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Why Its Illegal to Buy a Car from a Manufacturer - YouTube
Channel: Donut Media
[0]
- In 2014, automotive
marketplace website, Edmunds,
[3]
published a study that found
[5]
1 in 5 Americans would
give up sex for a month
[9]
in order to avoid the process
of haggling when buying a car.
[12]
And that 1 in 3 would
rather do their taxes.
[15]
A Gallup poll found that car salespeople
[17]
were ranked dead last
[19]
in a list of professions and
their perceived commitment
[21]
to honesty and ethics.
[23]
Landing below lawyers,
insurance salespeople,
[26]
and even members of Congress.
[27]
Safe to say,
[29]
the public does not like
car dealerships very much.
[32]
But how did that happen?
[33]
Believe it or not,
[34]
consumers used to have a lot of options
[36]
when it came to buying a car.
[37]
But now, in an age when you
can buy anything online,
[41]
you still can't buy a
new car from your phone.
[43]
Today on Wheelhouse,
[44]
we're gonna find out why it's illegal
[46]
to buy a car directly
from the manufacturer.
[49]
It's a little more complicated
than you might think.
[53]
- A big thank you to Omaze
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for sponsoring today's video.
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at omaze.com/donutmedia.
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Now, back to the show.
[124]
- Say you're a Tesla
fan that lives in Texas,
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and you're finally ready to
get the EV of your dreams.
[130]
The Model S Plaid.
[131]
You saddle up and mosey on down
[133]
to one of 13 Tesla galleries
operating in the state.
[136]
That's gallery, not dealership.
[138]
And take a look at what
they have to offer.
[139]
You talk to the helpful
staff about models,
[141]
performance, options, et cetera.
[143]
And then you inquire about the price.
[146]
Well, you just made your first mistake.
[148]
Why is it that you're not
allowed to talk about money
[150]
when it comes to Teslas in Texas?
[153]
A lot of people don't know this,
[155]
but you can't just buy a car
directly from a manufacturer.
[158]
Like, you can't walk
up to GM's headquarters
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and buy a Corvette.
[161]
That's why those companies
have dealerships,
[163]
but Tesla is the exception here
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because, in most states,
they have galleries
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where you can view the cars
and talk to experts about them.
[170]
Even discuss the options like I mentioned,
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but they don't have any
traditional dealerships
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where you can purchase the cars.
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So how do you actually buy one?
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Well, first, you're
gonna have to hop online
[180]
and order your preferred Tesla
[181]
through the company's website.
[182]
Just make sure you're not
standing on the property
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of a Tesla facility while you do that.
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You place your order and get
your paperwork sent to you
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from a Tesla store, anywhere
outside of the state of Texas.
[192]
Then you can go ahead
and pay for the vehicle.
[194]
Again, as long as you're not
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on Tesla owned or rented
property, while you do it.
[199]
And Tesla can then ship the car
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to one of eight service centers
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they have around the state of Texas.
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At that point, you can go pick up your car
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and Texas will be more than obliged
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to register it for you,
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and collect the appropriate taxes due.
[210]
Congratulations.
[211]
You can now chew through
electrons to your heart's content,
[213]
or until the batteries run out
across The Lone Star State.
[217]
So why the run-around?
[218]
Well, the very thing
that's preventing Texans
[221]
from buying Teslas directly
from the manufacturer
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is the same thing that prevents you
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from buying a Chevy, or a Ford, or a BMW,
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anywhere but a dealership.
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State franchise laws.
[231]
These laws were passed
way back before Tesla
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was even an inkling in the minds
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of Martin Eberhard and Marc Tarpenning,
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back before World War II, in fact.
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And the reasons they
came about are varied,
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complicated, and on
some levels, antiquated.
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Before state franchise laws,
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manufacturers sold their products
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through many different
distribution methods.
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You had dealer franchises,
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factory owned stores, wholesalers,
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retail department stores,
consignment arrangements,
[257]
even traveling salesman. I'm not joking.
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It was the Wild West of selling cars,
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and it was time for the
law to come to town.
[263]
Now, the optimistic story
behind state franchise laws
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is that they were intended
to protect the consumer
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and local communities.
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The reasoning given back then
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was that people opening up dealerships
[273]
were independent entrepreneurs
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spending their own money to buy
or lease land and equipment,
[278]
build facilities, and hire local people.
[280]
And if the major auto
manufacturers could just come in
[283]
with their nearly limitless
resources at their disposal
[285]
to set up their own distribution,
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no one on the local level
could possibly compete.
[290]
A local dealership could spend years,
[292]
and hundreds of thousands of dollars
[294]
establishing a presence
in a particular territory,
[296]
and a manufacturer could just swoop in,
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run them out of business by
undercutting them on price.
[301]
That's not good.
[302]
Even if they didn't drive
independent dealerships
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out of business completely,
[305]
without laws in place to
protect local entrepreneurs,
[308]
manufacturers could just
bully anyone they wanted,
[311]
doing things like forcing dealerships
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to buy unsold vehicles
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from the current model
year, under the threat,
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of not sending any of the upcoming models
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when they came out.
