is attempting to introduce stronger and more robust feedback into the disaggregated supply chain, and it will be interesting to see what the result will be.