CHAPTER 4

Organization of the Motor Vehicle Industry: Sales

This chapter focuses on the organization of the sale of the world’s motor vehicles. Included in this chapter are discussions of the distribution of vehicles around the world and the structures for their distribution.

As fragile, bulky, fabricated products, motor vehicles are produced near where they are sold. The cardinal rule among carmakers is to build vehicles near where they are to be sold. Thus, more than 90% of sales—as production—is clustered in Asia, Europe, and North America, and Latin America accounts for most of the remainder. Africa, with 15% of the world’s population, accounts for only 2% of the world’s vehicle sales. Nonetheless, the global distribution of motor vehicle sales does not exactly match the distribution of production. Some regions produce more cars than are sold, whereas other regions have higher sales than production.

Registration and Ownership of Vehicles

Roughly 3 billion motor vehicles have been built worldwide through the century-plus of motor vehicle production. Slightly more than 1 billion of these vehicles are currently registered. Asia, Europe, and North America each has around 300 million vehicles, leaving around 100 million in Africa and Latin America. The United States has the largest number of vehicles, around 240 million. Thus, the United States, with 4% of the world’s population, has 24% of the world’s vehicles. China and Japan follow the United States in the number of vehicles, with 78 million and 74 million, respectively.

The number of motor vehicles in the world is approximately 170 per 1,000 persons. The developed regions of Europe and North America have a combined ratio of 630 vehicles per 1,000 persons compared to a ratio of 80 vehicles per 1,000 persons overall in the developing regions, Africa, Asia, and Latin America. Otherwise stated, there is 1 vehicle for every 6 persons in the world as a whole, 1 for every 1.6 persons in the developed regions and 1 for every 12.5 persons in the developing regions (Figure 4.1).

Among the world’s most populous countries, the United States has by far the most vehicles per capita, approximately 800 per 1,000 persons, or 1 vehicle per 1.3 persons. Among the 10 most populous countries, Japan ranks second in vehicles per capita, with 600 vehicles per 1,000 persons, or 1 vehicle per 1.7 persons. Unique among populous countries, the number of vehicles in the United States (approximately 250 million) far exceeds the number of licensed drivers (approximately 200 million). Japan has just over 1 vehicle per licensed driver.

At the other extreme, vehicle ownership rates are very low in the most populous countries of Asia. The number of vehicles per 1,000 ­persons is 85 in China, 60 in Indonesia, 18 in India and Pakistan, and 3 in Bangladesh. That’s 1 vehicle per 12 persons in China, per 17 persons in Indonesia, per 56 persons in India and Pakistan, and per 333 persons in ­Bangladesh. Forecasts of rapid future growth in world motor vehicle ­registrations derive primarily from projections of increased ownership rates in these very populous countries of Asia. An increase of 1 per 1,000 in the vehicle ownership rate in each of these five Asian countries would add 3 million vehicles to the total world registration.

Motor vehicles must be registered with a government agency in order to be legally driven. The authority responsible for registering ­vehicles is a state or provincial government agency in North America and a national government agency in most other countries. As part of the registration process, license plates issued by the authority must be displayed on the vehicle. France issued the first license plates in 1893, and Germany followed three years later. U.S. states began to issue them in 1903. In some countries, the plates remain the same throughout the vehicle’s life, passing from one owner to the next, whereas other jurisdictions require that the plates be changed when the vehicle is sold. In North America, the plates are updated annually, either with a sticker or an entirely new set of plates.

Sales Volume and Trade of Vehicles

For most consumers, a motor vehicle is their second most expensive purchase after a house. In developed countries, the median cost of a new vehicle amounts to a little less than the median annual household income. In developing countries, the cost is five times more than income.

Motor Vehicle Sales

Worldwide sales of new motor vehicles totaled 82 million in 2012. Most vehicles pass through more than one owner. In the United States, 40 million used vehicles were sold in 2011, three times more than the number of new vehicles. Applying the same 3:1 ratio worldwide would produce a global estimate of 250 million used vehicle sales.

