GM tells dealers to cut ties with some Web sites

General Motors put the brakes on some Internet automobile brokers this week, threatening to punish dealers that sell cars through some independent Web sites instead of through official GM sites.

In a letter mailed to 7,700 U.S. dealers this week, the automaker reiterated a long-standing policy that prohibits dealers from selling to third parties for resale to consumers. Ford Motor recently sent a similar letter to its dealers.

Although the auto industry's prohibition on brokers preceded the Internet

Gartner analyst Adam Sarner says GM does not want to cede control of customers to a third party. Instead, it plans to improve online experiences by enhancing what is available to car buyers. see commentary

and the rise of e-commerce, GM's letter specifically tells dealers to avoid online services that use the direct-selling model, such as CarsDirect.com and CarOrder.com. These popular services buy cars from dealers and resell them to consumers, often at lower prices than consumers could negotiate at dealerships.

Robert Brisco, CEO of CarsDirect, discounted the effect of GM's mandate.

"My sense is that GM...wants its customers treated along quality standards of care that they have established," Brisco said. "We believe that we are operating in a way that is completely consistent with GM's intention about how they want their customers cared for and how they want their franchise dealers to operate.

"Where (the letter to dealers) is coming from is that there are a wide variety of practices out there in the way people purchase cars both online and offline," he continued. "For years, carmakers have been issuing statements about their guidelines and standards. I think this is more in the category of refreshing and reminding their franchise dealers they want them to deliver a high level of service."

CarsDirect has about 2,500 dealer partners, including numerous GM franchises. An executive at CarOrder could not be reached for comment.

"We are not trying to mandate anything," said GM spokeswoman Rebecca Harris. "We are just telling them that there is an agreement within the franchise that they should not knowingly provide motor vehicles to third-party resellers."

The letter emphasized that consumers may buy GM cars online at the GM Web site or at hundreds of individual dealer sites. Consumers also can buy cars through sites such as Autobytel.com or Autoweb.com, which act as referral services for dealers and usually charge dealers one-time and monthly fees.

"GM has made a commitment to its dealer-franchise organization that the only way we are going to sell our products is through the retailers in our system," said Harris. "That is the only way we are going to sell cars, vans, trucks, whatever."

The move comes as GM and other so-called old-economy manufacturers embark on ambitious business plans to enter the burgeoning e-commerce arena.

Slightly less than 3 percent of all automobile sales were finalized online in 1999, according to the National Automobile Dealer Association (NADA), but sales have been doubling for the past five years. Roughly 40 percent of automobile buyers said they used the Internet to hunt for vehicle information in 1999.

Automakers generally frown upon third-party brokers--typically Silicon Valley start-ups with few ties to the 100-year-old auto industry in Detroit--and hope to recapture that revenue stream from the dot-coms. GM, which will soon open a new e-commerce office in San Francisco, has been particularly aggressive in attempting to capitalize on e-commerce.

GM has another incentive to stifle brokers: The automaker fears the plucky start-ups won't coddle customers when they need repairs, warranties or maintenance work, tarnishing GM's brand identity. An online broker's involvement with a sale typically ends after the vehicle is purchased, which the customer often picks up at a nearby dealership without first having established a relationship with the local salespeople or service agents.

"Customer satisfaction is closely related to service, especially when there's a warranty issue," said Greg Salchow, vice president of research at Raymond James in Detroit. "The brokers buy and essentially deliver the GM vehicle to the consumer. Then the purchaser takes it to the nearest dealer, and they don't get any of the fringe benefits, like a loaner or quick service. And the customer is going to hold it against GM."

Roughly three-quarters of the nation's 40,000 separate auto dealer franchises had Web sites in 1999, according to NADA. Fewer than half of them had Web sites two years ago. More than half of all dealerships were allied with a larger online retailer, such as Autobytel, in 1999.

In early June, NADA will unveil its own Web site, DriversSeat.com, connecting 5,000 dealer sites and providing access to the largest inventory of new cars and trucks on the Internet--more than 500,000 when the site debuts, NADA executive director David Hyatt said today.

Although late in coming, such competition from automakers and dealers could put pressure on brokers. Struggling to develop their own Web sites in a rapidly changing e-commerce arena, dealers say online brokers are temporary solutions to customers' demands for online sales but will eventually be replaced by dealers' own sites.

"They served a purpose at one time, but now we don't really need them selling to our customers," said Russell Shelton, president of Shelton Pontiac-Buick in Rochester Hills, Mich., who doesn't cooperate with third-party sellers. "If brokers went out of business, I wouldn't shed any tears."

Some say dealers' and automakers' relatively cavalier attitudes toward third-party brokers symbolize the auto industry's reluctance to leap into the e-commerce fray with the same zeal of free-wheeling dot-coms. Although Detroit seems eager to join the e-tailing revolution, it has come to the battlefield relatively late.

"The auto industry has never been flexible or fast on its feet, and it's never had to respond as quickly as Internet-oriented businesses," said George Peterson, president of market research firm AutoPacific of Tustin, Calif. "They're not comfortable evolving so quickly, and there's a lot of anxiety out there."