Jim witnesses the dealership's British owner, Peter Thorndyke, being unnecessarily abusive towards a white Volkswagen Beetle that rolls into the showroom, and defends the car's honor, much to Thorndyke's displeasure.The following morning Jim is shocked to find that the car is parked outside his house and that Thorndyke is pressing charges for grand theft.
Tennessee, however, believes certain inanimate objects to have hearts and minds of their own and tries to befriend the car, naming it Herbie.
Jim's feelings about his new acquisition soon improve when it appears Herbie is intent on bringing him and Carole together.
Despite Tennessee's best efforts, it looks as if Herbie will be unable to start the return leg of the race the following morning.
Thorndyke then arrives and claims that this makes him the new owner of the car.
Wu regretfully tells Jim of the wager and that in accordance with its terms this is true.
Thorndyke, thinking he is Herbie's new owner, gloats to Jim about what he's going to do to Herbie and kicks Herbie's front fender, and punches Jim, but Herbie then unexpectedly lurches into life and chases Thorndyke from the scene, showing he is more than willing to race on.
Jim accepts, and despite Thorndyke's underhanded tactics, he and Herbie take victory.
Over the next few months they go on to become the toast of the Californian racing circuit, while Thorndyke suffers increasingly humiliating defeats.
By the time Thorndyke arrives to collect Herbie, he is nowhere to be found, and Jim sets off into the night hoping to find Herbie and make amends before the car is seized by Thorndyke's goons.
After narrowly escaping being torn apart in Thorndyke's workshop, and a destructive spree through Chinatown, during the Chinese New Year's parade, Herbie is about to launch himself off the Golden Gate Bridge when Jim reaches him.
A heated argument between Jim and Thorndyke is settled when Carole persuades Thorndyke to drop the charges if Jim buys the car on a system of monthly payments.