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Car laws favor dealers over manufacturers

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In the chapter of New Mexico law dealing with motor vehicle dealer franchises, there is a section titled “Unlawful acts; dealers.” That section is 176 words in length.

There also is a section titled “Unlawful acts; manufacturers; distributors; representatives.” It is 2,714 words long.

That’s an illustration of how New Mexico law – like the laws of all other states – tilts in favor of new car and truck dealers when it comes to their relationships with manufacturers.

“It’s really difficult to argue these laws benefit consumers. In fact, they do not,” said Francine Lafontaine, a University of Michigan professor who has researched and written about state laws on motor vehicle dealer franchises, and their impact on prices for cars and trucks.

The president of the New Mexico Automotive Dealers Association didn’t return repeated telephone calls, but Lafontaine said new car and truck dealers have gotten the edge over manufacturers because of their political influence.

Dealers are major taxpayers, employers and campaign donors. They also are often prominent in community affairs, generating goodwill for their charitable contributions and other support of local causes.

“They are well-organized in each and every state, and consumers are not,” Lafontaine said in a telephone interview this week.

Among the state laws that favor franchise dealers are statutes that prohibit motor vehicle manufacturers from selling directly to consumers. New Mexico and nearly all other states have such a prohibition.

Under New Mexico law, only licensed dealers can sell motor vehicles and manufacturers cannot be licensed dealers.

Tesla Motors, the California maker of electric vehicles, has ignited a nationwide debate over such state prohibitions because it sells directly to consumers and wants to set up a nationwide network of Tesla-owned showrooms.

“I’m glad to see a new technology coming up that makes us rethink old ways,” Lafontaine said.

Tesla has announced it is considering New Mexico and three other states as possible locations for a $5 billion battery factory.

Here are other examples of how New Mexico law gives motor vehicle dealer franchises an edge over manufacturers:

  • A manufacturer can cancel a dealer franchise agreement only with “due cause,” which is defined as a substantial and significant contract violation. Such state provisions frustrated attempts by U.S. manufacturers during the last recession to reduce their distribution costs by cutting their numbers of dealers.
  • A manufacturer cannot establish an additional franchise in the market area of a current one “if such addition would be inequitable to the existing dealer.” “Further penetration of the market is not grounds for establishing an additional franchise,” the law says.
  • In compensating dealers for warranty work, manufacturers must pay the same repair rates the dealer charges retail customers.
  • A manufacturer cannot force a dealer to accept motor vehicles the franchise doesn’t want to sell. The provision allows dealers to manipulate supply and demand in their market areas, and sell cars and trucks that generate the most profit.

Lafontaine said the liquor industry is the only other industry whose product distribution is regulated by state laws to the extent of that of the motor vehicle industry.

The regulation of motor vehicle dealer franchises began in the early 20th century in response to manufacturer abuses, according to an article by Lafontaine and Yale University professor Fiona Scott Morton published in 2010.

Little research has been done on the impact of state motor vehicle franchise laws on car and truck prices, but what research has been done has found consumers pay more as a result, Lafontaine said.

A U.S. Justice Department report issued in 2009 cited a study that found allowing manufacturers to sell directly to consumers via the Internet or other means would produce potential cost savings of 9 percent or more on the average vehicle price.

The Justice Department report also cited a survey that found nearly half of respondents would opt to buy cars directly from a manufacturer – even if they didn’t save money.

The report advocated for elimination of state prohibitions on direct manufacturer sales “to provide automakers with an opportunity to reduce inventories and distribution costs by better matching production with consumer preferences.”

Charles Henson, president of the New Mexico Automotive Dealers Association, couldn’t be reached for comment, but the National Automobile Dealers Association said it believes sales of new motor vehicles should be through independent, franchised dealers.

“It’s easy to see the rationale for state laws that foster a well-capitalized, dealer network,” the association said in a written statement. “A new vehicle purchase usually requires financing and often involves a trade-in. Consumers are better served by multiple retailers competing for their business.”

The New Mexico Automotive Dealers Association has lobbyists at the state Legislature and is a significant contributor to the campaigns of lawmakers.

In 2012, the association’s political action committee, Car of New Mexico, contributed a total of more than $50,000 to 89 candidates, including both Democrats and Republicans.

The Legislature, without a single “no” vote, last year passed legislation to expand the section of law dealing with the unlawful acts of manufacturers and their distributors and representatives.

The bill, signed into law by Gov. Susana Martinez, prohibits manufacturers from requiring dealers to build, remodel or relocate except as necessary to comply with health or safety laws or to meet technology requirements in selling or servicing vehicles.

Some motor vehicle manufacturers have lobbyists in Santa Fe; none is a major political donor to lawmakers.

UpFront is a daily front-page news and opinion column. Comment directly to Thom Cole at tcole@abqjournal.com or 505-992-6280 in Santa Fe. Go to abqjournal.com/letters/new to submit a letter to the editor.

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