Dealers, long protected, face days of reckoning

Roland Jones • Profile • E-mail

Amid the myriad problems facing the Big Three automakers, one is often overlooked — a costly, inefficient network of dealers.

But while thousands of dealers are likely to disappear in coming years, there is little the auto industry can do to make its distribution more efficient, because dealers are well-protected by a byzantine network of state franchise laws.

The laws prevent automakers from owning dealers or selling directly to members of the public, ensuring that vehicle prices get a minimum markup before they reach consumers.

“They can’t take an order over the Internet for a made-to-order car like Dell because the states have made it illegal,” said Peter Morici, professor of business at the University of Maryland. If automakers could sell over the Web they could probably reduce inventory costs and “lop something like $1,000 off the cost of making one of their cars," he said.

Consumer advocates long have criticized state laws that protect the dealers, saying they are anti-competitive and should be abolished.

“We’d like to see them go away, and that would immediately open up online sales of automobiles,” said Mark Cooper, director of research at the non-profit Consumer Federation of America. “Right now you have a bloated distribution network, and so squeezing that network down would lower costs, and from an environmental point of view when people buy online instead of in the showroom they won’t have their arms twisted to buy more horsepower.”

But don't look for that to happen anytime soon.

For one thing, auto dealerships are among the most powerful business groups in each state. They are politically well-connected and have been diligent in protecting the franchisee system or any attempt to cut them out of the car selling process, Morici said.

Dealers defend the system, including laws that prohibit manufacturers from unfairly canceling or refusing to renew a dealer’s franchise.

“Car dealerships are massively credit-intensive enterprises, and they are seen by lenders as more of a risk without state laws to protect them from being closed down,” said Bailey Wood, a spokesman for the National Auto Dealers Association.

He said the average individual dealership typically invests $11 million into a business over its life.

“That money goes into inventory, buildings, tools and personnel,” Wood said. “So if you suspended state franchise laws in general it would threaten the nation’s economic stability.”

In any case, the economy and the dire prospects of the industry ensure that many dealers will go out of business in the near future.

NADA predicts that this year alone will see the demise of 900 of the nation’s 20,700 dealerships. A report from consulting firm Grant Thornton LLP says 3,800 dealers, or one in five, will need to close by the end of 2009 as weak sales, increased operational costs and the credit crunch continue to take their toll.

In the survival plans GM and Ford submitted to Congress this month, the nation’s two largest automobile manufacturers said a fundamental part of their bid to stay in business is a reduction in their dealer networks.

GM said it will focus its U.S. resources around a smaller, more profitable set of nameplates, cutting the number from 48 to 40 by 2012, and consolidate its dealer network to 4,700 locations by 2012, compared with 6,450 currently and 8,138 less than a decade ago.

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