Rethink State Franchise Laws in Bailout

In the discussion leading up to the congressional hearings this week, many are reporting on the structural problems and challenges faced by the automotive industry today. The essence of the discussion is "they'll never be profitable unless they fix..."

Most have focused on labor contract issues and being more competitive with the transplants in salary and benefits costs. The interesting thing here, well known by the automotive press, but totally missed by many of the mainstream media and blogs, is that this issue was largely addressed in the most recent round of contract negotiations with the unions. The announcement today by the UAW that they were willing to delay the VEBA contributions and give up the bizarre jobs bank benefit focuses on the right issues in my opinion. That's not to say that the union issues are addressed but they are receiving more than their fair share of attention in my opinion.

Many in the marketing media point to the proliferation of weak brands as one of the key problems. This is true, and it is a major problem for the automakers for several reasons. One is the costs associated with supporting all of these individual brands. The other is that the over-saturation of choices in each segment of the market and lack of differentiation between many of these brands (caused in part by badge engineering and in part by "me too" product development). This results in a lack of pricing power, large incentive payments, and reduced profitability.

So the Big 3 should kill some of their brands. That's fine, and it has already been suggested and considered. So what's the problem?

The problem lies with the state franchise laws. Because of these laws, killing a brand is a very expensive proposition. The most recent example being the elimination of Oldsmobile, which cost GM over $1B. The state franchise laws require the manufacturer to buy out each dealer because, it is reasoned, the dealer has invested a very large amount of time and money and care in building their business and must be compensated for this. Sounds like a great deal to me. If the manufacturer of a product is going out of business and can't afford to support the product anymore, the distributors of that product should bear their share of the unfortunate consequences.

There are a lot of other problems with the state franchise laws, which were set up to protect dealers (although under the guise of consumer protection in some cases) and are, to a large extent, out of date. For the most part, they don't make sense in today's marketplace and should be dismantled. They certainly are not needed for protection of consumers anymore, and may actually hurt consumers.

Now is the time to tackle this major structural problem, because only in this time of crisis can the political courage be mustered to tackle some very well entrenched interests. If the Big 3 are going to restructure, which involves reducing manufacturing capacity, the number of brands, and the number of dealers (among other things), the federal government should get involved in passing legislation that pre-empts some or all parts of the state franchise laws to better enable the restructuring of the distribution channels in a cost effective and quick manner.

Along the way, an optional federal charter should be established for new manufacturers or brands to better enable them to distribute cars across the country through company owned distribution. Current laws make it difficult to sell directly to consumers in some states and even prohibits the servicing of cars directly by the manufacturer.

Existing dealers obviously wouldn't support this, because it threatens their economic interests and disrupts the status quo. State governments will not support this for the same reasons. But the reality is that the the market conditions and the financial health of the manufacturers will put an extraordinary strain on the distribution channel anyway, driving many of them out of business. If this country is going to support the restructuring of the automobile industry using taxpayer money, we should make sure that we address all of the structural issues that prevent this industry from being healthy in the long term, and that requires that we rethink the state franchise laws.