Automotive regulatory trends impacting the dealership industry

Franchise automobile dealerships are navigating one of the most complex operating environments in recent memory. From regulatory scrutiny and evolving technology to direct-to-consumer sales models and shifting emissions policies, dealerships face mounting pressures that directly affect profitability, compliance obligations and long-term business strategy. These developments reflect broader automotive regulatory trends shaping the future of the industry. While these challenges are significant, they also highlight the continued importance of the franchise dealership system and the role dealers play in serving consumers and supporting the automotive ecosystem.

On this month’s episode of Up to Speed, Mike Mader, principal with Baker Tilly’s dealership advisory services team, is joined by Dan Ingber, senior vice president of regulatory affairs at the National Automobile Dealers Association (NADA), to examine the complex automotive regulatory trends and market forces shaping today’s dealership environment. Their discussion explores key issues affecting franchise dealers, including direct-to-consumer sales efforts by manufacturers, evolving emissions and electric vehicle (EV) policies, federal regulatory enforcement and the growing role of artificial intelligence (AI) in dealership operations. Together, they outline what these developments mean for dealers and how businesses can stay compliant, competitive and prepared for continued industry change.

The franchise system under pressure

One of the most significant issues confronting dealers today is the growing push toward direct-to-consumer vehicle sales. Some manufacturers and new market entrants have explored bypassing the traditional dealership network, arguing that selling vehicles directly to buyers could simplify the purchasing process or reduce costs. However, the franchise system, long embedded in state law across the United States, exists for a reason. It balances the relationship between manufacturers and dealers while protecting consumers and local businesses.

For more than a century, franchise laws have ensured that manufacturers cannot compete directly with their own dealer networks or arbitrarily terminate franchises after dealers invest heavily in facilities, inventory and staffing. These laws also foster competition among dealers of the same brand, which can ultimately lead to better pricing and service options for consumers.

New ventures attempting to establish direct sales models have prompted legal challenges in several states. Dealer associations and industry advocates argue that when manufacturers create separate entities to sell directly to consumers while maintaining existing franchise networks, they undermine the purpose of franchise laws. These legal battles will likely continue as the industry evolves and new distribution models emerge.

The economic case for dealerships

Beyond legal protections, the franchise model provides measurable economic benefits. Studies examining vehicle distribution costs have found that the dealership network can be more cost-efficient than a centralized direct-sales approach when the full scope of services is considered. These services include maintaining inventory, marketing vehicles, providing financing options and delivering ongoing maintenance and warranty support.

Dealerships also provide a critical infrastructure for vehicle recall and service campaigns. Because dealers maintain long-term relationships with customers and operate local service facilities, they can quickly address safety issues and perform warranty work. In a purely direct-sales model, manufacturers would need to replicate this nationwide infrastructure at a significant cost.

Over-the-air technology and subscription models

Another area generating debate within the industry is the rise of over-the-air (OTA) vehicle updates and software-based subscription features. Modern vehicles increasingly function as connected devices, allowing manufacturers to deliver software updates remotely.

Many in the industry support OTA updates when they improve vehicle safety, reliability or functionality without additional cost to the consumer. Remote fixes can reduce service visits and address safety concerns more quickly.

However, subscription-based features, such as software-enabled services that require ongoing payments, raise new questions about revenue distribution and consumer acceptance. Dealers argue that when manufacturers generate recurring revenue from vehicle features, the dealership network should share in that revenue steam because dealers remain responsible for selling, servicing and supporting those vehicles.

There is also concern about consumer sentiment. Many buyers may resist paying recurring fees for features that are already installed in the vehicle hardware, such as heated seats or navigation upgrades.

Electric vehicles and regulatory alignment

Electric vehicles (EVs) represent another major shift reshaping the automotive landscape. While EV adoption continues to grow, policymakers and industry stakeholders remain divided on the pace at which the transition should occur.

EVs accounted for roughly 7% of new vehicle sales in the United States last year, and that percentage is expected to rise over time. However, many regulators previously proposed aggressive adoption targets that exceeded current consumer demand and infrastructure readiness.

Two factors largely drive consumer demand for EVs: affordability and charging infrastructure. EVs often carry higher upfront costs than comparable internal combustion vehicles, and public charging networks remain uneven across the country. When regulatory mandates push production ahead of these market realities, dealers can end up with inventory that sits unsold on their lots.

Dealerships themselves have invested heavily in preparing for EV sales and service. Many have installed specialized charging equipment, upgraded facilities and trained technicians – investments that can reach millions of dollars for larger dealer groups. Ensuring that regulations remain aligned with consumer demand is critical so that these investments can produce sustainable returns.

The continuing role of federal oversight

Regulatory scrutiny remains a central issue for dealers, particularly from agencies such as the Federal Trade Commission (FTC). Proposed rules governing vehicle sales practices have sparked debate within the industry, with dealers arguing that certain proposals impose excessive administrative burdens without delivering meaningful consumer benefits. These types of rulemaking efforts are part of broader automotive regulatory trends that dealers must monitor closely as policies evolve.

For example, previous regulatory proposals would have required dealers to provide detailed pricing disclosures and documentation at extremely early stages of the sales process, including during initial online inquiries. Dealers argued that such requirements would complicate transactions and increase costs for both businesses and customers.

While some of these proposals have been challenged in court or revised, regulatory oversight is unlikely to disappear. Instead, enforcement efforts are expected to focus on clear violations such as deceptive advertising, improper packaging of optional products or discriminatory lending practices.

Artificial intelligence enters the showroom

Artificial intelligence (AI) is another emerging factor reshaping dealership operations. Dealers are exploring AI tools to streamline customer communications, improve inventory management and enhance marketing strategies. At the same time, AI introduces new legal and compliance considerations.

Data protection is a major concern. When employees use AI platforms that process dealership data, businesses must ensure that confidential information is not inadvertently shared with external systems. Contractual agreements with technology vendors must also clarify who owns and controls the data generated by AI tools.

AI applications in lending decisions or hiring practices may also raise regulatory issues if algorithms inadvertently produce discriminatory outcomes. As AI evolves, dealers must remain vigilant about compliance with privacy laws, fair lending regulations and other consumer protection standards.

Staying engaged and prepared

Despite these challenges, the outlook for dealerships remains strong. The franchise model continues to play a vital role in connecting manufacturers with consumers while supporting local economies. Dealers provide expertise, service infrastructure and competitive marketplace that help customers navigate increasingly complex vehicle technologies.

For dealership leaders, the key to success lies in staying informed and engaged. Monitoring regulatory developments, maintaining strong compliance programs and participating in industry advocacy efforts, whether locally or nationally with NADA, can help dealers shape policies that affect their businesses.

The dealership network remains an essential pillar of the industry. Those who adapt to new technologies while continuing to emphasize customer service, compliance and operational efficiency will be best positioned to thrive in the years ahead.