Pub. 56 2015-2016 Issue 4

27 SUMMER 2016 Due to the manufacturers’ many points of leverage, the economic imbalance will continue inde nitely. During the Workshop, a number of the speakers asserted that whatever imbalance in bargaining power that may have justified the franchise laws in the past no longer exists and that the manufacturers and dealers of today are effectively economic equals. 29 Accordingly, this argument proceeded, the proper way for the relational disputes between the dealers and the manufacturers to be resolved is through normal contract negotiations in the marketplace. 30 Thus, this line of argument concluded, there is no longer any need for intervention by state legislatures. 31 Notwithstanding the constant refrain from the franchise law opponents on this point, repeating it does not make it so. The purported predicate of this argument — that deal- ers now have sufficient bargaining power to protect their interests at the negotiation table — simply does not reflect reality. To the contrary, dealers across the spectrum remain quite small relative to the manufacturers. Most dealers are still small, family-owned and operated businesses. The typi- cal dealer principal owns just over two stores and more than 7,500 own three or fewer stores. Indeed the vast majority of dealer principals own only a single retail outlet tied to one manufacturer. And this applies to the volume of vehicles sold as well. 39% of NADA’s members sell fewer than 300 new vehicles per year. The significance of these realities can be seen even more starkly by looking at the magnitude of the economic disparity between dealers and their manufacturers. For example, the average dealership, which is tied to just one manufacturer, has annual revenue of $52 million; in contrast, GM, by itself, has revenue of $152 billion and is more than 2,900 times larger. Indeed, even the large dealer groups do not possess the bar- gaining power that the Workshop presenters would impute to them. The manufacturers work very hard to ensure that no dealer group achieves ownership of a large portion of their dealerships. 32 Every public dealership group and the largest private groups operate under what are known as “framework” agreements. Among other things, the manufacturers use these agreements to constrain the number of dealerships of a particular brand that the signatory group may own. And these efforts are on-going. For example, as recently as last fall, Automotive News reported that “Mercedes-Benz USA is talking to its retailers about putting a cap on the number of stores any single dealership group will be allowed to own.” 33 The manufacturers’ efforts to limit the bargaining power of the major groups has been successful. Those groups rarely own more than a very small percentage of a brand’s stores. For example, a review of the SEC Form 10-Ks of the pub- licly-traded dealership groups reveals that even AutoNation, which is the largest dealer group in the U.S., is still only a small part of any single manufacturer’s franchised network. Following on with our GM example above, AutoNation owns less than 1% of the total GM franchises in the United States. And collectively, the public groups own just over 3% of the franchises nationwide.This is another example of what a highly fragmented industry this remains. 34 Clearly, dealers — even the largest ones — do not individually have the bargaining power to negotiate ef- fectively with their manufacturers. Moreover, dealers are also precluded by the federal antitrust laws from getting together and using their collective economic power for this purpose. The federal antitrust laws significantly con- strain collective dealer activities. Individual dealers may complain, criticize, second-guess, and vent about their manufacturers. Acting as a group, however, dealers are subject to extensive restrictions on their activities. Dealer  NADA RESPONSE — CONTINUED ON PAGE 28 29 See, for example, the following comments of Messrs. Chiapa and Goldberg and Professor Sappington: “[I]f we look back on the rationale of the statutes, . . . in effect there was an unequal bargaining power, [but] Warren Buffett is a different player than a mom-and-pop store from the 1950s.” (Mr. Chiapa, TR. I; 30.) “There's been some reference already to the historic unequal bargaining power and some reference to the size of auto dealerships. To put a little bit of a finer point on that, average dealerships in the country now generate $50 million of revenue a year, are profitable, and the Fortune 500 dealer entities now generate billions of dollars. On average, the six largest dealer groups generate over $10 billion of revenues a year. . . [Small dealers] get a free ride[] on the negotiating power of these enormous dealer groups.” (Mr. Goldberg, TR. II; 7.) “[A]s we've heard a bit this morning, I think the basic story that tries to justify these regulations is that . . . we have a setting where there's a huge dominant manufacturer and a small dealer who is beholden to the manufacturer . . . Now, that's a story that one might tell, but that's not the way I perceive the industry, and I think a more realistic depiction of today's industry is that in fact we have many manufacturers competing against one another to reach customers. They do so through their dealers, but those dealers, notice now in this new picture, are not tiny little entities. As Dan [Crane] has mentioned, they are in fact major players, major economic entities.” (Professor Sappington, TR. II; 9.) 30 For example, Professor Schneider stated that “it’s not clear to me why . . . long-term contracts can’t address” the issues governed by the state franchise laws. TR. I; 21. 31 See Professor Crane’s article “Tesla and the Car Dealers Lobby” Regulation 37(2) at page 14 (“Many dealerships are no longer small mom-and-pop organizations but large multi-location and even multi-state ventures. The dealers should protect their interests through contractual negotiations rather than through protectionist legislation.”) 32 Of course, such ownership would go a long way toward giving the larger dealer groups some modicum of bargaining power. 33 “M-B Looks To Cap Number Of Stores Per Group,” Automotive News (October 12, 2015, page 1). 34 What’s more, contrary to one of the assertions made at the Workshop, even if a few of the larger dealer groups were to have sufficient economic power to protect their own interests, this would not solve the problem for all dealers. During panel two, Mr. Goldberg claimed that some of the top dealer groups were large enough to bargain effectively on their own and that small dealers “get a free ride [] on the negotiating power of these enormous groups.” TR. II; 7. As we have explained, Mr. Goldberg was wrong about the negotiating power of the large dealer groups. But even if he was right, the scale, multi-brand nature, and other attributes of those groups make them an insufficient bargain- ing proxy for the more numerous smaller dealers.