By definition, geofencing is a technology that can register when someone enters a predefined geographical area. This is measured by GPS or RFID. Some marketers have begun using geofencing as a way to target coupons and ads at people within a certain distance of their dealership.
Google currently does not offer a direct way to advertise using this through adwords. They do, however, offer developers an API for creating geofences. Since use of geofences is currently limited to user-installed apps, the possibilities are still somewhat limited, but 3rd party companies offer ways to make use of geofencing to deliver deals to nearby customers.
I’m not sure when this technology is going to become available for everyone, but it would be pretty impressive to be able to serve an ad or display a coupon for your dealership when a customer is nearby, or better yet, when they’re in the waiting room for a competitor.