By on February 1, 2009

As a man with his finger on the pulse of the autoblogosphere, I can report that there’s a groundswell of critical coverage of The Big 2.8’s credibility. TTAC is no longer a lone voice. Questions are being asked. Issues raised. One of the most critical: why can’t Chrysler, GM and Ford just ditch their unwanted brands? Answer: state-by-state dealer franchise laws that heavily favor the dealers—thanks to their political clout. The Big 2.8 can’t live with ’em, they can’t afford to live without ’em. The Colorado Statesman’s Jerry Kopel does some deep diving into this devilish dilemma and provides some important insights on this life-or-death (well, C11 anyway) issue. 

Car dealers are “local,” known politically to legislators both in Colorado and other states. Whatever Lola wants, Lola gets. The same is true for locals, especially fundraising and fund-giving locals. In 1937, Colorado was among the first states to start interfering in arrangements between dealers and manufacturers. It is still on the books as CRS 112-6-201 to 213, the Antimonopoly Financing law. In 72 years, just one section has been amended.

Inactions have consequences. Here’s the money shot. 

“The sale and distribution of motor vehicles affects the public interest and confidence of the purchaser in the retail dealer from whom the purchase is made and the expectancy that such dealer will remain in business to provide service for the motor vehicle purchased.

“Proper motor vehicle service is important to highway safety and

(1) the manufacturers and distributors of motor vehicles have an obligation to the public

(a) not to terminate or refuse to continue their franchise agreements with retail dealers

(b) unless the manufacturer or distributor has first established

(i) good cause for termination or noncontinuance of any such agreement,
(ii) to the end that there shall be no diminution of locally available service.”

The manufacturers have the burden of showing “good cause,” but even if they do, they also have to show “no diminution of locally available service.”

(Note to the drafting office: “Good cause” is not defined in the statute. “Good faith” is.)

As a result, car dealerships have gained territorial monopolies (called geographic areas) from their manufacturers, fending off anyone who might want to muscle in by opening a competing franchise. So if Chrysler merged with Ford, who gets to sell the Chrysler cars? Does territorial integrity mean Chrysler franchises lose out, or that Ford franchises must defend themselves from lawsuits across the country?

And if that’s enough to make it impossible (i.e., extremely expensive) for an automaker to terminate a dealer and be done with it, Colorado is strengthening its laws in anticipation of just such an eventuality.

Romer’s SB 91 is assigned to the Business Affairs Committee. Here’s a sampling of the various amendments in the bill:

1. The manufacturer “who disapproves of a sale or transfer of a franchise shall reimburse the prospective purchaser and seller for any actual costs incurred in attempting to sell or transfer the franchise.”

Which means that there is no down side for the seller or purchaser. Payments must be made for lawyer or accountant fees. No wording has been added requiring “good faith” on the part of the potential purchaser or seller.

2. Temporary ownership of the franchise.

Present law allows the manufacturer two years to make the transition to another dealer. The bill cuts that in half to one year, providing less time to determine the credibility of applicants.

3. Termination of franchises.

Manufacturers with “good cause” are presently out of pocket for payments to the bad franchiser by statute. The Romer bill adds to that: The unused portion of the facility lease costs and “goodwill value.”

In addition, in order to prove “good cause,” manufacturers must submit a great deal of information for termination to occur. The Romer bill sets a time limit of 30 days for the manufacturer to submit that information.

Pragmatically, it would be smarter to pay off a bad franchiser than to try to meet the requirements of Colorado’s car franchise statute.

4. Squeezing the best out of ANY promotion.

A manufacturer, to save one franchise from going under in South Carolina, might offer a unique concept, such as offering trade-ins at no cost to either the dealer or the consumer. Under the Romer bill, the manufacturer would have to make exactly the same offer to each of its franchises in Colorado.

There’s no wiggle room here. A manufacturer operating in Colorado seeking to cull a brand or four or trim a dealer or 50 must either fork-out a fortune to terminate a franchise, slowly starve the dealers to death, convince Uncle Sam to write a law over-riding the state’s franchise regulations or file Chapter 11. Which would eliminate ALL this fancy footwork at a single stroke. Guess which one makes most sense?

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68 Comments on “Editorial: The Truth About Car Dealer Franchise Laws...”


  • avatar
    ca36gtp

    So, in a nutshell: More government, more economic problems.

    How shocking.

  • avatar
    Mike_H

    At some point, and that point is not now, it would be a far better business model for the manufacturers to own their sales outlets rather than rely on franchisees.

    The business and the consumer would benefit if the sales end followed something like the CarMax model- reasonably discounted prices, no haggling and consumer-friendly finance programs.

    The capital costs, of course, would be substantial, and not remotely possible to fund under the current economic situation. The benefit, however, would be a simplified selling system sized to market demand, elimination of sleazy sales practices (alright, maybe reduction), and a stabilized market value for new vehicles.

    Getting rid of franchise problems and UAW problems sure does make C11 look more appealing.

  • avatar
    Brian E

    I don’t understand why GM isn’t lobbying to get rid of these laws. And since you can’t sneeze without being under the influence of Congress (inasmuch as it affects the interstate market for Kleenex) why not give the Big 2.2 the bailout they deserve, not the one they need, by rewriting all of the franchise laws at the federal level?

  • avatar
    chuckR

    “Why not give the Big 2.2 the bailout they deserve, not the one they need, by rewriting all of the franchise laws at the federal level?”

    Because it is the states’ responsibility. I’m not eager to see further consolidation of Federal power. C11 it is.

  • avatar
    bluecon

    FDR’s New Deal also spawned the UAW and Fannie Mae/Freddie Mac. In the 30’s capitalism was seen as the problem and the end of capitalism was seen as the solution. FDR even pushed through a bill that was to nationalize industry(NRA) only to see it rejected by the Supreme Court. This after FDR confiscated all the gold from the people.
    History repeats.

