Business and Regulations,State Government

Bill Would Revise But Not Relax Auto Dealer Regs

S.B. 438 has dealers and car makers at odds

Apr. 26th, 2011
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RALEIGH — If you ever have wondered why you can’t order a new car online from the factory with a few mouse clicks, blame the vehicle franchise laws present in every state. The franchise law requires every new car purchase to be processed by a licensed, in-state dealer — a regulatory system dating from the 1950s.

Today, the Senate Commerce Committee is scheduled to consider Senate Bill 438, sponsored by Sen. Tom Apodaca, R-Henderson, a measure that would revise the law without easing many of its restrictions.

Supporters of S.B. 438 say these changes are needed to keep pace with evolving market conditions in the auto industry and improve consumer choice. But opponents say the reverse is true, and that S.B. 438 would reinforce a vehicle sales system that protects dealer networks from new distribution channels and limits the entrance of new dealerships and the relocation of existing ones by setting geographic boundaries on retail locations. By mandating that only franchised dealers can sell new cars, state laws prohibit manufacturers and online retailers from selling directly to consumers.

The debate over S.B. 438 highlights a longstanding criticism of the vehicle-franchising system, which provides some protections to dealers and manufacturers that translate into higher prices in the showroom. The franchise law gives dealers exclusive territories to market specific brands. In exchange for this exclusivity, car makers often dictate aspects of dealerships’ business practices, even including the signs they must purchase, the advertising they must run, and the design of their facilities. These rules increase sticker prices with questionable benefits to consumers.

North Carolina passed its motor vehicle and manufacturing licensing law in 1955. Since then, the law has been revised regularly. One of the most significant changes was made in 1983, the relevant market area provision, a regulation setting geographic boundaries on the location of car dealers. The RMA provision explains why, for instance, two Ford dealers are not allowed to build showrooms across the street from one another. It’s against the law.

Manufacturers’ perspective

Henry Jones Jr., a lobbyist for the Alliance of Automobile Manufacturers, an advocacy group representing 12 domestic and foreign vehicle manufacturers, opposes S.B. 438. Jones told Carolina Journal that a provision would expand the powers of the Commissioner of Motor Vehicles to resolve disputes over a dealer’s rights or obligations in the franchise or a franchise-related agreement.

Existing law prevents manufacturers from discriminating against individual dealerships when they allocate vehicles for sale. But this bill goes further, Jones said, by requiring manufacturers to allocate “an adequate supply of vehicles by series, product line, and model to remain economically viable” and to base the supply on each dealer’s specific allocation needs and historic selling patterns.

Proposed signage and facility requirements would make it tougher for automobile manufacturers to manage their brands and inventories. If a dealer has purchased or leased a sign in the past 10 years that displays the manufacturer’s or dealer’s name, a manufacturer could no longer require that dealer to purchase or lease additional signs or replace a sign. The same would hold true for dealers that have relocated or made facility alterations costing more than $100,000 in the past 10 years.

“We are selling a brand,” Jones said, and “if a dealer has an outdated facility, signage, or marketing materials, a manufacturer should be able to provide incentives for dealers to make these changes.” The commissioner would have the power to determine what is “reasonable.”

Dealers’ view

The North Carolina Automobile Dealers Association supports S.B. 438. John Policastro, general counsel for NCADA, told CJ that manufacturers benefit by having local franchised dealers control the retail marketing and distribution of new car sales.

Policastro said dealers invest millions of dollars into their inventory and facilities and shouldn’t be forced to make costly facility upgrades or relocate every few years. Also, dealers should have fair allocation of vehicles based on their historical sales data.

Cost of regulations

The franchising system raises the cost of new cars and repair services and erodes consumer choice. According to a 2009 report from the Economic Analysis Group (EAG) in the Antitrust Division of the U.S. Department of Justice, “the cost of the auto distribution system in the United States has been estimated as averaging up to 30 percent of the vehicle price.”

Even as competition has forced retailers and other businesses to shift their business models to cut distribution costs, maintain lean inventories, and respond to emerging consumer preferences, new auto dealers benefit from increased regulations that intervene in the private contract between auto dealers and car manufacturers.

In a 2005 John Locke Foundation Spotlight report, JLF legal and regulatory policy analyst Daren Bakst said the market conditions today and in the 1950s are very different. When states first began regulating auto distribution in the 1930s, there were only five passenger-car manufacturers in the U.S., and three of them produced more than 95 percent of all passenger cars sold in the U.S. As foreign competition has increased, domestic automakers have seen their market share plummet both in the U.S. and abroad.

In 1990, General Motors’ share of U.S. new car sales was 36 percent, but that number had fallen to 19.1 percent by May 2008, according to Automotive News. In the first quarter of 2008, Toyota took the global sales lead from General Motors.

Until recently, it was very difficult for local dealerships to receive a franchise from more than one manufacturer, limiting a dealership’s ability to market a variety of cars to customers. Now, many dealers carry automobiles from several domestic and foreign manufacturers, making it difficult to justify laws giving individual dealerships exclusive geographic territories.

Bakst noted that a sharp reduction in the number of franchised new car dealers gives an advantage to those remaining in business. In 1956, there were approximately 40,000 franchised dealers nationwide. In 2009, National Automobile Dealers Association data showed the number of new car dealers had fallen to 18,458. NADA says there were 600 new-vehicle dealerships in North Carolina in 2009, generating $13.7 billion in new-vehicle sales and 13.3 percent of the state’s total retail sales.

“Government should not be in the business of restricting economic freedom and creating special business privileges,” said Bakst.

Karen McMahan is a contributor to Carolina Journal.