Why You Can't Buy a New Car Online

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These parochial state laws also make the distribution system for new cars incredibly inefficient and expensive, one factor in the financial problems facing the Big Three in Detroit. Online sales would help companies like GM and Chrysler align production to sales better by allowing more people to buy their cars built-to-order from the factory, rather than having Detroit send out truckloads of vehicles to sit around on dealer lots for months in the hopes that a rebate offer will finally entice someone to buy them.

Now that the federal government is bailing out GM and Chrysler to the tune of $13.4 billion, and Congress is demanding major changes in the way they're run, consumer advocates think the time is ripe for Congress to clear the way for online sales as part of its effort to move Detroit out of the Stone Age. You'd think they would find a sympathetic ear among deregulatory Republicans who take great umbrage over any state interference with the free market, but you'd be wrong. Most free-market Republicans have no interest in taking on the car dealers, who are among their strongest local supporters. Since 1990, American car dealers have given more than $66 million to federal candidates, with more than three-quarters going to Republicans.

For decades, Republican governors have been some of the dealers' biggest champions and have signed much of the legislation creating their bulwark against real competition. California legislator Mark Leno discovered just how entrenched these roadblocks are in 2005, when he introduced legislation to let consumers buy hybrid and other low-emission vehicles directly from manufacturers online. The bill came in response to evidence that local dealerships were price-gouging consumers seeking hybrids, which were then in short supply. Environmentalists believed the savings consumers were likely to get by purchasing online would spur more sales for the cleaner cars and encourage automakers to produce more of them.

The bill would have allowed people to order their Priuses online and have the manufacturer deliver them to their doors—or, alternately, they could pick them up at Costco or the local dealership. The bill would have even allowed people to buy the cars on eBay or Amazon. Leno's office estimated that the bill would have little impact on the dealerships, because hybrids accounted for less than 1 percent of all new car sales. But he underestimated the power of the dealers, who were the reason legislation was needed in the first place.

Back in 1973, then-California governor Ronald Reagan signed a law that effectively prohibited any new car dealerships from opening within a 10-mile radius of another existing dealership selling the same make of car. The law was a gift to one of Reagan's "kitchen cabinet" members, Holmes P. Tuttle, and decades later would have made it difficult for hybrid manufacturers to create pickup facilities (which required dealer licenses) for cars ordered online.

Tuttle had famously sold a car to Reagan when he was an out-of-work actor. Tuttle went on to create one of the nation's largest car dealerships and helped fund Reagan's first run for governor. Reagan repaid him by signing the dealer franchise law. "A statutorily created monopoly was signed into law by Reagan to help his friend Mr. Tuttle," says Leno. He says Tuttle had been pushing for a law that prohibited the establishment of any new dealership without the majority support of the dealerships in that part of the state. Instead, he got the 10-mile exclusionary zone. Leno notes that the law was vigorously opposed by California state senator George Moscone, who was later assassinated, along with Harvey Milk, when he was mayor of San Francisco. Moscone labeled the bill "the turkey of the year," and issued a prescient statement observing that the bill would "freeze, for all time, the ability of new car dealers to make money without worrying about competition…How in the name of free enterprise could the governor even consider signing a bill that shuts off any future competition?"

Moscone's objections fell on deaf ears. Today, Tuttle's son Robert, who still owns the family auto chain, is the outgoiong US ambassador to the UK, an indication of just how strong the political clout of the car dealers—and the Tuttle clan—remains. Needless to say, Leno's bill to amend the franchise law never even made it out of a Democrat-controlled policy committee.

His experience isn't unusual. In the late 1990s and early 2000, the auto manufacturers themselves, sensing the potential of the Internet, attempted to challenge state franchise laws that restricted their ability to sell over the Internet. They got clobbered, and in no small part because of Republican governors, who, like Reagan, counted local car dealers as political supporters.

