Middleman's Revenge? No!

Getting it wrong, the New Yorker, yes the venerable New Yorker devoted a one-page story to the thesis that automakers made a “devil's bargain” when they adopted the franchise system of selling cars 100 years ago.

James Surowiecki's piece asserts that the use of franchised dealers ended up giving them power to “sway the decisions of global corporations like GM and Ford.”

As a result, bolstered by the introduction in 1937 of state franchise laws (starting in Wisconsin), auto makers cannot “simply shut down a dealership” or cluster same-brand outlets too close together.

What's more, the piece bemoans, dealers can exert more political influence at the state level than auto makers.

Without reflecting on the fact that entrepreneurial investments in dealerships save the auto makers billions of dollars, the article does point out that Ford (in the 1920s) and GM (in the 1930s) flooded their dealers with unwanted cars and used them as “a cushion against hard times.”

The New Yorker called it a “devil's bargain.” I don't think so. It would seem that in reality, when times get tough, the dealers have buttressed the factories time and again. No auto maker is stronger than its franchise network, which is needed for service and used-car sales in stormy weather, and to move the new units at profitable levels in good times.

Franchise laws were adopted in all 50 states by big majorities, applying legal protection to dealers against factory coercion, bad faith or intimidation and, above all, terminations or non-renewals “without valid cause.”

For their part, auto makers have been able to prohibit dealers from selling competing brands in their showrooms. This rule in franchise agreements prevented megadealerships or Wal-Marts from selling multiple brands of new cars and trucks in big-box buildings.

By contrast, the European Union has approved all-brand showrooms as pro-competitive. No serious effort has been made to open such dealerships in the U.S. because of opposition from manufacturers and dealers alike.

On this point, the system described by the New Yorker as “self-protecting” has held up with the blessing of both sides.

In the late 1990s, GM and Ford tried to weave together factory-owned “dealer collections” in select mid-market cities such as Tulsa, OK and, Salt Lake City. The movement toward reviving factory stores was fostered by two franchise system critics — then Ford chairman and CEO Jacques A. Nasser and then GM sales and GM North America President Ron Zarrella.

Ford's first “collection,” in Tulsa, quickly started losing sales to Chevrolet dealers. GM's sallies never really got off the ground as top management aborted the plan when faced with strident dealer opposition. But the threat of GM buying up stores in metro markets was advanced by Zarrella as a weapon against “under-performing” franchised dealers — just the kind of factory combativeness franchise laws were intended to protect against.

While the New Yorker piece focused on the “injustice” of state franchise laws towards auto makers, it failed to report that the state laws also invalidate coercive practices against manufacturer representatives by dealers or dealer personnel.

In 1954, Congress amended federal anti-trust laws to include a “dealer's day-in-court” clause that forbids coercion, intimidation and so forth.

GM in the late 1950s attacked the California franchise law in a case involving GM's attempt to franchise a dealer within the territory of an existing same-brand dealer. The U.S. Supreme Court upheld the state laws as equitable. No challenge against them has been made since.

Because of the investments required of dealers and the role they play in keeping vehicles running and safe, franchise laws have stood the test of time. The New Yorker, a literate and well-intentioned magazine, errs in concluding that dealers' rebellions against factory intrusiveness amount to “the revenge of the middleman.”

Rather, call it a rightness from a free-enterprise system that works — while keeping the nation on wheels.

Mac Gordon is the dean of U.S. automotive writers. He can be reached at [email protected].