Do franchise dealer laws run counter to the spirit of a free market economy? 
 - Photo by Angelo Giordano via Pixabay

Do franchise dealer laws run counter to the spirit of a free market economy?

Photo by Angelo Giordano via Pixabay

To say the franchised dealer system has its detractors is putting it mildly. The debate over whether automakers should be allowed to sell and service their own products has intensified in recent years as new entrants — most notably Tesla — have challenged the myriad state regulations that protect dealers from being undercut by factories.

Writing for the Iowa Law Review in 2016, Daniel A. Crane, an associate dean at the University of Michigan Law School, describes these rules as “crony capitalism” and “naked economic protectionism.” He argues that Tesla’s fight is a noble one that could free our nation from a maze of archaic rules and regulations.

“The direct distribution battle coincides with other high-profile conflicts between incumbent technologies protected by long-unchallenged laws and new technologies seeking to penetrate the market,” Crane writes. Later, he adds, “Laws prohibiting direct distribution can be explained only as capitulation to the dealers’ demands for protection from competition.”

As Crane illustrates, the system in place today was codified at a time when the Detroit 3 were by far the biggest players and had motive and opportunity to ride roughshod over their dealers. Though no two state standards are exactly the same, they typically prevent factories from forcing dealers to accept inventory in numbers you don’t want, canceling franchise agreements without cause, or awarding new points in your market.

The benefit to retailers is clear. But it’s not exactly a bad deal for manufacturers, who already own all the real estate and distribution headaches they can handle. So how is it working out for your customers?

Not so great, Crane says, turning once again to disruptive technology for proof. He cites a 2014 Consumer Reports study that sent secret shoppers into 85 dealerships in four states to test their sales teams’ knowledge about electric vehicles. For the most part, they didn’t know much about battery types, tax breaks, and charging infrastructure. Some even discouraged the purchase of an EV.

How could this be? Simple math, says Crane. Since EVs have fewer moving parts, they cost less to service, undermining a key dealer revenue stream.

It’s possible dealers and salespeople once conspired to steer customers away from EVs by pretending to know nothing about them. Another possibility is they didn’t care. They weren’t selling many.

But Crane’s central argument is that franchise laws prioritize dealers over consumers. Those regulations assume factories are only interested in selling through independent dealers, he says, neither considering nor applying to the direct distribution model Tesla is fighting for. Discouraging competition drives prices up. New ways of selling vehicles should be allowed to compete with old ways.

Are car buyers victims of franchise dealer laws? Do they stifle competition?

In a word, no, says Jim Ganther, an attorney, compliance expert, and F&I and Showroom contributor.

“There is an infinite amount of competition,” he says. “As I look out my 20th-story office windows in downtown Tampa, there are a number of dealers just within my line of sight, all competing against each other every day to provide better pricing and services. If all we have is OEMs drop-shipping cars, what kind of competition would we have?”

Wouldn’t Ford still compete against Chevrolet?

“Yes, but we have six Chevy dealerships competing against each other, all for the same products,” Ganther says. “Then you’ve got the issue of factory-authorized service. Whom do I talk to once the Tesla is delivered to my door and the flatbed drives off?”

Tesla’s largely unsuccessful effort to open and operate its own stores has done little to dispel the wisdom of outsourcing sales and service to a network of independent operators. Taking franchise laws off the books would certainly benefit that company and any other manufacturer itching to get into the retail game. But so would it strip dealers of the protections Crane and others decry, and it would leave car buyers to navigate the process of buying, financing, and servicing their next vehicle in an unfamiliar landscape.

“I am a capitalist, but I’m not a laissez-faire capitalist, and I’m not against all reasonable regulation,” Ganther says. “I think our laws need to balance the interests of OEMs, dealers, and consumers, and I think that existing franchise laws do that well. They’re not anti-competition. They’re preserving competition.”

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Tariq Kamal
Tariq Kamal

Associate Publisher

Tariq Kamal is the associate publisher of Bobit Business Media's Dealer Group.

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Tariq Kamal is the associate publisher of Bobit Business Media's Dealer Group.

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