Wednesday, December 17, 2008


As Congress considers whether to provide emergency assistance to the Big Three automakers, a number of advocates have called for tying such aid to significant reforms by the automakers. It is widely agreed that they must improve the fuel economy of their vehicles and produce them more efficiently. One industry reform, however, that has been little mentioned would be to improve the U.S. automaker distribution system. This will require federal preemption of the state laws that prohibit car manufacturers from selling cars directly to consumers, including over the Internet.

Over the years car dealers have succeeded in persuading state legislatures to pass a wide array of anti-consumer laws that protect car dealers at the expense of consumers, and ultimately at the expense of the health of the U.S. auto industry. Any package to aid auto makers should include federal preemption of these laws.

Perhaps more than any other industry, automobile dealers have succeeded in using public policy to limit competition. From laws that effectively prohibit new dealerships within a designated radius of an existing dealership selling the same make auto, to restrictions on warranty repair work or offering other auto-related services to consumers, including financing, insurance, and parts, to prohibitions on automobile manufacturers selling cars themselves - car dealers epitomize anti-consumer protectionism.

Automobile franchise laws prohibit manufacturer-owned auto dealers from selling cars in approximately 40 states. And direct sales of automobiles by manufacturers and online sellers without a franchise presence are prohibited in every state. After the emergence of the Internet in the mid-1990s, car dealers in several states sought successfully to toughen state franchise laws even more, to make it virtually impossible for manufacturers to sell cars directly over the Internet, rather than through locally franchised dealers.

Not only do these laws inhibit competition, they result in an enormously inefficient and high-cost distribution system. Indeed, there are potentially huge savings in allowing car manufacturers to sell directly to consumers. For example, if consumers could go online to choose the car and the components they want (as many consumers do now when buying a computer), the industry could cut out billions of dollars in costs related to inventory and sales. One Yale University study found that the average customer using an online service to buy an auto pays approximately 2 percent less than someone buying in person from a dealer. The savings would likely be even greater if consumers could go online and buy a car directly from the manufacturer. Doing so would dramatically reduce the costs associated with buying a car, including car dealer commissions and profits, and would reduce inventory costs as car companies would be able to produce more in response to actual consumer demands. For consumers, not only would they save money, but they would be able to better customize the exact features and extras they want on their car, all from the comfort of their home computer.

Moreover, enabling a direct Internet sales model is likely to benefit the Big Three more than foreign car makers, because consumers will be able to get much quicker online delivery from U.S. producers as they produce a much larger share of vehicles in the United States, close to consumers.

Auto dealers and their trade association, The National Automotive Dealers Association, use a number of spurious arguments to defend their protectionist claims, principally that they protect consumers from unscrupulous manufacturers. Yet there is no evidence of this, particularly with existing federal regulations regarding warranties and recalls.

Car dealers also claim that there is no need to allow Internet sales of cars from manufacturers, because while consumers might purchase computers and books online they won’t purchase cars online. But the evidence suggests otherwise. Not only have consumers learned to shop online for just about everything else, but according to a 2008 Capgemni study, around 20 percent of U.S. consumers indicated that they would consider buying a car online, a number that has increased in recent years. As the study noted, “The growing interest in online vehicle buying stems from frustration with the dealer negotiation process, consumers’ increasing web sophistication and their greater comfort level with making online purchases.” Indeed, the study reports that only 40 percent of U.S. consumers are satisfied with the process of buying a car from a dealer. And if U.S. consumers could actually buy cars online it’s likely that many more than 20 percent would eventually favor and use the process. Besides, if consumers don’t want to buy cars online from the manufacturer, why are car dealers so opposed to it? Jettisoning the inefficiencies of the past is crucial to rebuilding the economy. By including a preemption of state auto dealer franchise laws and allowing direct sales of cars over the Internet, Congress can help not only the Big Three, but the car buying public.

Robert D. Atkinson is president of the Information Technology and Innovation Foundation. Mark Cooper is director of research of the Consumer Federation of America.

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