Pub. 56 2015-2016 Issue 4

21 SUMMER 2016  NADA RESPONSE — CONTINUED ON PAGE 22 service and repair, financing, and customer sales and service experiences. • Lawmakers recognize that it is best to have dealer owners with local knowledge, ties, and interests. When the going gets tough, a large manufacturer can simply close up a local outlet and go away. For the local business person, when the going gets tough, closing the doors and moving on is often not a realistic option. And the franchise laws present the best opportunity to ensure local ownership and operation of dealerships. • Franchise laws promote price transparency. The sale of all motor vehicles involve distribution costs; as a result, by definition, there is a retail margin in the price of all motor vehicles. There are a number of internet sites and other sources fromwhich a customer can learn the difference between the invoice price on a vehicle and the manufacturer’s suggested retail price. This assists consumers in seeking out the most competitive price for the vehicle. It would be virtually impossible to so deconstruct a manufacturer’s price to determine its retail margin. • Franchise lawsoperate toensure that there is ahealthy economic alignment between those that advocate for and perform warranty work and the consumer. New car warranties are a key component to vehicle ownership. However, manufacturers see warranty work as a cost while dealers view warranty repairs as an opportunity to perform remunerative work and deliver customer satisfaction. This puts dealers firmly on the side of the consumer. Many of these laws also require that manu- facturers file the details of their warranty coverage with the state and ensure that manufacturers and dealers perform their warranty obligations. Finally, a number of states also require manufactures to discharge fully their obligations regarding motor vehicles that are recalled due to product defects. • Franchise laws protect consumers through licensure and other related requirements. The franchise laws ensure that dealers are not only governed by their private franchise agreements, but are also regulated in great de- tail as to such things as their selling and service respon- sibilities and advertising content. All of these provisions focus on protecting the public from the unscrupulous. • As explained inmore detail below, state legislatures understand that the franchised dealership is one of the most powerful economic engines ever created. The franchise system directly produces jobs for more than one million Americans and indirectly supports many more. In addition to the foregoing, one often overlooked con- sumer benefit of the franchise laws is the stability that they bring to dealership operations and the impact that such stability has on dealerships’ cost of capital. The franchise laws, especially those that were explored during the first panel at the Workshop, protect dealers against both arbi- trary terminations by manufacturers and the unjustified and unsustainable addition of nearby competitors. As such, these laws lower the risk of investing in a dealership. Lower investment risk means a lower cost of capital, and the highly competitive nature of the auto retailing market ensures that this cost savings is pushed all the way through to the end purchaser of the dealerships’ sales and service offerings — the consumer. Evidence of this impact on dealers’ cost of capital can be found in the securities law disclosures made by the publicly-traded dealer groups. Under the guidelines of the Securities and Exchange Commission (SEC), publicly-traded companies need to disclose to the public “information about the most significant risks that apply to the company or to its securi- ties.” 18 Virtually all of these groups list elimination of the state franchise laws as one of their key risk factors. For example, the most recent disclosure document for Sonic Automotive, a publicly-traded auto retailing group headquartered in North Carolina, states as a risk factor the following: “If state dealer laws are repealed or weakened, our dealer- ships will be more susceptible to termination, non-renewal or renegotiation of their franchise and dealer agreements.” 19 If elimination of the franchise laws increases the risk of termination or non-renewal, then retention of those laws reduces that risk. As risk decreases, so does the return on investment demanded by and paid to investors. 20 And, while the existence of the franchise laws lowers the amount that dealerships have to pay for their capital, dealers are not the beneficiaries as intense price competition pushes these cost savings all the way to the consumer. 18 How to Read a 10-K can be found at http://1.usa.gov/1TS19bE. 19 Sonic Automotive Inc, 2015 Annual Report (10-K) at 12 (February 26, 2016). 20 And this is not a phenomenon that solely affects public companies. The risks described in the public disclosures are common to all dealerships (including those that are privately capitalized) and are similarly known to the capital sources that private capital dealers access – for example, banks and other lenders. In other words, the working capital loans that private dealers have carry lower interest rates as a result of the franchise laws. And, again, competition causes these cost savings to flow all the way through to consumers.