Approximately 38 million new vehicles were sold in Asia (including Oceania) in 2012, 19 million in Europe (including Russia), 18 million in North America (including Mexico), 6 million in Central and South America, and 3 million in Africa (Table 4.1). China is by far the world’s largest market for vehicles. Sales totaled 19 million in China in 2012, 24% of overall world sales. The United States is second in the world with 15 million sales in 2012, that is 18% of the world total, followed by Japan with 5 million sales, that is 7% of the world total. Countries with between 2 million and 4 million annual sales include Brazil, France, ­Germany, India, Russia, and the United Kingdom.

Worldwide figures for vehicle sales do not match the distribution of production. In 2012, Asia produced 44 million new vehicles and bought 38 million, Europe produced 20 million and bought 19 million, North America produced 16 million and bought 18 million, Central and South America produced 4 million and bought 6 million, and Africa produced 1 million and bought 3 million. Thus, on balance, more vehicles are assembled than sold in Asia and Europe, and fewer are assembled than sold elsewhere in the world.

As with production, the distribution of motor vehicle sales has changed sharply in the past quarter-century. In 1990, worldwide sales of new motor vehicles totaled 49 million. Approximately 12 million vehicles were sold in Asia (including Oceania) in 1990, 19 million in Europe (including Russia), 16 million in North America (including Mexico), 1 ­million in Central and South America, and 1 million in Africa (Figure 4.2).
Thus, during the past quarter-century, vehicle sales have stagnated in Europe and in North America, but they have increased from 12 to 38 ­million vehicles in Asia, from 1 to 6 million in Central and South ­America, and from 1 to 3 million in Africa.

Annual sales of new vehicles reached historically high levels in North America and Europe in 2005 and 2007, respectively. In Europe, sales peaked in 2007 at 23 million and declined in the following years by around one-fifth. The lingering effect of the severe recession that began in 2008 has continued to depress new vehicle sales in Europe. The declines have been especially severe in Southern European countries, including Greece, Italy, Portugal, and Spain, where the recession was especially severe and long-­lasting. Sales declined more sharply in North America than in Europe during the severe 2008–2009 recession by 40% in North America compared with 20% in Europe. But sales have recovered to near the pre recession level in North America, whereas sales have continued to stagnate in Europe.

New vehicle sales in China exceeded 5 million for the first time in 2005, 10 million for the first time in 2009, and 20 million anticipated in 2013. China passed Germany as the third-leading new vehicle market in 2004, Japan as the second-leading market in 2006, and the United States as the leading market in 2009. The share of the world’s vehicles sold in China increased from 10% in 2005 to 24% in 2010. ­One-third of the worldwide growth in vehicle sales during the next decade is expected to come from China.1

International Trade in Motor Vehicles

On a global scale, net trade of vehicles among regions is relatively modest. The numbers of vehicles produced and sold are roughly equal within Europe. More vehicles are produced in Asia than are sold in that region, whereas more vehicles are sold than produced in the rest of the world (North America, Latin America, and Africa). The net movement of vehicles among these regions amounts to less than 10% of total world production and sales. On balance, approximately 7 million vehicles of the 80 million produced and sold worldwide are exported from Asia into North America, Latin America, and Africa (Table 4.2).2

The relatively modest global net trade figure masks larger flows of vehicles among regions, as well as even more substantial movement of vehicles among countries within regions. At the interregional scale, approximately 15 million of the 80 million vehicles sold in 2012 were produced outside of the region of the sale. From Asia, roughly 3 million vehicles were exported to North America, 3 million to Europe, and 1 million each to Latin America and Africa. Approximately 2 million vehicles were shipped from Europe to North America and 1 million from North America to Europe. Approximately 2 million each were exported from North America to Latin America and from Europe to Africa (Figure 4.3).

The import of vehicles from other regions is impeded by barriers that can raise the price of imported vehicles to uncompetitive levels. Tariffs contribute to higher prices in some countries, including the United States, but the principal cause of higher prices for vehicles imported from other regions is homologation. Homologation is government certification that a particular vehicle matches specified criteria to which all vehicles sold in that country must conform. The challenge for carmakers is that criteria vary among countries and regions. The variations could be relatively minor and inexpensive to address, such as the shape of the license plate holder. However, some variations are extremely costly for carmakers, such as the type of glass that can be used for the windshield.

