What happens when half-century-old state auto franchise laws clash with the Internet?

Not a lot.

And that’s a problem, according to some consumer experts.

“The business models that would serve consumers best are illegal,” says Mark Cooper, director of research at the Consumer Federation of America.

State franchise laws govern auto retailing within a state. Each state determines the standards a local dealership must meet before it can sell cars to consumers. Only franchised dealers can sell cars as a business. Private owners, of course, can sell their own cars.

Most state franchise laws:

  • Prohibit manufacturers from selling cars directly to the consumer.
  • Prohibit anyone but a franchised dealer from selling cars over the Internet.
  • Prohibit dealers from delivering cars across state lines.

“Auto dealers have exclusive territories. State laws regulate with incredible amount of details how manufacturers can sell cars in the states,” Cooper says.

“We think if you get rid of these restrictions you get lower prices and you get better services.”

How so? It would open up the retail auto market and allow more companies to sell cars over the Internet.

The power of the market

“The Internet is the best example of the market at work,” says Lucas Mast, a researcher in information studies for the Cato Institute.

“Any time you’ve got more choices, you’re going to end up with more opportunities for consumers and lower prices.”

Right now, independent companies looking to get in the online auto business have limited options.

“They’re very constrained. They have to try to squeeze in under these laws,” Cooper says.

Some sites act as virtual auto lots, providing consumers with information on vehicles and then referring customers to dealers for sales.

Other sites talk about selling cars directly to consumers, but in essence they add a second middleman to the sales process and a second markup to the price. In such a scenario, a vehicle would travel from manufacturer to dealer (price markup No. 1) to Internet company (price markup No. 2) before making its way to the consumer.

“Everyone thinks the Internet should drive down costs,” says George E. Hoffer, an economics professor at Virginia Commonwealth University.

“The trouble is we have institutions in place that preclude any viability of cost savings. Nobody can bring any real savings.”

Car buyers seek more options

Consumers, of course, are up for anything that would drive down auto prices. They also seem eager for more auto-buying options. For example, many new car shoppers would like to buy their vehicles directly from manufacturers, according to a recent study by J.D. Power and Associates.

Nearly half of the 400 Internet-savvy car shoppers surveyed would choose to purchase an auto directly from the factory even if it didn’t save them any money. With a manufacturer-direct sale, they would be able to get the exact model with the exact features they wanted. Plus, they could avoid all the back-and-forth negotiations at the dealership.

If a factory-direct sale would save them $3,000, more than 70 percent of those surveyed would be willing to buy straight from the manufacturer.

Allowing a manufacturer or a dealer to sell cars across state lines would also bring more competition to the market and give consumers more choices.

“If I want a Ford Mustang and I want the best price on it and it shows up on my door, I don’t care if I got it down the street or if I got it from across the country,” Mast says. “The whole point of this process is to give customers exactly what they’re looking for at the lowest price.”

Right now, a consumer could jump on the Internet and find the car they’re looking for at an out-of-state dealership. But there’s no way for the dealer to deliver the car.

“Even if you find a dealer out-of-state willing to take a lower markup on the car, state franchise laws prevent the dealer from coming in and selling it to you,” Hoffer says. “You have to go and get it.”

Dealers tout their services

But dealers point out that cars are different from books, compact discs, computers and other items bought over the Internet. Consumers could ship back those items to an out-of-state company if there were any problems. Not so with a truck or car.

“Gateway can ship UPS. You can’t send a car that way. We’re not there yet,” says Mike Morrissey, a spokesman for the

National Automobile Dealers Association.

Plus, new cars need servicing. State franchise laws set operational standards for dealerships to ensure they provide consumers with adequate service centers in local communities.

“This is a fairly unique product. It requires service after the sale. It’s also a huge investment,” Morrissey says.

“Customers don’t really want to buy a car sight unseen. They want to test drive it. They want to know there’s a place in the community for follow-up services and to get their questions answered.”

Morrissey also points out that the Internet is already having an impact on how cars are sold. Of the nation’s 22,000 auto dealers, 84 percent have Web sites and many sell cars online. He does not believe allowing Internet retailers to sell cars would bring big cost savings to consumers.

“You’ve already got 22,000 dealers. I don’t think a few Internet retailers are going to add significantly to the competitiveness of the market,” Morrissey says.

“This is an extremely competitive marketplace. Just look at the transaction price on a new car. It’s often a break-even price for a dealer or a loss. It’s hard to imagine a more competitive marketplace.”

Less regulation, lower prices

But some consumer experts disagree. Cooper estimates that consumers could save $1,000 to $2,000 on car purchases if state franchise laws were lifted. A loosening of the laws could also open up a broader market for servicing cars after the sale, bringing more choices and lower prices for consumers.

“There will be a huge market in services that will expand to meet consumer needs,” Cooper says.

Dealers are keen to keep the auto retailing and servicing business just the way it is. In the past year, nine state legislatures have tightened auto franchise laws at the urging of local car dealers.

“The car dealership is the largest small businessman left,” Hoffer says. “The dealerships are just ingrained in the local body politic. They’re very strong at the state and local level.”

Because of this, Hoffer believes any change in the retail auto business would have to come from the federal level. A congressional moratorium on state franchise laws as they apply to Internet retailing of autos would do the trick. This ban would be similar to the one that prohibits taxes on the Internet.

“I think dealers are most vulnerable at the federal level because the new technology crowd is relatively strong there,” Hoffer says.

“No matter how strong franchise laws look today, I think they are one rider away from being a non-factor.”

Until such a day, online auto sales will continue to be ruled by the dealer up the street.

— Posted: Nov. 8, 2000

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