    NRA Propaganda video from the ’30’s
    http://ca.youtube.com/watch?v=WJTxhz2dBCk

  • avatar
    carguy

    +1 to chuckR’s comment. If every time a state passed a stupid law the feds interfered, then the states would have lost all political independence and we’d be run by the feds.

    GM can either lobby the states or face the fact that C11 is their best long term solution.

  • avatar
    magoo

    Chapter 11 does not wipe the slate clean of the manufacturers’ civil liabilities, or their franchise agreements, or their responsibilities under state vehicle franchise laws. As creditors, dealers can invite themselves into the C11 process — acting individually or as part of local, state, and national dealer associations. And of course as multi-dealer corporations, as a large number of them are. Quite legitimately as their livelihoods are at stake.

    http://www.nysada.com/

    Since dealer-automaker relationships obviously involve interstate commerce, Congress has authority to enable legislation overriding the state franchise laws. And the states and the dealers have the right to challenge that legislation in the courts for a nearly unlimited number of totally legitimate legal and Constitutional reasons, which would take years.

    The only practical course in decreasing dealership count is the one currently taken: attrition, consolidation, and negotiated buyouts. (Looks like attrition will do a pretty good job this year.) It’s agonizingly slow and unbelievably complicated, naturally, but there it is.

    One of the interesting things about the current critique of the Detroit Three: For the most part it’s a bunch of guys standing on the sidelines screaming, “Look! Here is a magic wand that will solve all your problems! Why won’t you idiots pick it up and wave it?” There is no magic wand.

  • avatar
    PeteMoran

    @ magoo

    You’re reading too much into that NYSADA document which I’ve seen mentioned before.

    Chapter 11 parties are at the pleasure of the bankruptcy court appointed Judge. Debt seniority and the negotiated arrangements are ruled on by said Judge, which may or may not include arrangements to any unsecured creditors.

    From your link;

    “If the automaker rejects the (Franchise) Agreement, it will no longer be responsible for its obligations under the Agreement and the dealership relationship will be terminated. The damages incurred by the franchised dealer as a result of the rejection of the Agreement will be determined pursuant to relevant state law, and treated as a pre-petition general unsecured claim in the manufacturer’s bankruptcy case.”

    @ RF

    Is Richard Tilton available to comment?

  • avatar

    magoo :

    If/when The Big 2.8 file for C11, the state franchise laws will be rendered moot. Whatever claim dealers have as creditors will be crammed so far down– below Uncle Sam, pensions, bondholders, suppliers, etc.– as to be meaningless.

    Back in November (before a single bailout buck was exchanged), J.P. Morgan reckoned GM’s total debt was $43.3 billion at an annual interest expense of about $2.9b.

    Oldsmobile dealers got “just” a billion when GM was relatively healthy. There’s only so much you can “recover” from a dead man’s estate. Especially when you’re last in line.

  • avatar
    Luther

    Everything “bad” that happens can be traced back to the socialist/fascist POS FDR in the 1930s. The Federal Reserve Central Bank and FDR turned America’s strong and prosperous individuals into a bunch of crybaby beggars…I doubt Obama can get away with what FDR did…I don’t thing Americans today are quite that ignorant and weak…I have been known to be wrong though.

  • avatar
    magoo

    Robert Farago :
    “If/when The Big 2.8 file for C11, the state franchise laws will be rendered moot.”

    Not really true. State franchise laws apply to valid franchise agreements, naturally. In C11 franchise agreements are executory contracts: at the discretion of the debtor under the supervision of the court. The franchise agreements that stand remain subject to state franchise laws — where the court’s authority does not reach. So while C11 relieves the franchiser’s responsibilities to the discarded dealers at reset, all the ongoing obligations with the remaining dealers remain.

    As a practical matter, what this means is a C11 automaker has at best a one-time shot at re-aligning its entire national dealer network. For GM, the process includes a multiplicity of brands, duals, and channels — in a rapidly evolving (or devolving) market, and with millions of dealer-based consumer relationships. Early on C11 becomes by far the more expensive and cumbersome option — if fixing the dealer problem was the objective, anyway. As Colin Chapman liked to say, “what are we trying to do here?”

  • avatar
    dwford

    It seems that the terrible auto market, the tightening credit, and the lack of fresh product all are taking care of this problem slowly but surely.

    I would think that the Big 3 would be starting to be concerned about gaps in their retail coverage. For example, in the last year the Hartford CT market has lost Ford, Lincoln/Mercury, Mitsubishi, Suzuki, Saturn, Buick, Pontiac, GMC, Jaguar, Cadillac, Dodge.

    Anyone interested in those brand have to travel outside the Hartford metro area to one of the smaller mom and pop stores out in the sticks. Can’t be good for business.

  • avatar
    michaelC

    @Luther

    Your purely political rant is off topic and has nothing whatsoever to do with autos or the industry. There are many places in the Internet where you can work through your issues with the new administration.

    @Farago
    IMO, purely political posts are a real threat to TTAC. I have taken Luther’s words at face value — but if he is a troll, well that is a bad sign for the future of discourse at this site.

    Michael

  • avatar
    John Horner

    “Everything “bad” that happens can be traced back to the socialist/fascist POS FDR in the 1930s.”

    If FDR’s policies are the root of all problems, then we must conclude that the US was in terrific shape before he was elected, right?

  • avatar
    MBella

    It’s true that the dealers own the states. A year or to ago I was considering selling cars part time. When I looked into getting a dealer license here in Michigan, I found out about all the rules you have to satisfy. Some of the stupid rules include:

    A parking lot that can hold at least 15 cars, with a 150 square foot office,

    The dealer has to hold big dealer hours, 7am-8pm Monday and Thursday, 7am-6pm Tuesday, Wednesday and Friday. (If I was doing it part-time, how can I do this? Why can’t you be open when you want to be.)