Restrictions and tariffs in the movement of vehicles between the United States and Canada were eliminated during the 1960s. The North American Free Trade Agreement (NAFTA), implemented during the 1990s, eliminated barriers to the trade of vehicles among the United States, Canada, and Mexico.

Prior to the 1960s, Canada’s auto industry was organized separately from that of the United States, and high tariffs limited imports into Canada. A Canadian government commission in the early 1960s concluded that the country’s auto plants, which were all owned by U.S. companies, were unprofitable and at risk of closure. Because of the small size of the domestic market, Canadian plants had to produce a wide variety of vehicles in unprofitable and inefficient small batches. As a result, Canada signed an agreement with the United States to eliminate tariffs on vehicles and parts. Of more significance to Canada, U.S.-owned carmakers signed letters of understanding agreeing to guarantee a minimum level of production in Canada.

Mexico attempted to support its auto industry during the 1970s and 1980s through a series of decrees that alternated between raising and lowering requirements for the minimum percentage of local content in vehicles sold in Mexico and for the maximum percentage of vehicles that could be imported and exported duty-free. Foreign-owned carmakers increased investment in Mexico primarily in the early 1980s and again in the early 1990s.

With implementation of NAFTA in the 1990s, Mexico’s vehicle market was fully integrated with those of the United States and Canada. In 2012, 1 million vehicles were sold in Mexico, approximately evenly divided among imported and domestic. Production in Mexico was 2.7 million vehicles in 2012. With around 0.5 million sold domestically, 2.2 million (i.e., 81% of production) were exported primarily to the United States.

Approximately 4 million of the 17 million vehicles sold in North America in 2012 were imported, including approximately 2.5 million from Asia and 1.5 million from Europe. Nearly all imported vehicles were passenger cars rather than light trucks. The United States imposes a tariff of 2.5% on cars and 25% on pickup trucks and vans imported from countries other than Canada and Mexico. The extremely high tariff on trucks is a legacy of the so-called chicken tax. In 1962, several European countries, including France and Germany, raised tariffs on imported chickens, effectively eliminating access to European markets for the U.S. poultry industry. A year later, the United States retaliated by setting a high tariff on a collection of products imported into the United States that had a value equivalent to U.S. chicken exports to Europe at the time, and that turned out to include pickup trucks. When the chicken tax was imposed, the primary target was German-made VW vehicles, but as Asian carmakers became the leading exporters to the United States, they were most affected.

Approximately 3 million vehicles are exported from North America, including around 2 million from the United States and 1 million from Mexico. Exports are destined primarily for Europe and Latin America. Mexico is playing an increasingly important role as a center for exporting motor vehicles. In 2012, 83% of vehicles assembled in Mexico were exported (including those sent to the United States), the highest percentage for any country and the fourth highest in volume behind Germany, Japan, and South Korea. Carmakers are attracted to Mexico as a location for assembly plants, primarily because Mexico has free trade agreements with 44 government entities, including the European Union, as of 2012.

Within Europe, a large percentage of vehicles produced in one country are sold in other European countries, but relatively few vehicles are imported from or exported to other regions of the world. Of the 19 million vehicles sold in Europe, 3 million are imported, nearly all from Japan and Korea. Of the 20 million produced in Europe, 4 million are exported, around 1 million to North America and 3 million to Asia.

Barriers to the movement of vehicles from one country to another within the European Union were eliminated. However, the European Union has a 10% tariff on vehicles imported from other regions, including the United States.

Unlike the other two major vehicle-producing regions, a large percentage of vehicles produced in Asia are exported to other regions, but relatively few move from one country to another within the region. Around 5 million vehicles, two-thirds of the country’s production, were exported from Japan. Shipments from Japan included 2 million to North America, 1 million each to Europe and other Asia-Pacific countries, and 0.5 million each to Latin America and to Africa. South Korea is also one of the world’s leading exporters; 3 million of the country’s 5 million total vehicle production is exported. South Korea’s distribution of shipments among regions was close to the pattern for Japan. By contrast, only around 1 million of the 18 ­million vehicles produced in China in 2012 were exported, nearly all to Asia.

China imposes a 25% tariff on the import of vehicles. Japan has no tariffs on importing vehicles. Instead, it has especially challenging homologation rules that result in doubling the price of vehicles, thereby effectively curtailing imports of all but a few luxury models.

