Why Dealers And Automakers Are Locked Into A ‘Holy War’

There is tension in the air, I can sense it. I can taste it. What was supposed to be a year of slow but stable growth has turned into a potential nightmare for dealers, automakers, and customers. Tension craves release, and if it can’t be quietly dissipated, it’s going to result in conflict. That’s just the way it is. The big conflict of the moment is the long-simmering showdown between dealers, as represented by the National Automobile Dealers Association, and automakers, as represented by the Alliance for Automotive Innovation.

Today, The Morning Dump goes to war. Not as a combatant, but as an observer. An embedded journalist. Ernie Pyle or, maybe, Evan Wright. War is a pretty heavy subject, so I’m going to couch this all in the philosophical observations of Monty Python. I’ll start with the ‘holy war’ between dealers and automakers, because it’s a big deal and could have an impact on consumers.

Why is this all happening now? There are two wars going on simultaneously. There’s a war for market share, which is basically a land war, and a war for margin, which is essentially a war of attrition. How this is best viewed is in incentives, which are starting to bleed away as automakers deal with tariff impacts. Oh, right, there’s also a trade war at the center of all this, and it’s hitting Japanese automakers hard.

One war that some automakers will be happy to win is the War Against the Environment, though there’s at least one automaker getting hit by friendly fire.

So, you’ve been warned; this is what’s coming today. Either you can run away, or you can be impressed by my huge tracts of… text.

Automakers Sent A Letter To The Justice Department That Sparked A ‘Holy War’

“I’ll bite your legs off!”

You have to give credit to a reporter who nails a quote that makes the whole story. That reporter is not me, but Molly Boigon of Automotive News, who got this quote about a battle brewing between the dealers and the automakers:

“If there is such thing as a holy war in the franchise world, it’s a holy war,” said Don Hall, CEO of the Virginia Automobile Dealers Association. The alliance’s letter is “an affront to this industry.”

Oh, that’s good. Run it right into my veins.

What are we talking about here? What is this letter? I’ll let Automotive News explain:

The Alliance for Automotive Innovation has asked the U.S. Department of Justice to examine whether state franchise laws restrict competition and harm consumers, provoking a battle with the National Automobile Dealers Association in an auto industry clash of the titans.

The alliance’s May 27 letter, addressed to the government’s new Anticompetitive Regulations Task Force, specifically asks the Justice Department to examine state laws governing vehicle warranty service and state laws that limit establishing franchised new-vehicle dealerships in certain areas.

NADA views the alliance’s actions as “a direct attack to the franchise system,” the group told its board and its Automotive Trade Association Executives in a July 14 email obtained by Automotive News. The Automotive Trade Association Executives represent more than 100 state and metropolitan franchised new-car dealer associations in the U.S. and Canada.

This White House is doing things, and besides defunding MotorWeek and Sesame Street, it’s set up an Anticompetitive Regulations Task Force that theoretically “advocates for the elimination of anticompetitive state and federal laws and regulations that undermine free market competition and harm consumers, workers, and businesses.”

The Alliance for Automotive Innovation is the new name of the automotive lobbying group that represents most automakers and a big chunk of the Tier 1 suppliers as well. That group sent a letter to the DOJ asking, hey, maybe look at state franchise laws, which govern how vehicles can be sold in various markets.

Does this have to do with direct sales to consumers? Not quite. One of the biggest issues the Alliance highlighted, according to Automotive News, was that existing dealers can oppose new dealerships within a certain distance called the “relevant market area,” though there’s no consistent standard on how big that area can be. The Alliance contends this hurts competition at the expense of consumers.

That’s not the biggest issue, though. The biggest issue is over warranty repairs. We’ve covered this before, but the Alliance doesn’t love that dealerships basically have agreed-upon hourly charges for warranty repairs given that, because of these laws, automakers have no choice but to pay the dealerships to do the service — dealers “effectively have a monopoly,” per Automotive News’ quote of the alliance’s letter. While this isn’t uncommon, the dynamic is that the automaker is the one providing the warranty, yet, at the same time, it can’t choose how that warranty is fulfilled. Dealers make a lot of money from warranty repairs and so are loath to part with that part of the business.

How the Task Force might change state laws, other than suing, is a little unclear at the moment. Dealers have taken this as yet another attack, and now the Alliance seems to be walking it back a bit, saying that it does “support the dealership franchise model. Period. Full stop.”

I guess we’ll call it a draw!

Incentives Are Going Down As Automakers Decide To Retreat To Margins Over Market Share

When danger reared its ugly head, he bravely turned his tail and fled.

If you’re interested in the real nitty gritty of the automotive world from a dealer’s perspective, I recommend reading the CCar Dealership Guy Newsletter, which talks today about incentives, which are going away. As CDG points out, incentives rose pre-tariff to $2,900-per-unit in Q1, only to drop to $2,700-per-unit last quarter.