In 1999, as governor of Texas, George W. Bush signed what was then the nation's toughest law in the country banning new car sales online. Egged on by local car dealerships, state regulators invoked the law to help shut down Ford's fledgling attempt to sell used cars online. Ford had started letting people buy used cars on its website; local dealerships delivered them. But Texas regulators cracked down, threatening Ford with $10,000 daily fines for allegedly violating a state law banning manufacturers from selling their products directly to the public. Ford tried to fight back in court, arguing that the state franchise law was a restraint on interstate commerce, but the court was no more sympathetic than the governor. The federal judge hearing the case wrote that if Ford were allowed to sell cars online, "all state regulatory schemes would be nullified" as they "fall before the mighty altar of the Internet." Texas regulators, never known for regulating much of anything, also forced GM to abandon its foray into e-commerce. The automaker had bought a handful of dealerships in the state to use as distributors for cars bought online, but regulators refused to give GM a dealer license. GM gave up and sold off the dealerships.

Texas inspired car dealers in other states to seek similar protections from competition. Arizona, for instance, passed a law that not only blocked manufacturers from selling cars online but also restricted manufacturers from offering other services online, such as financing. Other states followed suit, as car dealers feared predictions that only half of them would survive the next seven years thanks to competition from the Internet. Since then, the manufacturers have largely given up the fight.

"We have a very good relationship with our dealerships," says Charles Territo, a spokesman for the Alliance of Automobile Manufacturers, which represents 11 manufacturers, including the Big Three. "The dealers are the faces of the manufacturer." Territo says that after their experience trying to change state laws in the 1990s, the manufacturers have no interest in picking a battle with the dealerships over online sales, which he considers unworkable anyway.

"What about sales tax?" he demands, suggesting that if people start buying cars over the Web, local governments would be deprived of revenue that supports their communities. He says that in California, fully 25 percent of state tax revenue comes from vehicle sales. Even if people could buy new cars online, he says, the nature of the sales means that the "dealer would still need to be part of the equation," either because they would need to service the cars or arrange delivery of them.

Territo says that the lack of Internet sales is the least of the problems for the automakers right now, when the credit markets have made it virtually impossible for many consumers to buy new cars. "It doesn't matter whether you buy it on the Internet or on a street corner—if you can't get credit, you're not going to be able to buy that car," he says.

Territo's argument mirrors that of the car dealers. Jack Fitzgerald, the owner of a chain of dealerships in Maryland who's known as an honest broker among consumer advocates, calls online new car sales "a pipe dream." From his perspective, the state franchise laws that prevent manufacturers from selling their own products "are what little protection dealers have against the abuses of the manufacturers," which have a long history of beating up on both their own employees and their dealerships, which the companies force to assume much of the risk of the sales business, he says.

Fitzgerald suspects that if the manufacturers could sell new cars directly over the Internet, consumers would actually pay more for them than they do now. Right now, he says, dealerships actually pay about $2,500 more for a car from the manufacturer than they sell it for. Dealerships make their money elsewhere—on repairs and servicing, financing, and other products. Fitzgerald says that the manufacturers haven't sold cars directly to the public in 75 years, since the days when you could buy a car at Sears. Those sales didn't work out, he insists, because someone still has to service the car, and that's usually the dealership.

Jack Gillis, the Consumer Federation's executive director, says allowing online new car sales wouldn't necessarily remove dealerships from the equation. It would just introduce more competition into the marketplace and reduce some of the inefficiencies in the distribution system. If Ford or GM could sell cars through Amazon or eBay, for instance, the dealerships could still handle the deliveries and warranty work. Indeed, Fitzgerald concedes that under such an arrangement, he might actually make more money than he does now.

"It's unfortunate that the car companies have capitulated to the desires of the dealers," says Gillis, noting that allowing online buying might actually stimulate sales. "The loser there, first and foremost, is the consumer, but ironically, so is the industry," he says. "People would flock to the Internet."