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The more cynical take is that
the state franchise law model
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saved the auto manufacturers
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the money, time, and hassle
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of opening up their own stores
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in cities across the country,
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allowing them to pass that
cost onto dealerships,
[331]
and as a result, the buyers,
[333]
and to quickly establish a presence
[335]
in multiple markets, all at once.
[337]
So instead of buying your
iPhone from the Apple store,
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it'd be like, if you could only buy
[340]
from a licensed independent dealer
[342]
who first bought the
phones directly from Apple,
[344]
marked up the product,
and then turned around
[346]
to sell it to you at a higher price.
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It doesn't sound like a
very good deal, does it?
[350]
Regardless of their reasons,
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dealerships went around
lobbying state legislatures
[354]
to pass these laws.
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Their arguments when something like:
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"Mandating the franchise model
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will keep the dealerships and their owners
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as upstanding members
of the local community.
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More likely to hire locally,
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support local businesses,
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and take pride in their
products, and repairs,
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throughout the life of the vehicle.
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More than that,
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in markets large enough to support
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more than one dealership of
any particular manufacturer,
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the franchise model
will foster competition,
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driving down prices, and giving
an incentive for dealerships
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to go the extra mile in
pleasing the customer,
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whether that's better financing options,
[384]
or better sales and service experience."
[386]
For example, if every Chrysler dealership
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is owned by Chrysler,
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the price of a 1952 Imperial is the same,
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no matter what showroom
you happen to wander into,
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giving no incentive for
competitive pricing.
[396]
And when it comes time
for a recall, or a repair,
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it's a lot harder for a
franchise owner to live down
[401]
shoddy warranty work
when your kids both play
[404]
on the same Little League team.
[405]
Unfortunately, though, these predictions
[408]
haven't exactly come to pass in reality,
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or even by dealer's own admissions.
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Manufacturers already
set their market price
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at the highest point
they can get away with,
[417]
whether that's at a
wholesale or retail low,
[419]
and any attempt to increase
over that price point
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would just drive down the
demand in an elastic market,
[424]
offering an advantage to the competition.
[426]
And with the franchise
model requiring dealerships
[429]
to maintain huge inventories of cars,
[431]
the cost of that maintenance
will always be passed
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on to the consumer.
[434]
In fact, as I said earlier,
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that's the very reason why dealerships
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initially started lobbying for these laws
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in the first place.
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The worry, that they put in the effort
[442]
to establish a foothold
in a certain market,
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only to have the manufacturers come in
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and take over by offering the product
[448]
at a lower price.
[449]
The dealers already admitted
that they simply can't compete
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with manufacturers when it comes to price.
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A fact that should be obvious to anyone.
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These arguments were very successful,
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at least at the state level.
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And today, every US state has some version
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of franchise laws on the books.
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And federally,
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with the "automobile dealers
day in court act" of 1956,
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say that three times fast,
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dealers are allowed to
bring a federal suit
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against any manufacturer
who fails to comply
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with the terms of a franchise
agreement, or terminates,
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cancels, or refuses, to renew a franchise.
[479]
Sounds good, right?
[480]
So where did we go wrong?
[482]
Well, today your local dealership
[483]
probably isn't very local,
[485]
or at least the numbers
are trending that way.
[487]
Today, there are around
17,000 dealers, nationwide,
[490]
compared to more than
22,000, just 10 years ago.
[494]
That's a drop of around 20%.
And the trend is continuing.
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Your average dealer is far from
[499]
the mom and pop shop of yesteryear
[500]
who struggled to just
barely make a living.
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Massive, publicly traded
dealership groups, like AutoNation,
[506]
and Lithia Motors, are
buying up and consolidating
[508]
independent dealerships
as quickly as they can.
[511]
And the result is higher cost for you
[513]
and higher profits for them.
[514]
In the last decade,
[515]
Lithia saw their sales revenue
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jump from 2 billion to 12.7 billion,
[520]
and AutoNation saw an increase
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from 12.5 billion to 21.3 billion.
[526]
And that's not just because of inflation.
[528]
According to the National
Auto Dealer Association,
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the 16,623 franchise light
vehicle dealers, in the US,
[535]
sold 14.5 million light
duty vehicles in 2020,
[538]
a drop of about 15% from the
17.1 million sold in 2019.
[543]
And yet, with total sales
topping $980 billion in 2020,
[548]
that represents an increase of almost 50%.
[551]
And that's not even counting the money
[552]
they make off repairs.
[554]
Including that, and you can add
[555]
another 100 million to the cat foot.
[557]
So how does that math work out?
[559]
Well, it's mostly COVID's fault.
[561]
Long story short, the bottom
fell out of the car market
[563]
in the spring of last year.
[564]
Factories were shut down and
supply lines were disrupted.
[567]
No one knew what was going
to happen in the world,
[569]
let alone the auto industry.
[571]
Then people started shopping again.
[572]
And the problem was, there
weren't any cars to be had.
[575]
Demand returned, but supply
hadn't rebounded yet.
[578]
That's a recipe for disaster
for the average consumer,
[580]
and dealers had an
appetite for destruction
[583]
that ended up putting a squeeze
[584]
on the car-buying public.