Even worse for consumers, VW, Land Rover, Volvo, BMW, and the Stellantis brands all dropped incentives by large margins as they tried to absorb rising costs related to tariffs. Automakers are trying to preserve profits and not necessarily gain new customers. Obviously, if everyone is dropping incentives, then there’s a cartel effect like the one we saw during the pandemic (sometimes called Seller’s Inflation).

Not everyone is there, yet, as pointed out in the newsletter:

But here’s the problem, it’s become a game of chicken.

“Automakers likely still feel they are in a war for market share, no one wants to blink first,” Cox Automotive’s executive analyst Erin Keating told me.

OEMs want to protect margins while dealers manage the affordability gap. But inventory doesn’t lie.

“We’ve never been in a history that sits by and says, let’s just let it age,” Keating said. “If sales continue to plateau, I think we’ll see incentives come back.”

CDG contends that this isn’t going to work long term, and by that, Q4 the market should be friendly again to buyers as cars pile up on dealership lots, causing automakers to retreat from margin and get back into the business of selling more cars. Why? Dealers have to play, via floorplan loans, for a car every month it sits on the floor. Eventually, you just start losing money as well as customers. Ford is the real outlier here, as it continues to push for share.

One rabbit stew coming right up!

Japanese Automakers Are Caught In A Trade War That Makes No Sense To Them

You can’t expect to wield supreme executive power just because some watery tart threw a sword at you.

Did anyone vote for this specific outcome? Were people specifically mad at, like, Toyota (the brand for which most Americans are loyal), and wanted Japan to be punished? I have talked at length already about the strangeness of President Trump’s fixation with Japan, but it’s the reality of the moment, and Japan’s automakers will have to face it.

How are automakers doing this? For the moment, Japanese companies are absorbing price impacts, but that also can’t last forever, as Nikkei Asia points out:

Japanese carmakers have been resorting to steeper price cuts in the U.S. to retain market share, said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

While some of the disparity in value and volume “simply reflects the strengthening of the yen as US-bound exports are typically invoiced in dollars,” Thieliant wrote in a note, “most of it is due to price cuts, with carmakers seemingly absorbing nearly all of the 25% US tariff imposed by Trump in April in their margins.”

Despite being the most important U.S. ally in Asia, Japan has made little progress in persuading Washington to lower its tariffs. Trump has been determined to narrow the U.S. trade deficit with Japan, which stood at $68.5 billion in 2024, and therefore refused to scrap the new tariffs on Japanese autos.

As the negotiations drag on, Japanese carmakers are starting to raise prices in the U.S. and preparing to boost American production, as absorbing increased costs from the tariffs seem to have reached their limit.

What happens next is a little up in the air while everyone waits for the outcome of Japan’s upcoming elections. As we all know, executive power derives from a mandate from the masses, not some farcical aquatic ceremony.

President Trump’s War On The Environment Takes A Surprising Turn

Nobody expects the Spanish Inquisition!

Yes, it’s not from Holy Grail but, instead, Flying Circus. I bet you didn’t expect that. Just like no one expected…the president to cut off the subsidies from Elon Musk’s company. There was always the threat that President Trump would nix the EV tax credit, which happened. But by retroactively removing penalties for violating CAFE standards and killing California’s Clean Air Act Waiver, Elon Musk may have just lost a key source of income.

The rub here is that automakers, once encouraged to pursue a green future with electric cars through regulations, are retreating to meet market demand for trucks, which automakers can can now build without fear of penalty, as the Trump administration has pretty much scrubbed CAFE standards. While automakers generally lobbied to keep the EV tax credits, the removal of CAFE penalties provides a lot of upside to companies like GM and Stellantis.

That is what’s happening, according to Reuters, and even better, it’s retroactive for three years.

The tax and budget bill approved by Trump ends penalties for not meeting Corporate Average Fuel Economy rules under a 1975 energy law.

The National Highway Traffic Safety Administration said in a letter to automakers seen by Reuters it is working on its reconsideration of fuel economy rules. The decision is one of a number made by Washington to make it easier for automakers to build gasoline-powered vehicles and to make electric vehicle sales more costly.

Last year, Chrysler parent Stellantis paid $190.7 million in civil penalties for failing to meet U.S. fuel economy requirements for 2019 and 2020 after paying nearly $400 million for penalties from 2016 through 2019. General Motors previously paid $128.2 million in penalties for 2016 and 2017.

Tesla doesn’t make any gas-powered vehicles, so this doesn’t help it at all. What Tesla does make is about $2.8 billion globally from regulatory credits earned by offsetting these kinds of penalties. Under this new system, it’s not clear how much money Tesla might make from credits in the United States. Additionally, there’s some talk in Europe about removing these credits from the automaker.