    You also can’t be open on Sunday’s.

    Manufacturers can not own dealerships.

    The big dealers lobbied for these rules, to keep others out, and to make sure they have a grip on the market.

  • avatar
    MBella

    John Horner If FDR’s policies are the root of all problems, then we must conclude that the US was in terrific shape before he was elected, right?

    FDR made the depression longer. He didn’t help the situation one bit. The country would have never recovered if it was not for the massive militarization during WWII, and the Brenton Woods agreement signed after wards, where rebuilding nations agreed to use the US Dollar as their reserve currency.

  • avatar
    ruckover

    I have a few problems with this thread, and not centered on the “pos fdr” comment–Hoover did so much better between the crash of ’29 and the ’32 election (I know FDR did not end the great depression, but when he took office, there was 25% unemployment, and even in 38 which was a terrible year it was still down to 13%).

    While we have all been to dealerships that deserve to go out of business because of their rotten practices, I don’t think we really want the franchiser to simply end relationships with the franchisee. These businesses have huge investments in their dealerships, and as long as they have done nothing wrong, why should the manufacturers simply get to throw out the old contracts?

    I understand that it makes far better business sense for there to be fewer dealerships, but a contract does seem to be a contract, and it takes two parties who agree to a change to amend a contract.

    Finally, there is a reason politicians support locals . . . they support the local populace. It seems to me that every small-town dealership has helped local charities, fundraisers, food-drives, high school homecoming parades, and more. If all of these small, inconvenient dealerships were to be cut off from their manufacturers, I am sure that the pols would hear about it. Not all influence is fiscal.

    Just a couple of question. Should all franchise laws be amended so the franchisee has fewer protections, or is it just the auto dealers? Also, while we all gripe about the over-reaching government, doesn’t it seem that it was a lack of governmental oversight that allowed the housing and banking issues that are wrecking our economy?

  • avatar
    GS650G

    This goes a long way towards explaining why customers are treated like toilet paper. There really isn’t any danger of Ford or GM or anyone else pulling a franchise even if the salesman grabs your wife’s ass and feels up your daughter.

    well you can’t get blood from a stone and when Cry-sler turns to stone it’s going to be awful to watch.

  • avatar
    Dynamic88

    Chrysler seems to have got rid of Plymouth with no problems. I would think GM and Ford could do the same to some extent. Where sales channels are combined, giving the ax to one or two brands shouldn’t be a problem, should it?

    As an aside, there is a Chevy dealer here in MI open Sundays.

  • avatar
    Steven Lang

    OK, ordinarily I stay as far away from the political realm as Robert does from a Chevy Aveo. But in this instance, I’m going to make an exception.

    Hobbyists are an absolute cancer on the retail side of this industry. If you want to be a ‘dealer’ you need to have it operate like an established business.

    That should include…

    1) Having set hours: If you can’t be open for your customers on a regular basis you shouldn’t be in business.

    2) Physical place: Some folks want to operate out of their house. So long as they have the confidence and experience needed to make that work, that’s fine. In our country we should be encouraging folks to start there own businesses and have minimal costs… at the beginning. But you also should have a few other items as well.

    3) Tow and Repair Sources: As far as I’m concerned, AS/IS means AS/IS. But if you sell a crappy product that breaks down within 30 days, you HAVE to get the vehicle towed to a repair shop of the customer’s choosing within a 15 mile radius, and offer them a loaner car that is at least comparable to the one you sold for $20 a day. I offer both for free and have only needed to use it once in the past 12 months, and that was for a lady who ended up bottoming the car on a crater sized hole.

    4) Curbstoning: Can’t do it. This refers to folks who put their cars up for sale in various corners of the neighborhood and do not have a dealer’s license. Sorry there. But you’re dealing with one of the very few products that can make the difference between life and death if it’s in substandard shape. You sell it at an established place of business and are licensed with the state because that way, your customers know where to find you.

    I can go through a long laundry list of requirements that I believe would improve things for dealers and consumers. However, I realize that others who have been in the business for decades will have views that are far different than my own and for very sound reasons.

    I will say this though. If dealers were required to spend more money protecting consumers, and if consumers spent more money protecting themselves, this would improve the current state of affairs for everyone. I’ll also say that folks spend way too much on cars. But that’s a story for another day.

  • avatar
    Luther

    John Horner:

    Are you saying that those laws are not the problem today? The Federal Reserve caused the Boom/Bust with their monetary inflation and then deflation in the 1920s…EXACTLY what is happening today. FDR turned a Fed-caused economic downturn into a 10 year Great Depression with his socialist crap…Those same “Laws” and bureaucracies are damaging the Big 2.451 and wider economy today…Are they not?

    The downturn is just revealing the stupidity of those old 1930s thieving socialist gimme-gimme laws that violate human and earned property rights…And freedom of contract rights.

  • avatar
    AGR

    If manufacturers instead of demanding exclusive representation with branded facilities, would permit “multi make automotive centers” where several manufacturers / makes are represented it would streamline the entire retail network.

    The Detroit franchises are not “good money makers” there are public dealers that would quickly jump at the opportunity of opening and operating “Detroit retail centers” with Ford-GM-Chrysler under one roof, and perhaps buy a few additional dealers just to consolidate.

    Up until Detroit demands exclusive representation, dealers want “protection” for their investment.

  • avatar

    I am a capitalist my parents fled communism. People need to stop using demagoguery to portray anyone more to the right or to the left than yourself as a wack job

    FDR like him or not was a capitalist. He didn’t destroy capitalism he saved it. During the great depression we had 25 percent unemployment and real wages falling about the same 25 percent.

    The alternative would have been a real communist or socialist or a real nazi. I use the term real because too many people throw out the term communist (even socialist) or fascist to people who are neither. At that time the threat was real that America would turn to such an extreme.

    Some people would have you believe that every topic every problem etc is somehow related to unions or FDR or even George W Bush.

    I can safely state that the problem of state franchise laws making it difficult for manufacturers to dump excess dealers has nothing to do with FDR, George W Bush or the UAW but the usual suspects will go ahead anyway and try to place blame at their favorite target.

  • avatar
    MBella

    Steven Lang, I have no problem with your rules. I would say that the tow should be up to the dealer. Like you said, as-is means as-is. Since you do offer to tow cars in the first 30 days, it will bring back a customer that you came through for. You sound like a really upstanding guy. The set hours are fine, but not ridicules hours MI requires. Everyone needs to start somewhere, and MI doesn’t give you a way to start unless you have boatloads of money to begin with.

  • avatar
    Dynamic88

    … MI doesn’t give you a way to start unless you have boatloads of money to begin with.

    Then why do so many little used car lots pop up? It appears that starting up isn’t as much of a problem as continuing.

  • avatar
    ruckover

    Just so we can get back to cars, I would like to emphatically state (and this coming from a rather liberal reader of TTAC) that FRD was the cause of deflation in the 1920s. And since we are going to blame him for things that happened before he was elected, I will also admit that he was the cause of the panic of 1907, the recession of 1873, the panic of 1857, the Whiskey Rebellion, and the Boston Massacre.

    Now, let’s talk cars.

  • avatar

    Now back to the thread of the editorial
    Too many people focus on the ends justifying the means. Yes, there are too many domestic dealers. Yes, it would be better for the central parent company if they could force out of business many of their dealers. And yes, I am on record as hating all dealers. If they all went out of business I would not shed a tear.

    However, as a former small video store owner and as a capitalist, it angers me to see people simply wanting the laws to be changed to benefit the side of the famous big company. People have to understand that contracts and business agreements are two sided affairs. You just can’t pick the side you like (manufacturers) and say the laws are f-cked up.

    How would any of you like to invest your money and your time into building a small business and after entering into a business arrangement contract etc with a large company and then all of a sudden just because it is no longer convenient for the big company to have your contract terminated.

    I don’t know about most of you but I think it stinks. I own a number of houses that I rent out to tenants. I have signed leases with all of them. Now I am more powerful and wealthier than my tenants. I matter more economically than my tenants but just because the terms of one of my signed leases may no longer be as beneficial to me does not somehow let me off the hook to my obligations. The reasoning on all of the too-many-dealer threads seems to follow the logic of how can we change the laws so that GM can shuck its dealers. Maybe I can ask how can we change the laws so that I can shuck my tenants at will even though I have obligations under a signed lease.

  • avatar
    Steven Lang

    Well, I would have to disagree with having the tow ‘up to the dealer’. A professional has to stand behind their work. I happen to offer free tows for folks even if they bought the vehicle a year ago from me. If they need a tow after that, I charge them cost. I simply think having this type of policy reflects how you stand for your customer and your product.

    I do sympathize with the hours deal. I think that’s completely ridiculous and most dealers I know are buying or selling vehicles at auction during those supposed times. That policy is there more for ‘show’ in Michigan than in actuality.

    I can’t sympathize with those who want to be part time hobbyists. This type of work involves a lot more than just a part-time commitment if you’re wanting to do it the right way. Perhaps you can make a side living doing other things (I work as an auctioneer during the week) but someone should be available on a daily basis so that any matter that’s needed to be resolved gets immediate attention. A lot of folks simply can’t make a living if they don’t have a reliable car, and sticking people with a pile of crap without an opportunity to make things right strikes me as nasty and inhumane.

    Hobbyists who are simply interested in ‘flipping’ cars are passing problems to other people and giving the industry a bad name. Either they need to stand behind their work, or they need to find a line of work that doesn’t involve such commitments.

  • avatar
    bluecon

    @Sherman Lin

    Look up the New Deal. FDR was stopped by the Supreme Court from implementing his ideas that very much resembled those of Mussolini.

    Just confiscating all the gold from the American people is hard to believe and then it goes on from there. The NRA goons would bust down the doors of business’s and search and question all inside while they enforced the prices and regulations that FDR and the government set.

  • avatar
    Dynamic88

    Sherman Lin,

    Some good posts.

    If it weren’t for the channel stuffing in the 20s and 30s, maybe state franchise laws wouldn’t have been necessary.

  • avatar
    Brian E

    Because it is the states’ responsibility. I’m not eager to see further consolidation of Federal power. C11 it is.

    GM is doing everything possible to avoid C11. In the meantime they are getting a bailout from the feds. Wouldn’t you rather that Congress fixed one of the underlying problems by creating a uniform national dealer franchise system with sane termination provisions (thereby exercising their proper authority over interstate commerce) instead of handing out loans, incentives, and what have you? I know which I’d prefer.

  • avatar

    Bluecon I actually have a friend of mine whose house was stormed by armed bounty hunters and my friend and her family was held at gun point because of a false tip to the bounty hunters. This is legal in Florida due to some obscure state law. It was legal under every Governor both Democtric and Republican for the last 100 years. This also doesn’t make those governors fascists and it has nothing to do with the state franchise laws protecting dealers, You can’t blame that on FDR. Trying to always connect everything bad back to FDR or George W Bush or the unions or big business just doesn’t make sense

  • avatar

    Dynamic 88, I seem to recall reading in the late 70’s before AMC was purchased by Renault that there were about 40,000 auto dealers of which 20,000 were GM dealerships, 10,000 Ford and 5000 Chrysler dealerships. The remaining dealers were either AMC, International harvester or import dealers. I recall reading about what a great advantage it was to GM as those figure roughly corresponded to the market share. GM had almost 50 percent of the market, Ford had 20 to 25 percent and Chrysler had 10 to 12 percent. I recall reading that this was one of GM’s strengths as this basically ensured that no matter what Ford or Chrysler did it wouldn’t matter as the dealership totals basically ensured total domination by GM It was convenient for GM and to their advantage back then. Does anyone know if those figures that I am recalling from memory are in fact accurate?

  • avatar
    BuzzDog

    For some reason we still distribute new vehicles through a system that may have worked well in the 1950’s, but is oddly out-dated and anti-free trade in today’s economy.

    Many state dealer laws have the effect – whether intended or not – of protecting dealer oligopolies within micro-markets, when in fact they were devised to prevent a few large manufacturers from controlling the entire U.S. vehicle market. Some will argue that there are certain consumer protection and public safety reasons for keeping things as is, but the simple truth is that if such laws were applied to other industries they would be hard-pressed to pass the anti-trust muster of our legal system.

    Think for a minute what would happen if computer, appliance and television manufacturers were only allowed to be sold be through a limited number of licensed dealers, operating under a plethora of state regulations. It’s easy to say, “Well, cars are different,” but that’s an assumed constraint…face it, it’s easier for me to get into the business of building and selling $250,000 houses than it is to sell $25,000 vehicles, and the consumer’s risk and need for protection is arguably higher than with vehicles.

    For some of us, and particularly younger consumers, we look forward to the day when we can configure a vehicle online, have it shipped to us directly from the manufacturer and serviced through an manufacturer-authorized repair center. Or if I’m in a hurry, purchase one that is 90% of what I want from a local store that’s devoted to sales, and rely on the maker’s repair center to handle my long-term perception of overall quality.

    If you think this distribution model can’t work, look around you at the electronics, fixtures and appliances in your home. No, it’s not a perfect solution but eventually there would be market-driven incentives for products to be sold at reasonable prices, and to maintain certain levels of quality.

  • avatar
    Bridge2far

    The current distribution network of retailing new cars is not changing anytime soon. There is a huge “correction” going on right now where many dealers are closing up shop and going away. GM, for instance, would not be able to terminate these points due to state franchise laws. The market seems to be dictating what GM is striving for as far as the dealer network is concerned. GM realizes that it is saturated with dealer points and does not necessarily need small single line in-town Main St stores any longer. In fact, they would prefer new modern facilities in high traffic areas carrying several franchises. These stores would also need to have positive customer satisfaction scores for both service and sales and be well capitalized. The dealers that do survive this downturn and adhere to wise business practices will be stronger and more profitable once things get back to normal. And of course there is also pressure on GM to make sure that a dealer housing several of their brands has distinctively different vehicles to offer the consumer. As stated here many times, it does a dealer little good when a consumer comes in and looks at an Enclave, Acadia, Traverse. They are all the same! The goal would be to have a serious upscale offering (Cadillac), a brand with a wide scope (Chevrolet), some sporty luxury vehicles (Buick), and perhaps a high end truck (GMC) as well as a niche sports sedan coupe (Pontiac). That could work.

  • avatar
    Pch101

    Wouldn’t you rather that Congress fixed one of the underlying problems by creating a uniform national dealer franchise system with sane termination provisions (thereby exercising their proper authority over interstate commerce) instead of handing out loans, incentives, and what have you?

    I wouldn’t. Franchise laws are largely a state affair. There’s no reason for the feds to bother with that area of law.

    Dealers deserve protection because they invest substantial capital in operating their businesses. Dealerships spend significant amounts of money to construct and operate large, purpose-built facilities that would leave them exposed to the whims of the manufacturer under your proposal. To give the manufacturers broad, arbitrary powers to leave their franchisee clients high and dry just for the hell of it is as good as theft.

    That being said, nothing prevents GM from focusing on a couple of brands, while funneling the rental dreck to the other brands. (This is effectively what Ford is already doing, although they still have yet to turn the Ford badge into a consistent stable of winners.) This would be a legal way to have the dealers simply fail on their own because they will continue to have trouble moving that product. That’s bad management on GM’s part, which is par for the course.

  • avatar
    seanx37

    What about just starving the dealers to death? Just make no new product for brands you want to get rid of. For example, Pontiac…kill everything that they make except say…G5 which they already make as a Chevy. The dealer would die all on its own.

  • avatar

    seanx37 :

    That’s the plan. Only one problem: the U.S. taxpayer is paying for it. And paying. And paying. And it still might not work.

  • avatar
    Bridge2far

    “And it still might not work.”
    True. This is definately a gamble. If they fail, the taxpayer is out and the domestic auto industry is in tatters. If it works, the domestics pay back their loans and continue to employ thousands. I would suggest that the powers that be consider this a wise move. Sometimes you have to take risks.

  • avatar

    BuzzDog is right.

    The car dealership is an anachronism. A dinosaur who has somehow (through goofy law perhaps?) outlived its usefulness. It has no way to adapt to the current climate, so it will become extinct… eventually.

    I’ll never set foot in a car dealer ever again in my lifetime. I won’t be buying any new cars until the day I can order it online. No haggling, no “let me talk to my manager” no, “what will it take to put you in this car today Mr. Goolsbee.” No more having to endure some sleazeball pulling out the old four-square on me.

    –chuck

  • avatar
    Deepsouth

    Most of the profit in domestic new car dealerships comes directly from the used car lot. I work in a multi-line franchise. We have 4 brands under one roof and none of them at present contribute enough front end profit per unit to sustain the franchise. We feast at the local factory sales and stock low mileage program units that offer value to the buyer and decent margins to the store. New cars are sold for little, and some times no profit. So starving the dealer on new cars…. Mission accomplished.(No Pres.Bush references please.)

  • avatar

    If FDR’s policies are the root of all problems, then we must conclude that the US was in terrific shape before he was elected, right?

    That’s a non-sequitor. What happened before FDR has little relevance when evaluating his own performance. Amity Shlaes makes a persuasive argument that FDR’s policies and the New Deal extended the Great Depression.

    One of Detroit’s big problems is the UAW. The only reason why the UAW has the power it has is because of the Wagner Act of 1935 that heavily favored organized labor and established the NLRB. The Wagner Act was a key part of FDR’s agenda.

    Amity Shlaes and Jonah Goldberg have both written at length about FDR’s shortcomings. The New Deal incorporated a good deal of “progressive” ideology and as Goldberg shows in Liberal Fascism, progressive ideology is cheek by jowl with fascism and totalitarianism.

    FDR recognized the threat to civilization posed by the Nazis and their allies. He was a great war time president. Everything else, not so much.

    I do find it interesting that many of the people who idolize the FDR of the New Deal and react with umbrage at suggestions that the NRA and those who enforced it were totalitarian, look at FDR’s internment of Japanese Americans as an aberration.

  • avatar
    stuki

    With these silly franchise laws at the state instead of federal level, at least there’s some chance one state’s electors may come to their senses one day and dump them. And then auto buyers in other states gets to wonder why they can’t order cars online, pay thousands less, etc., etc.

    If the feds step in, forget consumers and hopeful entrepreneurs having any input whatsoever on the law. It’l be all manufacturer and national dealer lobbies.

    Federalism does work. The two main reasons it is no longer so obvious, is that the Feds have expanded disproportionately into areas that used to be states’ domain, and that each state has grown so much bigger population wise that it has it’s own opaque special interests currying favors.

    What we really ought to do is push to ‘federalize’ the states, and move previous ‘states rights’ down into county, city and neighborhood rights, not up into national concerns. Look at Swiss Cantons for a partial example. A country with a fraction of the population of big US states, split up into 26 highly autonomous Cantons.

  • avatar
    Brian E

    I won’t be buying any new cars until the day I can order it online.

    I pretty much did that with my Acura TSX. I requested quotes online, got a nice, no-fuss quote from my local dealer, went in and did the paperwork, and drove out happy. Well, happy with everything except my bank and my insurance company, both of whom were significantly more difficult to work with than the dealer.

    I’m sure not every dealer is like this, and I no doubt compromised my ability to haggle every last dollar out of the process, but at least I didn’t have to deal with any ridiculous aftermarket “protection plan” upsells or dealer extended warranties.

  • avatar
    Brian E

    stuki: So we can pretty much say goodbye to having a national market for goods and services? As a small business owner, I’d rather not have to deal with fifty states (or a thousand counties) worth of independent regulations on how I can sell my product. That’s why Congress was given control over interstate commerce. It seems obvious to me that the laws which a Michigan company must adhere to in order to sell their product in Wyoming belong at the federal level for just this reason. When Congress does not do its job in rationalizing laws pertaining to interstate commerce, rampant protectionism is the order of the day. It’s why I can’t order a bottle of wine directly from a California winery as an Illinois resident.

    Also, if allowing every state to set their own laws is so great, why did so many of the European states decide to form a common market in the form of the EU? Perhaps they decided that the benefits of uniform regulation outweighed the loss of local autonomy.

  • avatar
    tesla deathwatcher

    The state franchise protection laws — both the special provisions for car dealers and the general franchise statutes — are there for a reason. All of the laws were born to combat particular abuses. The dealers and the manufacturers have different interests, and the manufacturers have much more power than any dealer. The state laws are designed to balance that power.

    As with all things, what was born out of good reason has been corrupted. Many dealers have used the dealer protection laws to give them advantages over other dealers. And the manufacturers still stuff their channels and otherwise abuse their power. Selling cars remains a brutal business, with raw power struggles barely kept in check.

    The current struggles of the Detroit Big Three may have an effect on the dealer laws. But maybe not. The foreign brands also have to live with those dealer protection laws, and have conformed rather than fought. I think that will continue.

    One hope, though a modest one, is the electric car driving onto the scene. Tesla and Th!nk, two electric car companies, both plan different sales models as well as different kinds of cars. And Project Better Place has a radically different model for selling cars, giving them away like cell phones “for free” if you sign up to a contract for the electricity to power them.

    Carmaking is in crisis. As is car selling. There will be a lot of pain as we struggle through the next year or two. But maybe some good will come out of it as well.

  • avatar
    yankinwaoz

    Mike_H, Re: Car makers selling their own cars.

    No, that won’t happen. The non-factory dealers don’t want to have to compete with the factory for sales.

    Now that being said, how Apple manages to sell their products through own stores AND and still convince other retail outlets to carry their products baffles me. I think Apple dictates the price the retailers must charge for the Apple products, which sounds illegal to me.

  • avatar
    ihatetrees

    chuckgoolsbee :
    I’ll never set foot in a car dealer ever again in my lifetime. I won’t be buying any new cars until the day I can order it online.

    I agree that the current dealership model is broken (especially for the D2.8), but I’m not optimistic about it going away soon. Perhaps a strong BK judge will see the sense in an exit plan that mandates a SINGLE national retail channel with certified repair shops. Current dealers can take their 5 cents on the dollar.

  • avatar
    ihatetrees

    tesla deathwatcher:
    Carmaking is in crisis. As is car selling. There will be a lot of pain as we struggle through the next year or two. But maybe some good will come out of it as well.

    As a consumer, why should I give a sh$^#?

    It’s NEVER been better to buy a new or slightly used car or truck.

    And for the future, fewer (domestic) dealers and manufacturers will be a good thing.

  • avatar
    psarhjinian

    Now that being said, how Apple manages to sell their products through own stores AND and still convince other retail outlets to carry their products baffles me. I think Apple dictates the price the retailers must charge for the Apple products, which sounds illegal to me.

    You’re right that it’s illegal, but they (Apple) don’t dictate price. What Apple manages to do is pure marketing: the store is part of the Apple “experience”, which is attractive to the casual buyer. There’s nothing to stop Best Buy from selling Macs and iPods at a lower price, but then you’d have to put up with Best Buy.

    Sony does something similar, but lacks the brand cachet. There’s more than a few clothiers and fashion houses that do the same. I don’t think such a model would work outside of boutique auto brands. Mini would be about the cheapest brand that could pull this off, and they’ve already comitted to a traditional dealership model. GM could have done it with Saturn, but chose not to

    Selling cars with waged staff and/or factory-direct is a hard proposition. A lot of why people buy cars is the result of the “hard sell”, and it’s that sell that generates margin dollars. Take away that and you might make it up in volume, but the margin would evapourate.

    Its rather like how socialism is more equitable, but less profitable.

  • avatar
    AGR

    In Canada Mercedes-Benz owns dealerships in Montreal (2 factory owned) in Toronto (5 factory owned) in Vancouver (4 factory owned).

  • avatar
    cynder

    Lots of interesting and, quite frankly, erroneous historical references about Hoover, FDR and political policies in general. Just stop it, leave your political agendas and ideological name calling elsewhere where we can have a proper smackdown and allow informed parties of all stripes to weigh in. This is not the place.

    Some thoughts came to me as I read the article and posts and I’m not sure if any are accurate but I understood these to be true:
    1.) Auto manufacturers are forbidden from operating their own distribution and dealer network because they interfere with their existing dealer networks.
    2.) Plymouth and Oldsmobile were extremely costly to shut down which is why they are hesitant to repeat the process.
    3.) The individual state franchise laws covering these dealers makes it easier for consumers to get court-ordered compliance when something goes wrong on the dealer level. Think Worthington Ford of California.

  • avatar
    creamy

    hitler!

  • avatar
    Landcrusher

    @michaelC

    Would you care to mention one of those sites where people can work through their political issues? Seriously, I have been on the net since it was called “the net”, and politics are everywhere, but there is no decent discourse on political sites.
    A lot of politics come up here because as soon as you say “industry” you included politics. It may not be your favorite thing, but it won’t be the death of TTAC. I have been here a good while, and I have stayed because RF works really hard and successfully at keeping things fairly positive. Overall, the level of discourse here is better than anywhere else on the net I have found.
    I ignore the comments on stories in my local paper, and even the WSJ. I would suggest that you simply avoid the comments section of what are obviously hot political topics, and enjoy the ones on the more model specific topics.

  • avatar
    psarhjinian

    In Canada Mercedes-Benz owns dealerships in Montreal (2 factory owned) in Toronto (5 factory owned) in Vancouver (4 factory owned).

    I’ve borne witness to that arrangement, and it’s basically factory-enforced price-fixing.

    I was pretty close to buying a C230K and the sales rep did tell me that unless I drove out to either Burlington or Peterborough the price he was quoting was the price I’d paid, and that my information had been helpfully entered into their database in case I got other ideas. Oh, and a little bit of enquiry on my part led me to learn of the utter travesty that is Benz service in Toronto.

    The reason I own a 9-3 and not a C230K, and the reason I will not ever, ever step into a Benz dealer again, is mostly related to this behaviour.

  • avatar
    ihatetrees

    psarhjinian,

    I suppose Canadian Benz dealers won’t service vehicles purchased in the US?

  • avatar
    psarhjinian

    I suppose Canadian Benz dealers won’t service vehicles purchased in the US?

    They’ll service them just like the do in the US: badly, and for lots of money. They’ll just suffix “That’ll be $2000, plus labour” with “eh”.

  • avatar
    moedaman

    GM could close down two brands right off the bat without many lawsuits. Just get rid of Pontiac and GMC. Those stores will still have Buick. Add another couple of lines to Buick and your good to go. As far as Saab, Hummer and Saturn. I don’t see individual Saab dealers,so you could just stop importing them again with minimal lawsuits. As a last resort Hummer and Saturn could be moved to Buick stores to replace Pontiac and GMC. But these last two brands will probably be the ones that will cost GM the most money to close down.

    What I don’t understand is that the dealers and manufacturers have contracts with each other. Do these contracts run forever? There isn’t an expiration date to them?

  • avatar
    tedward

    Ronnie Schreiber

    “as Goldberg shows in Liberal Fascism, progressive ideology is cheek by jowl with fascism and totalitarianism”

    The rest of that comment was interesting and worth engaging on the merits, but citing Goldberg, and this work in particular, makes me doubt that you want anyone to take your arguments seriously. Goldberg embraces the Coulter tradition of trading inflamatory, unresearchable and uprovable slander for attention, all while producing a work which is so poorly presented that it could be used as a bad example in freshman undergrad classrooms. I felt sick reading as much of this book as I could, and deeply embarassed that it was considered and discussed at all in other media.

    Both parties have a strong incentive to create their own version of a suburban utopia and both repeatedly make use of tools that conservative (not the party) Americans have good reason to fear and mistrust. They pursue this agenda at the expense of good government when they need to energize their “base” (10% of their time – max) and every single other thing done is bought and paid for. Screaming “Nazi” or “Fascist” does nothing but prove that your not listening, or watching, what your own politicians are doing.

    What’s with all the politics around here anyway? It’s much more fun to indirectly address the implied politics of people’s posts without dragging all the hair-pulling excitement out onto the front page isn’t it?

  • avatar
    tedward

    I need to add that I did greatly enjoy (slightly disagreeing with) the rest of that comment, but your Goldberg citation came in as the political slander straw that broke my back with this comment thread.

  • avatar
    chevydealer

    Robert,

    I think this is an overly-simplistic view of the matter. At the end of the day, the only reason those laws are in the books is because the manufacturers have proven time and again that they will screw their dealer body over, again and again.

    Example: Our company spent close to 10 million on a non Chev store (Bought previous owner and his real estate, plus the NEW real estate supposedly in a “better” location [as determined by the manufacturer], and then for the NEW building on the NEW property [as an aside, the “old” building and location were six years old and only about 8 miles away].

    On our grand opening some members of the Manufacturer’s regional BDC come in to tour the new facility, which while we were very proud of, we were also very nervous about due to the increased sales this facility was going to necessitate.

    As they leave, they let us know that they would be putting in a new dealer 10.1 miles away from us, and less than 2 miles away from the “old” location. Of course this is just anecdotal evidence, but it should make you think.

    One of the first commenters mentioned that the manufacturers should adopt this and run it like a Carmax. As it just so happens, Ford did exactly that and got their ass handed to them. Seriously. Many other people often point out that people should be able to buy their vehicles over the internet direct from the manufacturer, but I think this also discounts one of the most important parts of most deals – the trade.

    Are the franchise laws perfect? Emphatically no. Are they better than the alternative? Just as emphatically yes.

    I sense a lot of anti-government attitude here, and its worth mentioning that the government does a lot that we should be thankful for. Without lemon laws I guarantee no one would be able to turn back a vehicle – I represent numerous manufacturers and they all hate to go take back their “infallible” machines, and they all hate when we expect them to pay for defective goods.

    And if they didn’t have to, I don’t expect that most would.

  • avatar

    Moedaman “What I don’t understand is that the dealers and manufacturers have contracts with each other. Do these contracts run forever? There isn’t an expiration date to them?”

    Well think about it if you pay for a McDonald’s franchise Do you think your going to pay big bucks for one that they can cancel on you at will or has a limited life?
    Why would anyone buy or build a franchise unless the franchisee has certain rights to protect their investment. When you buy a house you mean you get to keep it forever? Yup as long as you meet your obligations to the seller and the bank and thats why I have a problem with the general logic of these how can GM dump its dealers threads. Its sort of like how can the bank get John Doe out of his house if he’s current on his mortgage argument.

  • avatar
    Landcrusher

    Chevydealer,

    I don’t believe your premise. The reason those laws are on the books was not to keep the dealers from being screwed. That is a side benefit. The reason is to keep money flowing through those dealers to the politicians and the state coffers, rather than having the money leave untapped. The reason is to allow legislators to have some control and keep their hands in the pie.

    The truth about the franchise situation is that we don’t know the most efficient and successful model because the state has decided it will be done a certain way. Certainly, the trade is a problem for the direct sales model, but that didn’t stop Cirrus from shooting to number one in light aircraft without using dealers. Personally, I like having the dealers, and I can choose between the good and bad. I also tell my friends. However, I think the situation would be better for all if the whole set up wasn’t managed by fiat.

    It is likely, there would still be dealers. Perhaps the dealerships would not be as valuable. Or, maybe the manufacturers would start competing to be the best vendor rather than simply play by the law. I don’t know. The market was circumvented. You don’t know either, because only the market could tell us.

  • avatar
    Landcrusher

    Sherman,
    Not so fast. You could have a limited term franchise, and there are such things. Just like leases on houses. Of course, that changes how much one will invest directly, and indirectly into the deal.

  • avatar

    True landcrusher years ago I had a video store and I later sold it to a Blockbuster franchisee and I worked for them for a few years. The terms of my bosses franchise agreement were that the franchise had to develop and open x number of stores in our geographic area in a set amount of time and there was a provision that the parent company Blockbuster had the absolute right to buy back the franchise at a set dollar amount which of course guaranteed a certain level profit for the franchisee after a designated time period. They did exercise their option shortly after I had left. I just kind of think its funny that some people seem to have a problem that franchisees have certain rights that the parent company cannot terminate at will and without cost.

    CH11 is the way to go. The only and I mean the only reason CH11 is not an option to companies like GM is that CH11 means pain and loss to the parent company GM. Management loses rights (and is hopefully fired) to creditors and GM’s owners get screwed. GM and many of its supporters seem to feel that only other people should feel the pain. The dealers should feel pain, the suppliers should feel pain, the employees should feel pain, the end customers should feel pain but not GM itself. Screw that go CH11 then the pain is mutual some dealers will lose out as well as the owners of GM.

  • avatar
    moedaman

    Shermin Lin, I wasn’t saying that GM should dump the dealers, I was just wondering about franchising. I have no knowledge on how these things work.

    I live in the Detroit area and know plenty of D3 employees. Quite of few members of my family were UAW members too. After observing the situation first hand for many years I can tell you that upper management and the UAW screwed this thing up. The vast majority of lower management has put up with underserving crap for many years. And now it looks like the dealer network is trying to get squeezed as well. Although I have dealt with plenty of pathetic dealers who deserve to go belly up.

  • avatar
    agenthex

    There’s also the issue of accountability. The D3’s dealer network is in such a sorry state because the parent company made it that way. Therefore they should bear responsibility.

    They also built the network like they built cars, quantity over quality.

  • avatar
    George B

    Existing private contracts between manufacturers and dealers should be honored, but there is no reason that distribution model needs to be forced on new manufacturers entering the automotive market. My problem with the car dealer franchise laws is they prevent a new brand from rising up and following the Michael Dell model of build to order. Instead, cars get built with the wrong color and an excess of dealer profit adding accessories, sit on parking lots, and eventually sell with price reductions. I understand that the dealer profit on most new car sales isn’t enough to keep lights on at the dealership, but why am I forced to bear this unnecessary cost? Why do I have to accept extra features that add little value to me? Just ship the custom built car directly from the manufacturer to me and cut out the middleman.


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