Pub. 57 2016-2017 Issue 1

27 FALL 2016 their vehicles for repair, (2) complimentary car washes, and (3) other amenities in the service department waiting room such as food and beverage service. These services and amenities benefit consumers to be sure, but providing them represents an expense to dealers that must be paid. Dealers are also required to return failed parts to the manufacturer as part of the warranty process. While these requirements will vary by manufacturer, it cannot be disputed that dealers incur significant costs associated with performing warranty service, not of all of which is reimbursed as part of the payment from the manufacturer. 57 It was stated during the panel two discussion thatmost dealers are receiving cost plus 40% for parts used inwarranty repairs. Indeed, it is our understanding that this figure represents the amount that many, if not most, manufacturers believe is the appropriate figure for dealers nationally, and this is the amount most dealers have typically received in recent years absent the state laws regulating this area. 58 Professor Sappington stated that he had estimated that the increased cost to four manufacturers over a five-year period of complying with Florida’s warranty reimbursement law was over $80 million. TR. II; 10. 59 In other words, Professor Sappington explained that, absent the law in Florida, these manufacturers would not have incurred this expense. However, simply describ- ing the amount of reimbursement the Florida law requires does not provide a credible argument that the Florida legislature got it wrong or any rebuttal to the point that the manufacturers had been for years enjoying discounted pricing for warranty work performed by dealers. A fundamental fact about warranty work is that it represents an expense to manufacturers. As such, there is an economic disincentive for manufacturers when faced with warranty work. In contrast, dealers are incentivized to want to take care of their customers by performing warranty work. Their interests are perfectly aligned with those of the consumer. 60 This is not to  NADA RESPONSE — CONTINUED ON PAGE 28 57 Of course, dealers are fully supportive of warranty work. Indeed, they consider it to be a critical customer care function of the dealership. However, it still must be noted that these costs are unavoidable. 58 The reimbursement payments that a dealer receives in excess of the cost of a part, however, should not be confused with the dealer’s profit. The “cost plus” figure refers to dealer gross revenue. Only after all direct expenses paid and overhead incurred by the dealer are calculated can what a dealer nets on the reimbursement for warranty work from a manufacturer be calculated. Therefore, a 40% retail margin is not a 40% profit. The net profit on a 40% margin is much less. Moreover, as the story that Mr. Appleton told regarding the wholesale price of a replacement fuel tank engine demonstrates, TR. II; 3, the underlying cost figure is subject to manipulation itself. 59 The Florida law in question provides for several ways to determine the amount dealers should be reimbursed for warranty work, including a formula providing reimbursement for parts at the “retail” rate or based on a formula roughly approximating the customer pay that dealers receive for the same or similar repairs. 60 Further evidence of the alignment between consumer and dealer interests can be seen in the statements made by Tesla Motors in its various securities law filings. There, Tesla candidly acknowledged that manufacturers have a conflict of interest with regard to war- ranty work because, to the manufacturer, warranty work represents a cost. Tesla Motors Inc., 2014 Annual Report (10-K) at 8 (February 26, 2015). This same provi- sion also appeared in Tesla’s 2013 10-K. (Interestingly, this statement has been deleted from Tesla’s 2015 10-K which was filed after the Workshop at which Ms. Keller noted this admission of conflict. TR. III; 19.)