Vehicle Classification

Vehicles are sold in a wide variety of sizes, styles, and prices. Gone are the days when one model, Ford’s Model T, accounted for half of the world’s sales. The French magazine Auto Moto identified 100 models sold in 2013 by the world’s 10 best-selling companies, and another 100 by others. Excluded are many more companies that sell only a handful of vehicles.

Market Segmentation

The terminology for identifying vehicles and classifying them into segments is not standardized by government agencies, carmakers, or trade organizations. The most popular vehicles are identified informally by carmakers and trade publications with the letters A through F. These distinguish vehicles by a combination of size and price.

• A is a minicar such as Fiat 500.

• B is a subcompact car in North America and a small car in Europe such as Ford Fiesta.

• C is a compact in North America and a lower medium or small family car in Europe such as Ford Focus.

• D is a mid-sized car in North America and an upper medium or a large family car in Europe such as Honda Accord.

• E is a compact luxury car in North America and an entry premium car in Europe such as BMW 3 series.

• F is a mid-sized luxury car in North America and a medium premium car in Europe such as BMW 5 series.

The most popular sizes in Europe are B and C, each accounting for roughly one-fourth of all sales. In Japan, the C segment has around 40% of all sales. In North America, the two most popular sizes, C and D, account for only around one-sixth of sales each. Light trucks account for nearly half of sales in North America, compared to only around 10% in the rest of the world.

Carmakers often blur distinctions among the six letters by deliberately creating models with dimensions that fall between two letters. They also sell vehicles that are more sporty or rugged than the archetypal models of a particular letter classification. Vehicles are also sold that are distinctive to one region of the world.

Recognizing that carmakers have created numerous segments that do not fall neatly into one of the six letter sizes, Automotive News identifies 26 segments of vehicles sold in North America and 22 in Europe. Thirteen of the segments in North America are considered cars, and 13 are considered light trucks. In Europe, 11 each of the Automotive News segments are cars and light trucks. In North America, around one-half of the sales are accounted for by 4 of the 26 segments: compact (C class such as Ford Focus), mid-sized (D class such as Ford Fusion), full-sized pickup (such as Ford F series), and crossover utility vehicle (such as Ford Escape). In Europe, around one-half of the sales are accounted for by just two of the 22 segments, which correspond to the international C and D class designations. Half of the segments in Europe and North America hold less than 1% of the respective region’s market.

Government regulations can influence classification. In Japan, for example, most vehicles are classified as 1 through 5 based on the prefix of the license plate. A “1” is a large truck, a “2” is a bus, a “3” is a large car, a “4” is a small truck, and a “5” is a small car. Each of the 5 segments pays a different tax. In the United States, carmakers designate vehicles as trucks or cars because the two classifications have separate fuel efficiency standards.

Corporate Branding

Each company typically markets its vehicles by make (or brand), model (or nameplate), and trim. For example, a Honda Civic DX identifies Honda as the make, Civic as the model, and DX as the trim. “Honda” doubles as the corporate name as well as the make. Honda, the carmaker, also sells vehicles with the Acura brand. Similarly, a Ford Focus S identifies Ford as the make, Focus as the model, and S as the trim. The Ford Motor Company also sells vehicles with the Lincoln brand. Most major carmakers use their corporate name for their best-selling brand. The leading exception is GM, which rarely doubles its corporate name as a brand.

Carmakers also classify vehicles by platform. A platform is the chassis and other underpinnings of the vehicle upon which a variety of bodies and powertrains can be attached. Vehicles in several segments can share a single platform. For example, the Ford Focus car and Ford C-Max truck are based on the same platform, known inside the Ford Motor Company as C1. Designing a variety of vehicles from a single platform enables ­carmakers to save considerable development costs. At the same time, the shared components are largely invisible to consumers, so vehicles on a single platform appear and perform differently for consumers.

Ford Motor Co. accounted for half of the vehicles sold in the United States and in the world during the 1910s with only one make, one model, and one platform—the Ford Model T. Henry Ford envisioned the motor vehicle as something useful rather than stylish. He famously sold the Model T in only black for most of its 18 years of production, because black took less time to dry than other paint.

