About a year ago this month, I bought a new car for the first time in my life, and it was an entirely crazy-making process.
Shopping for furniture or appliances or other consumer durables is pretty straightforward. You look up what items are for sale and what they cost, you decide what you’re interested in, and then you can pay. Sometimes the item you’re looking for isn’t in stock locally (this happened to me with a couch recently), so you’re told you’ll have to wait a few weeks for delivery.
With cars, though, everything is nuts. You need to go from dealer to dealer, each of whom has his own inventory. One guy only has blue paint. The other guy doesn’t have the blue paint, and also only has dark gray seats. And each has his own fake sticker prices and complicated cash-back offers. It’s no wonder 83 percent consumers say they would rather skip the haggling, and a third of people say doing taxes is less annoying than working with a car dealer.
But it’s not just the hassle. State bans on direct sales turn out to cost consumers an enormous amount of cash. It’s an enormous problem, and it warrants a federal solution.
Auto distribution is expensive
Cars are the most expensive consumer product that the typical consumer buys. And while it may seem obvious that cars are expensive due to the material and labor required to build them, the logistics of distributing cars is actually a very expensive part of the process. Research by Eric Marti, Garth Saloner, and Michael Spence has concluded that as much as 30 percent of the cost of a car is the cost of distribution.
Along most aspects of the automobile value chain, manufacturers work hard to find less costly ways of producing automobiles. Initially these savings accrue to manufacturers in the form of higher profits. But as competition leads to the dissemination of new techniques, consumers win by getting cheaper or more advanced cars.
And yet there is little innovation in the distribution process, largely because distribution needs to be run through a dispersed network of dealerships. What’s visible about this to consumers is the limited choice and anachronistic haggling involved in the dealership model. The more economically savvy will note that for the dealerships to be profitable, consumers must be paying an extra, unnecessary markup.
But as Gerald Bodish wrote in a 2009 analysis from the US Department of Justice, the most expensive part of the whole process is hiding in plain sight — it’s the stockpiles of unsold vehicles sitting around on dealers’ lots. He observes that in late 2008, there was a staggering $100 billion worth of unsold dealer inventory, with an annual carrying cost of $890 million.
In other words, it’s a huge pile of waste. At any given time there is a vast quantity of newly built cars sitting around unsold, and the price of the cars that are sold needs to be high enough to cover the costs of building and storing the unsold ones. Bodish cites a Goldman Sachs analysis indicating that replacing the current inventory-heavy method with a more efficient build-to-order method could reduce costs by 8.6 percent. Real-world experience from Brazil, where Chevrolet sells Celtas direct to consumers, shows a somewhat more modest savings of 6 percent relative to what’s paid at traditional dealerships. Either way, for a product that costs tens of thousands of dollars it’s a meaningful saving — over and above the large increase in convenience.
It’s not just Tesla
The issue of direct auto sales is frequently in the public eye these days because of Tesla. Tesla does not work with car dealerships. Instead, the company owns its own showrooms and sells cars directly to consumers. Every once in a while a state acts to ban these direct sales (it was Michigan most recently), and stories get written about it. But the real story here is much more general than Tesla. As Federal Trade Commission economists have written, protectionist laws that defend the interests of car dealerships over the broader public exist all across America.
The only reason Tesla is able to sell directly at all is these laws are frequently written so as to protect existing dealership networks. Since Tesla is brand new, it has no existing dealer networks to circumvent, and it is able to operate legally in many states until new laws are passed to block it.
These fights that are playing out sporadically around the country are important. Most people aren’t in the market for an $85,000 electric luxury car and won’t be for the foreseeable future. But buyers of F-150s and Accords and Camrys and Fusions deserve the benefits of direct sales as well. That means not just fighting back against efforts to add new anti-Tesla provisions to existing state laws, but actually rolling back the tangled web of anti-competitive rules currently in place.
A national problem needs a federal solution
Legal restrictions on direct car sales are typically a matter for state law. But the problem of excessively expensive, time-consuming, and choice-restricting auto purchases is a national one. It deserves a federal solution. What’s more, it likely needs a federal solution.
One reason dealers are so effective in lobbying state legislatures is that typically a car dealership company is local, while the manufacturer is out of state. What’s more, citizens simply don’t pay much attention to state politics, making it even more of a plaything for special interest lobbies. It’s striking that dealer-coddling protectionist measures are just as likely to be supported by theoretically market-loving Republicans like Michigan Gov. Rick Snyder as anyone else.
At the national level, a coalition for reform could be built on legislators from car-manufacturing regions, principled free marketeers, and reform-oriented liberals. The fact that the Obama administration’s economic team has already weighed in against direct sale bans gestures toward the possibility of bipartisan cooperation.
What the FTC doesn’t have is an actual proposal. But while the federal government can’t directly step in and repeal state-level bans on direct auto sales, it can take advantage of the large federal role in transportation finance. A quarter of all transportation funding flows from Washington through various grant programs. Some of that money should be set aside in a “best practices” pool and made available to states that allow for open entry into the car-selling market, while states that refuse to reform will lose out.
American consumers spend more than $60 billion at new car dealerships each month. A change in legal regime that might reduce prices by 6 to 8 percent of that total while also reducing hassles would be a huge win. And while like any useful reform it would face special interest opposition, car dealership reform doesn’t force anyone to cross any ideological red lines in gridlocked Washington.