Pub. 55 2014-2015 Issue 1

34 The fact that dealers earn very little on new car sales – or even lose money at certain points in time – reinforces the real- ity of competition in the marketplace. The chart that follows, which sets out data consolidated from NADA member dealers, shows that (1) over the past 15 years profits on the sale of new cars (including financing revenues) never exceeded one percent of revenues and (2) for several years (surrounding the period of the financial crisis of 20082009) dealers lost money in their new car departments. In 2012, the margin increased not because dealers were able to keep more of the spread between wholesale and retail prices but because low interest rates reduced their floorplan inventory carrying expenses while inventory turnover rebounded. Approximate Average Dealer Profit - New Car DepartmentNew Car Department Only Revenue Profit (incl. F&I) - See Note Year PVR PVR Margin 1998 $23,600 $144 0.61% 1999 24,445 224 0.92% 2000 24,923 115 0.46% 2001 25,797 153 0.59% 2002 26,163 220 0.84% 2003 27,565 189 0.69% 2004 28,060 180 0.64% 2005 28,381 63 0.22% 2006 28,451 -32 -0.11% 2007 28,797 -45 -0.16% 2008 28,350 -212 -0.75% 2009 28,996 -302 -1.04% 2010 29,793 -138 -0.46% 2011 30,659 23 0.08% 2012 30,910 111 0.36% Note: Profit for new car department is based on average dealer profit including F&I revenue divided by average new vehicles retailed. Profit is pre-tax but after department expenses. The Review of Economics & Statistics, 455-462, 1993, re- published in 2006 at http://bordley.org/publications/econ/elast10. pdf) In a competitive market, one would expect elasticities for each vehicle segment to be higher than for the market as a whole. This is indeed the case; elasticities for vehicle segments are three- to four-fold higher for vehicle segments. Bordley (2006) This further evidences the healthy competitive market for new motor vehicles that is supported by intra-brand competition. Keller & Elias at page 14. The combination of constantly ad- justing local vehicle pricing and robust intra-brand competition creates a pricing structure that is better for consumers than the comparatively more homogenous pricing strategy that manufac- turer-controlled dealerships would implement. 2. Independent franchised dealers enhance consumer safety. The unique relationship that dealerships have with both their customers and their auto manufacturers allow them to play a vital role helping to ensure their customers’ safety. Current franchise agreements are structured such that manufacturers compensate dealers for warranty and recall repairs; thus, dealers have an independent financial incentive to do this work which benefits consumers. Additionally, it is in the dealer’s interest to ensure that customers remain satisfied with the operation of their vehicles – and this can be achieved, among other ways, by resolv- ing warranty claims and handling recalls and technical service bulletins expeditiously as they arise. Although the higher build quality of today’s cars has reduced many warranty claims related to fit and finish issues, dealers still confront the challenges of solving problems which exceed the limits of current diagnostic equipment. Furthermore, vehicle owners often ignore recall notices if they think the repair is not critical; dealers, however, routinely confirm that vehicles brought in to them for service are up-to-date on recall repairs. In contrast, warranty repairs and recalls represent a cost for the manufacturers. As a result, the manufacturer’s economic incentive is to do the minimum (subject to concerns about safety liability and consumer loyalty). Accordingly, the franchised model has a distinct advantage in ensuring the completion of warranty and recall work. Franchised dealers often advocate for vehicle owners with regard to vehicle-related disputes. In a manufacturer-controlled system, consumers would likely have fewer outlets where they could get service, and the local manager, as an employee of the automaker, would be less likely to advocate on behalf of the cus- tomer. This role as an advocate between the customer and the manufacturer is especially important in light of the large volume of recalls that the consolidation of vehicle platform and parts has created. When so many units are recalled at once, they present a challenge that can most effectively be handled by a national network of dealers that is capable of making repairs as soon as the manufacturer provides parts and establishes the repair protocols with the National Highway and Transportation Safety Agency, the agency within the Department of Transportation which has oversight of vehicle safety. It is precisely this alignment of consumer and dealer interests that a factory direct retail model would eliminate. Even com- panies like Tesla acknowledge this. In the excerpt from Tesla’s 2013 SEC Form 10-K filing that you cite in your writings, 29 Tesla emphasizes that “by owning [its] sales network [it] will avoid the conflict of interest in the traditional dealership structure inherent to most incumbent automobile manufacturers where the sale of warranty parts and repairs by a dealer are a key source of revenue 29 Your letter to the New Jersey legislature at footnote 23.