General Motors passed Ford in sales during the 1920s in part by offering a variety of makes and models. Alfred P. Sloan, GM’s long-time ­President and Chairman of the Board, called GM’s marketing strategy “a car for every purse and purpose.”3 For 75 years, GM prospered by selling five makes—Chevrolet, Pontiac, Oldsmobile, Buick, and ­Cadillac—listed here in order from least to most expensive. Chevrolet was marketed as affordable, Pontiac as stylish, Oldsmobile as well-engineered, Buick as refined, and Cadillac as elite. Each of the five makes offered a variety of distinctively named models—for example, Chevrolet in 1955 had the 150 series, 210 series, and Bel Air models—but the differences among these so-called models were what would now be considered variations in trim.

Beginning around 1960, North American carmakers began to sell models within makes in a variety of platforms as well as price points. Four principal platforms emerged, known at the time as subcompact, compact, mid-sized (or intermediate), and full-sized (or large). In 1970, for example, the Chevrolet make included the subcompact Vega, the compact Nova, the intermediate Chevelle, and the full-sized “regular” Chevrolet. Several specialty and limited production vehicles were also marketed. In the wake of gas shortages and price rises in the 1970s, U.S. carmakers reduced the dimensions of the four main types of vehicles. The rising popularity of substituting trucks for passenger cars added to the variety of models in the late 20th century.

Top Vehicles by Market

The market share held by the leading companies varies among the major markets around the world as do their individual makes or brands and their nameplates or models.4

• These companies had at least 5% of the national or regional market in 2013:

∘In the United States, GM had 18%, Ford 16%, Toyota 14%, Chrysler 12%, Honda 10%, Hyundai 8%, and Nissan 8% (Figure 4.4).

∘In Europe, VW had 26%; Renault (including Nissan) 12%; PSA Peugeot Citroën 11%; GM 8%; Ford 7%; and BMW, Daimler-Benz, Fiat, and Hyundai 6% each (Figure 4.5).

∘In Japan, Toyota had 43% and Honda, Nissan, and Suzuki had 13% each (Figure 4.6).

∘In China, the corporate level needs to be counted in two ways because of the preponderance of joint ventures between international and domestically owned carmakers. Among Chinese-owned companies, Shanghai ­Automotive had 23% of the market, Dongfeng 14%, FAW 12%, ­Changan 10%, and Beijing Automotive 8%. Among international carmakers, VW’s joint ventures with several of the above-listed Chinese companies amounted to 14% of the market and joint ventures from the above list involving GM and Hyundai 7% each (Figure 4.7).

• These makes or brands had at least 5% of the market in 2013:

∘In the United States, Ford had 15%, GM’s Chevrolet 13%, Toyota 12%, Honda 9%, Nissan 7%, and Hyundai 5%.

∘In Europe, VW had 13%; Ford and GM’s Opel 7% each; Peugeot, Renault, and VW’s Audi 6% each; and BMW, Fiat, ­Mercedes-Benz, and Peugeot’s Citroen 5% each.

∘In Japan, Toyota had 29% and Daihatsu, Honda, Nissan, and Suzuki had 13% each.

∘In China, only three brands had at least 5% of the market: VW with 11%, Wuling with 7%, and Hyundai with 5%.

• These models or nameplates had at least 2% of the market in 2013:

∘In the United States, Ford F-150 pickup truck had 5% and GM’s Chevrolet Silverado pickup truck and Toyota Camry D-class car 3% each. With 2% each were the D-class Ford Fusion, Honda Accord, Nissan Altima, and Toyota Prius; the C-class Ford Focus, GM’s Chevrolet Cruze, Honda Civic, Hyundai Elantra, and Toyota Corolla; the Ford Escape, GM’s Chevrolet Equinox, and Honda CR-V crossover ­utility vehicles; and Chrysler's Ram pickup truck.

∘In Europe, the C-class VW Golf and the B-class Ford Fiesta each had 3% of the market. With 2% each were the A-class Renault Clio, Fiat Punto, and Opel Corsa; the B-class VW Polo, Peugeot 207, and Fiat Panda; and the C-class Ford Focus and Renault Megane.

∘In Japan, the D-class Toyota Prius and C-class Toyota Aqua (called the Prius C in the United States) had 5% of the market each. The B-class Honda Fit and Nissan Note (called the Versa in the United States) had 3% each. The Nissan Serena minivan, the F-class Toyota Crown, and the B-class Toyota Vitz had 2% each.

∘In China, the only models to have at least 2% of the market in 2012 were four small trucks. Wuling Sunshine had 3% and Foton Forland and Wuling Hongguang and Rongguang/Xingwang had 2% each.

Dealership Networks

Dealerships are independent businesses that purchase vehicles from the factory at wholesale prices and sell them to customers at retail prices. Carmakers set a manufacturer’s suggested retail price (MSRP), but customers rarely pay this amount. As with housing, most vehicles are sold at prices negotiated between buyers and sellers. The profit margin for a dealer on the sale of new vehicles is thin, in the magnitude of 1%–3%. However, carmakers often reduce the wholesale price of vehicles sold to dealers, especially for slow-selling models.

Each dealer has an exclusive franchise to sell a carmaker’s vehicles within a specified territory. Within that territory, no other dealer is allowed to have a showroom that displays or sells the same carmaker’s vehicles. In exchange for the exclusive franchise, the dealer agrees to purchase a predetermined number of vehicles, maintain an agreed-upon inventory of replacement parts, and repair vehicles at agreed-upon prices using factory-authorized parts. The dealer also agrees to display signs, arrange the showroom, and run advertising consistent with the carmaker’s marketing strategy. The sales staff are paid primarily, if not exclusively, on commission.

The mean gross sales in 2012 for a franchised dealership in the United States were $38.4 million. The sale of new vehicles had revenues of $21.6 million, or 56% of total sales, at the average dealership. The average dealership also generated revenues of $12.2 million from the sale of used vehicles and $4.6 million from performing service and selling parts. The pretax profit for the average U.S. dealership in 2012 was $843,697, only 2.2% of sales. Sales of used vehicles, service, and parts accounted for disproportionately large shares of the profits.5

Most vehicles are sold in North America on credit. Most often, the dealer handles the financing arrangements as part of the transaction although some customers obtain loans directly from commercial banks or other financial institutions. Availability of credit was one of the most important elements in the rapid growth of sales in the United States during the first decades of the 20th century. To meet the growing demand for credit, GM established the General Motors Acceptance Corporation (GMAC) in 1919. GMAC extended credit to dealers to carry inventories and to consumers to cover new vehicle purchases. Other carmakers subsequently established in-house financing agencies. Dealers typically check with both commercial banks and in-house agencies to secure the most favorable rate for their customers.

Early cars were sold alongside bicycles, in department stores, hardware stores, and other general purpose retailers. This arrangement was unsatisfactory for both consumers and manufacturers: retailers needed more expertise, because early vehicles were unreliable, difficult to operate, and most of all simply unfamiliar to nearly all buyers. After a period of experimentation in the first two decades of the 20th century, vehicles have been sold in the United States almost exclusively through franchised dealers.

A dealership has three ways to generate income: sell new vehicles, sell used vehicles, and perform service. The sale of new vehicles accounts for 55%–60% of revenues, the sale of used vehicles 25%–30%, and the ­provision of service 10%–15%. Profits are distributed differently: 30% from new vehicle sales, 25% from used sales, and 45% from service.6

Approximately 17,000 dealers are in operation in the United States, holding 31,000 franchises. The large difference between the number of dealers and the number of franchises is because dealers are allowed to hold franchises for more than one nameplate used by a particular company. For example, Chrysler has 9,000 franchises but only 2,300 dealers, because all but a handful of them sell all four of the company’s nameplates (Chrysler, Dodge, Jeep, and Ram). Overall, approximately 10,000 dealers sell Detroit three nameplates and 7,000 sell international nameplates.

Dealerships have traditionally been small businesses. Nearly all of the 47,000 dealerships in 1950 were owned by individuals who held one franchise to sell one brand of vehicle in their hometowns. The 17,760 dealerships in the United States in 2013 were owned by approximately 7,000 companies. The most typical arrangement is for a company to operate two or three dealerships with one selling Detroit Three nameplates and another selling those of an international carmaker.