[585]
We're actually gonna go way more in depth
[587]
on COVID's effect on the car market,
[588]
in the aftermarket in a few weeks.
[590]
So make sure you subscribe,
so you don't miss that.
[592]
But, surprisingly, there's
good news on the horizon.
[596]
A major portion of the
cost of vehicles we buy
[599]
comes in transportation,
[600]
moving all those vehicles around
[602]
to the various dealer lots
[603]
and in unsold dealer inventory.
[605]
A 2009 analysis by the
US Department of Justice
[608]
found that, in 2008,
[609]
there were $100 billion worth of vehicles,
[612]
just sitting on dealer lots,
[614]
incurring a cost of around
$900 million, annually.
[617]
Keeping cars on hand costs money.
[619]
Dealers have to pay for huge lots,
[621]
employees to move, wash,
and maintain them, and more.
[624]
That same study found
[625]
that if our national dealer system
[627]
moved to a build-to-order model,
[629]
like they use in other
markets around the world,
[631]
costs could be reduced by 8.6%.
[633]
I know that doesn't sound like much,
[634]
but with the average car price tag
[636]
eclipsing $40,000 this year,
[638]
an extra 3,500 bucks in your pocket
[640]
doesn't sound too bad, does it?
[641]
Costs aside, who wants to be beholden
[644]
to whatever the dealer has on the lot.
[646]
Even with the average dealer,
[647]
having nearly 600 new and used
vehicles in their inventory,
[650]
it seems like you never manage to find
[652]
exactly what you want.
[653]
Not to mention the cost to the environment
[655]
and the wasted space.
[656]
It seems to benefit no one.
[658]
It's extra cost for the dealers
[659]
and less choice for the buyer.
[661]
And in a world where
anyone with a smartphone
[663]
can find out exactly what
dealers are paying for cars,
[666]
what cars are actually
available in their area,
[669]
and what everyone else has
already paid to buy them,
[671]
the benefits of the
dealerships are dwindling.
[675]
The COVID-19 pandemic
has meant that customers,
[677]
and dealers alike, have had to shift
[679]
expectations and deliverables.
[681]
With more shopping happening online,
[683]
people being more willing to wait
[684]
for the exact car they want,
contactless interactions,
[687]
and benefits that would
have been unheard of
[689]
just two years ago,
[690]
like return policies up to seven days
[692]
if you don't like your purchase,
[693]
this is already happening.
[695]
And it doesn't have to end here.
[696]
Even small steps,
[697]
like taking care of the
majority of paperwork at home,
[699]
and online, would have a massive effect
[701]
on the overall satisfaction customers
[703]
have with the dealership
buying experience,
[705]
something that has been
historically and notoriously low.
[709]
Look, I know a fair amount of people
[711]
that have worked at dealerships.
[712]
I know some of watching might
also work at dealerships.
[715]
We've worked with car dealerships,
[717]
and they've always been great places,
[718]
but something has to
change in this process
[721]
if we want consumers to be happy
[723]
with their buying experience again.
[725]
A car is the most
expensive consumer product
[728]
most of us will ever buy.
[729]
And I know I'd prefer to
get exactly what I want,
[732]
with the exact color, the
exact options I choose,
[735]
rather than having to settle
[736]
from the limited selection
at a local dealership.
[738]
Getting all that at a cheaper price,
[740]
without having to haggle for hours
[741]
and drudge through mounds
of boring paperwork
[743]
sounds pretty great.
[745]
But for all the talk about franchise laws
[747]
protecting the consumer,
[748]
we've really gotten the
raw end of the deal.
[750]
It's taken a company, like Tesla,
[752]
with a disruptive new
technology and piles of cash
[754]
to finally make some headway
in breaking the momentum
[757]
that the franchise model has built up.
[759]
The timing is right, too.
[760]
The auto industry is
experiencing a historic wave
[763]
of upheaval right now,
[764]
with manufacturers closing plants,
[766]
canceling models, and
revamping production,
[768]
figuring new stuff out, new technologies.
[770]
Let's extend that to the franchise model
[771]
and build a new system
that benefits dealers,
[774]
buyers, and even the environment,
[776]
preferably before I go to buy my next car.
[778]
Alright, thank you very much
for watching Wheelhouse.
[780]
Let me know what you
think of car dealerships
[782]
down in the comments.
[783]
What have your experiences been like?
[784]
If you have a good story,
a bad story, let me know.
[786]
What could they have done better?
[788]
What did they do right?
[789]
I want to hear about it.
[790]
I think some car dealers
[791]
are probably going to be looking at these.
[792]
Follow doughnut media, on all
social media, @donutmedia.
[795]
Follow me @NolanJSykes.
[796]
If you're a doughnut super freak,
[798]
hit that "join" button down below,
[800]
if you haven't already
joined the donut underground.
[802]
But you get access to a Discord channel,
[803]
exclusive merch, exclusive videos.
[806]
We've got a fair amount of those now.
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It's pretty awesome. They're all awesome.
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They're all great.
[810]
Be kind. I'll see you next time.
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