News > Technology
Car dealers hold the keys
September 20, 2000: 4:06 p.m. ET

Automakers pressure dealers to stay away from Internet startups
By Paul Elias
graphic graphic
SAN FRANCISCO ( - Despite Internet car sellers' best efforts, car manufacturers and their traditional auto dealers continue to tighten their grip on the Web by refusing to do business with the startups.

<-[if gte vml 1]> graphicThe latest example comes from a Charlotte, North Carolina dealership chain. Scott Smith, president of Sonic Automotive said he wants to supply cars to But last week, Mr. Smith barred managers of Sonic's 173 dealerships from continuing to supply DaimlerChrysler cars to He acted after receiving a letter from the manufacturer threatening him with economic sanctions if he continued to do business with Internet middlemen.

Mr. Smith said he continues to supply General Motors cars to but adds, "I haven't heard from General Motors, yet." Sonic, the second-largest dealership in the country, has a small equity stake in

Roadblocks everywhere

DaimlerChrysler's demand follows similar bans involving automobiles produced by Ford, Honda, and General Motors. Those four car makers have threatened dealers with economic sanctions if they sell cars to online companies they deem third-party brokers such as, and .

Internet car sellers must rely exclusively on traditional dealers for cars because franchise laws in many states forbid car manufacturers from selling cars to anyone but licensed retailers. Those laws, along with a desire by carmakers not to upset their decades-old dealer networks, have become big roadblocks to what was once thought would be a new way to sell cars over the Web.

"According to Ford's policy, Greenlight is a broker," Mr. Smith said. "Until Greenlight brings us something written from the manufacturer, we will not supply them with Fords." The same holds true for Chryslers and Hondas, he said.

"This is news to us," said a spokeswoman. CEO Joel Manby was unavailable for comment Tuesday. In an interview with last month, Mr. Manby insisted that only a "few dealers" in his network of 2,000 had been refusing to sell automobiles to and that he was confident he'd get them back into the fold.

Headed off at the pass

Mr. Manby faces an uphill battle. Ford executives reportedly have been urging, among others, Asbury Automotive, a big Connecticut dealership and car supplier, to stop doing business with the startup.

Over the summer, 400 dealer-strong Autonation, by far the largest auto seller in the country, instituted a similar ban against working with Internet car sellers. A spokesman for United Auto Group, which plunked down $17 million for a 10 percent stake in, refused to say whether or not the company continues to supply cars to the startup. UAG chairman and CEO Roger Penske, the famous racecar driver, didn't return repeated telephone calls asking for comment.

graphic"Selling a car over the Internet is a lot different than selling a book over the Internet," said a spokesman for the Alliance of Automobile Manufactures, a Washington, D.C., lobbying group representing car makers. Because online dealers hawk cars without servicing automobiles like traditional dealers, the spokesman said, manufacturers are afraid of diluting their brands and alienating consumers.

At Ford, a spokesman said: "Our problem with the online brokers is that they do not offer the same services and experiences as our licensed dealers."

Pressure by manufacturers has contributed to the demise of several Internet startups, such as, which folded in August. unabashedly ignored the dealers and planned to buy traditional dealerships for its inventory supply. But because manufacturers have the right of first refusal in dealership sales, they refused to allow to purchase a single franchise. Executives at Web firms such as and now stress how badly they need the dealers' blessings to be successful.

What about the dream?

It wasn't supposed to be this way. Several Internet startups popped up last year promising to transform the traditional car-buying process of wheedling and haggling, which many consumers find repulsive. According to the vision, shoppers would go to the Internet, research car information, check inventory, compare prices, and buy cars without being harassed by fast-taking salesmen. Instead it appears that traditional car dealers will remain an essential intermediary.

graphicTwo years ago, Ford Motor began selling cars directly online in Texas, which had consumer advocates rejoicing and proclaiming the demise of traditional dealers. A year later, Ford turned off its direct-sales Web site, beaten badly by the dealers who used their considerable political muscle to enact state laws barring car manufacturers from selling direct.

Next month, General Motors and Ford plan to start selling cars online while working closely with their respective dealers. GM is launching a test program with seven Minneapolis-area car dealers, directly attacking the online startups. Presumably, consumers will be able to buy the car they want for a fixed price through one of the participating dealerships.

Ford, meanwhile, plans to unveil a similar program, dubbed, throughout California and has ambitious plans to expand it throughout the country within a year. The company said 3,000 of its 4,200 dealers have paid an initial fee of $99 to participate. will receive fees from dealers for each car sold online. The site, like the startups' Web pages, will also provide financing options and accessories -- a fact that leaves Sonic's Mr. Smith and other dealers skeptical of the endeavor because auto dealers make a lot of money in those areas.

Instead, Mr. Smith points to Autonation's Web strategy as the one he thinks will ultimately win. That's because Autonation buys its automobiles directly from manufacturers, while the Internet companies rely on dealers for their inventory -- an unnecessary and costly layer. Through its Web site, Autonation sold $1 billion's worth of cars and trucks -- 40,000 of them -- through its dealerships last year.

"As much as I hate to talk about a competitor," Mr. Smith said, "I think Autonation has got the right idea."

Discuss this story in the Auto Industry in the New Economy discussion forum, or check out forums, video, and events at the home page. Back to top

© 1997-2000 Red Herring Communications. All Rights Reserved

  RELATED SITES runs out of gas.

Will Greenlight cause a pileup on Amazon?

Welcome to the Red Herring Online!

Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney