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Consumer Group Criticizes Curbs on Web Auto Sales

February 9, 2001

The Consumer Federation of America (CFA) has released a study concluding that, if anti-competitive state laws were repealed, new-car buyers would eventually save at least $20 billion a year -- an average of $1,500 per vehicle.

Of particular concern to the CFA, and to consumers surveyed, are new and threatened state restrictions on Internet car sales, the organization said at a Feb. 8 press conference in Washington, D.C.

State franchise laws, first created in response to car dealers who wanted protection from unfair business practices, are being manipulated to prevent "virtual dealerships" -- those that don't have brick and mortar showrooms, according to Jack Gillis, CFA public information director and author of The Car Book and other automotive-related publications.

"The marketplace hasn't been given the opportunity to operate freely and openly," Gillis said.

"We intend to stop the extension of these laws and begin to roll them back," Gillis said. "Our goal is to stop the process.

"All credible research has found that anti-competitive state laws restricting new-car sales not only cost consumers billions of dollars annually right now, but also severely limit the ability of the auto industry to realize Internet-driven efficiency gains in the future," said CFA Research Director Dr. Mark Cooper, author of the study, "A Roadblock on the Information Superhighway: Anti-Competitive Restrictions on Automotive Markets."

A related survey conducted for CFA by Opinion Research Corporation International (ORCI) found that consumers strongly oppose state restrictions on new car sales and strongly desire the ability to purchase new cars through the Internet directly from manufacturers or third parties.

"Consumers who have gotten used to shopping for many products through the Internet now want a similar ability to purchase new cars online," Gillis said.

NADA Calls Report "Inconsistent"

The National Automobile Dealers Association took quite a different view of the report in a Feb. 9 statement.

"The Consumer Federation of America's (CFA) report is inconsistent and overly simplistic," the statement said. "On the one hand, CFA argues for more dealerships to increase competition, but then advocates direct Internet sales from manufacturers, creating virtual factory stores which would reduce competition by driving independent dealerships out of business. You can't have it both ways. What CFA advocates could lead to an OPEC-like auto cartel.

"CFA also suggests that dealers are opposed to Internet auto sales," the statement continued. "The fact is that dealers are in the forefront of online auto retailing. Three years ago, less than 50 percent of dealerships had Web sites. Today, close to 90 percent offer online services. Dealers clearly have embraced the Internet.

"The current automobile distribution and service system, which is based on healthy competition between dealerships, is working very well," the NADA statement contends. "State governments have long required that franchised dealers have an established business in the local community to service the cars they sell. When you consider that more automobiles are recalled each year than are sold, you can see why it is necessary to have an extensive network of new car sales and service centers.

"It is the franchise law that is chiefly responsible for creating the stability necessary to support such a network of more than 20,000 independent dealerships nationwide," NADA's statement reads. "Franchise laws, with their built-in consumer protections, are more relevant than ever in the age of the Internet. Ultimately, the business model that strikes the best balance between consumer protection and consumer convenience is the one that combines online sales with facilities anchored in the local community. This is the very model adopted by franchise dealers in every community in the country."

Report Addresses Concerns About Manufacturer Discrimination Against Dealers

The Cooper report also examines potential unintended negative effects that have been invoked by dealers to defend or extend laws restraining direct sales of motor vehicles. It concludes that there is little likelihood those consequences would materialize, for several reasons, according to the report: First, increased competition would make it difficult for any party to gain market power. Second, warranties would remain in force. Third, when the most popular dealerships expanded, quality repair and maintenance services would be more available. And fourth, general consumer protection laws would remain in force, the report says.

However, the report also recommends the establishment of new protections. While concluding new distribution channels should be open, the report supports imposition of "reasonable licensing requirements" for new sellers of automobiles. In addition, according to the report, protections for dealers should be created to ensure that, when manufacturers are allowed to sell vehicles and service directly, they do not discriminate against competing dealers.

The report proposes new state laws to give dealers a private right of action to pursue claims of discrimination under state law.

A copy of the CFA report is available at www.consumerfed.org/internetautosales.pdf.

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