The mean number of vehicles sold per dealer in the United States in 2012 was approximately 900. This compares with approximately 100 vehicles per dealer in 1950 and 300 in 1980. The rapid increase is a reflection in part of the two-thirds decline in the number of dealerships, but the larger share stems from increasing sales. The largest dealership company in the United States, AutoNation, owned 221 dealerships in 2012 and sold 267,810 vehicles. Three other companies—Penske Automotive Group, Sonic Automotive, and Group 1 Automotive—each held at least 100 dealerships and sold more than 100,000 vehicles. The 100 largest dealers together accounted for around 2.4 million sales, or 16% of the national total in 2012.

Economies of scale have pushed the consolidation of dealerships. Competition from the increased number of carmakers has driven down net profit per vehicle. The service department—the profit center for most dealerships—requires expensive equipment to diagnose and repair problems, which are increasingly electronic rather than mechanical in modern vehicles. Dealerships get more favorable terms from carmakers if they sell at higher volumes.

At the same time, franchise laws in most U.S. states protect dealers from national consolidation. A dealer holding a franchise in one market may not solicit customers in other markets. A customer who chooses to travel to another market to buy a vehicle must pay the taxes applicable to purchasing a vehicle in the hometown. As a result, unlike most other retail sectors such as electronics and clothing, national dealership brands have not been created.

The density of dealerships has been much higher in Europe than in the United States. In 2000, for example, Europe had more than 100,000 franchises, compared to 30,000 in the United States. Franchises in Europe have been divided roughly evenly between dealers and sub-dealers. The franchised dealers have played a role as wholesalers for sub-dealers located in small towns and rural areas. Subdealerships were especially common in France and Italy as outlets for the national brands (Citroën, Peugeot, and Renault in France, and Fiat in Italy).

Consolidation of dealerships has been occurring at a rapid rate in Europe in the 21st century. European Commission regulations adopted in 2002 and implemented in 2005 enabled dealers to hold franchises for more than one brand, as in the United States. In the wake of the new regulations, one-fifth of the dealerships in Europe closed between 2002 and 2005. As national brands such as Fiat and Renault lost their dominant market positions in their home countries, many of their subdealers closed. The lingering effects of the severe recession of 2008–2009 have induced more closures. In Italy, for example, the number of dealerships declined by 31% between 2008 and 2013.

Ford, the innovator in so many aspects of the industry, tried to sell vehicles directly to consumers in company owned stores in the early 20th century. The arrangement proved impractical. Sales people on the Ford payroll were found by the company to have less incentive than independent dealers to sell more cars and watch expenses. Ford’s biggest challenge, though, was that the rapid growth in demand for vehicles outpaced the ability of the company to open and staff stores.

Company-owned stores persist in countries other than the United States. In Europe, 2%–3% of dealerships are company-owned. In Germany, Daimler-Benz owns 98 dealerships that employ 16,000 people and accounts for half of the company’s sales in its home country. BMW has 43 company-owned dealerships that account for one-quarter of its sales in Germany. Company-owned stores are not profitable in Germany, and the carmakers are looking to sell some of them to independent dealers.

In Japan, the carmakers exercise more control over sales. Most cars in Japan were traditionally sold door-to-door by sales representatives employed by the carmakers. Very high brand loyalty and limited turnover in the sales force meant that customers were dealing repeatedly with the same corporate representative, thereby reinforcing brand loyalty. Most vehicles were special-ordered rather than sold from preexisting inventory. Close coordination between sales and production was possible with the same company owning both functions. The door-to-door sales system is being replaced in Japan with Western-style dealerships displaying large inventories and offering opportunities for test-drives. The transition has been generational since the late 20th century, with older people clinging to the traditional approach and younger people, preferring to visit dealerships before buying.

The long-standing structure of local franchised dealerships has inhibited the selling of vehicles through the Internet. Carmakers and dealers are permitted to provide consumers with information, including price, about vehicles available at particular stores. In response to a consumer inquiry, a dealer may send an e-mail stating a price for a specific vehicle. However, the transaction may not be completed through the Internet. The customer must go to the dealer to effect the transfer of money, papers, and keys to the vehicle. In the United States, an estimated 70% of new car buyers consult the Internet. Possession of information from the Internet and, in some cases, responses from multiple dealers have helped customers negotiate lower prices.