Do you care about the power struggle between manufacturers and car dealers in Australia? You should, because something just happened in the Antipodes that could affect that relationship in other countries as well.
Here’s what happened. At the end of 2021, most of the franchise dealer agreements Mercedes had with its 49 franchise dealers in Australia were set to expire. Mercedes decided not to renew them, offering instead to enter into a new contractual relationship with its dealers that would shift from the traditional dealership model to what is known in the business as an agency model.
A dealership is entitled to purchase new vehicles from a manufacturer at wholesale prices and is free to retail them to customers at whatever price it can get. The dealership model encourages haggling and permits dealers to mark up popular models to earn extra profits.
In an agency model, the manufacturer owns the new cars and sets the sales price for them. It deals directly with customers, with the dealers becoming little more than delivery agents for the new cars once they arrive from the factory. The dealer would also provide test drives to customers who are not comfortable making a major purchase online.
Why would Mercedes want to make the switch from a dealership to an agency model? Primarily because it means more money in its pocket. The new agency agreement would pay the dealer a fixed commission for each new car delivered. The dealer would continue to derive income from its parts and service departments and maintain the right to trade in used cars as it sees fit.
One benefit to Mercedes is its customers would no longer need to arm wrestle with dealers to get the best price — a process many new car shoppers loathe. It can be argued that someone who can afford a Mercedes does not want to haggle like rug merchants in a bazaar and will appreciate a straight forward business transaction that is quick, easy, and transparent.
The impetus for all this, of course, is Tesla, which started selling its car direct to customers in Australia in 2014. It has no franchise dealers and just a handful of showrooms scattered across the country. Today, the Tesla Model Y is the third bestselling car in Australia. That sort of success makes others sit up and take notice.
Honda decided to switch over to an agency model last year, but the experiment has not gone smoothly. Honda sales in Australia were down 72% in March of this year — the most dismal performance by the Japanese company since it started selling its cars in Australia. Clearly, no haggle pricing is not the only factor in play here.
Mercedes Dealers Sue
Last year, 38 Mercedes dealers sued the manufacturer, claiming that the expiration clauses in their franchise dealer contracts could only be exercised if they failed to meet sales quotas, if they specifically breached the franchise agreement, or failed to complete improvements to their dealership as agreed between the parties. Absent those factors, they argued in court, Mercedes was obligated to renew their franchise agreements now and in the future.
The dealers argued that Mercedes had forced them to sign agency agreements under duress, had acted unethically, and had appropriated the good will they had built up in their businesses over many years without compensation.
Not so, ruled Justice Jonathan Beach of the Australian Federal Court. He spent 9 months crafting his decision and CleanTechnica readers will be delighted to hear we will not reproduce all 567 pages of his decision here. The decision will no doubt be appealed and the judge was at pains to create an opinion that would withstand close scrutiny by the appellate court. For a thorough analysis of the case, Australia’s KeyPoint Law has an exacting and precise review of the case, the pleadings, and the court’s decision available online.
The judge found that Mercedes had no obligation to renew the expiring franchise dealer agreements under Australian law. He also found the dealers had suffered a loss of “good will,” as that term is commonly understood by the accounting profession — an intangible asset that represents the value of a business over its book value derived from branding, reputation, customer and employee relations, intellectual property, or a loyal customer base. The dealers were asking for an award of AUS$650 million in damages.
However, the court found that Australia’s franchise law speaks only of “good will” as the right to continue an ongoing business during the term of a franchise agreement. It analogized this case to a prior case in which improvements made by a tenant during the term of a lease become the property of the landlord when the lease is over.
Since Mercedes had a right to terminate its franchise agreements, “good will” in the accounting sense was not an issue and no compensation could be awarded for its loss. The court intimated that the dealers should look to the legislative process to amend the franchise law with respect to future business dealings. But in this case, the court found Mercedes acted properly under the franchise law and did not coerce the dealers to sign agency agreements by using undue pressure tactics.
What Does This Decision Mean?
In terms of the effect of the court decision in Australia, it means that any franchise agreement may be terminated at its expiration and the franchisor owns nothing to the franchisee, who has no implied right to continue in business after the franchise agreement ends.
In the larger view, the decision is another shot across the bow of the franchise dealer model. Volkswagen now uses an agency model to sell its electric cars in Germany. Mercedes began using the agency model in Sweden last year and has expanded it to South Africa. Tesla, of course, is to blame for all this. Elon Musk made a decision early on to sell his cars only online and dispense with traditional dealers. Now Rivian and other electric car startups want to follow in Tesla’s footsteps.
Most customers will not miss the arm twisting and high pressure sales tactics of traditional franchise dealers, but some industry analysts worry the absence of those same techniques may lead to higher prices for all. The opposite may also be true. So far this year, the Chinese new car market has been roiled by aggressive price cutting by most of its EV manufacturers. Nobody complains when prices go down.
Objectively there is no reason why a person shouldn’t be able to buy a car online. What we are witnessing is a power struggle between manufacturers and dealers — a struggle has been going on since the transition from horses to automobiles began. First manufacturers had all the power and abused it egregiously. That led to the rise of dealer groups which managed to seize much of the power for themselves. They also have abused their power egregiously. Power seems to foster abuses.
The Conversation says in an article about this court decision, “The court verdict makes one thing clear. All parties need to reset and refine their roles and responsibilities in a rapidly evolving consumer landscape. While we know that for the foreseeable future there will always be plenty of people lining up to buy new cars, the judgement raises the question of whether their days of buying them from standalone dealerships are numbered.”
The laws in Australia may have little bearing on how business is conducted elsewhere, but it is clear that cracks are beginning to appear in the franchise dealer model, largely as a result of the EV revolution that is taking place everywhere all at once. We as consumers only care about whether all this will affect us when we go to buy a new car. The answer is definitely “maybe.”
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