It’s always interesting to go back and review past studies to refresh our understanding of the situation under study at that time and to see what predictions were made going forward. The same is true for a May 2009 Economic Analysis Group paper on the effects of state bans on direct auto sales to car buyers. EAG Competition Advocacy Papers disseminate analysis concerning public policy from economists of the Antitrust Division of the Department of Justice. They are meant to stimulate discussion of economic issues within industry where the creation of competition replaces monopoly but include a disclaimer that the views are those of the author not the DOJ. The paper begins by advocating the elimination of state bans on direct auto sales in order to reduce manufacturer costs while, at the same time, better meet consumer preferences.
In 2009, billions of dollars in bailout loans were being provided to GM and Chrysler as part of the Troubled Asset Relief Program (TARP). Including Ford, the Big Three were forced to dramatically cut costs and retool their business models. With franchised dealer distribution estimated to average 30% (half manufacturer-related and half dealer-related) of the vehicle price, the franchise distribution model was one of those costs under scrutiny. GM alone announced it was dropping 2,100 of its 6,200 dealers. A Casesa Shapiro Group Report, valued the total inventory held by the 20,700 dealers around the US at just over $100 billion with carrying costs of around $890 million. Though this inventory belonged to the dealer, the added costs associated with it are passed on to the consumer for cars in inventory that do not necessarily meet all the consumer’s actual desires.
Interestingly, prior to all of this in 2001, GM had embarked on a build-to-order program in Brazil, not unlike Dell computer’s sales model, for its Chevy Celta economy car that still continues today. Cars are ordered over the internet that provides 20 “build-combinations” from which consumers can configure the model of their choice. Prices are 6% lower as a result of reduced inventory and lower real estate costs that are passed on to consumers. Delivery is only about one week compared to the several week lead-time when custom ordering a car in the US. GM does utilize 470 dealers throughout Brazil but each only requires two cars; a showroom model and a test car. Though the paper doesn’t say, it is assumed that the dealers are compensated by commission and service revenue opportunities. By 2008, the car was among the sales leaders in Brazil motivating at least one auto analyst to state the model could result in “spectacular improvements in the company’s competiveness and profitability.” It remains a top seller today and most of GM’s models in Brazil are now sold this way. Because almost all states have bans on such a sales model though, no auto maker could translate this success to the US.
The paper concludes with examples of failed challenges to such state laws, particularly in Arizona and Texas, but predicts that “no matter how strong franchise laws look today, they are one rider away from being a non-factor.” It seems that Tesla is that “rider” and, though their car distribution model is not new, it is breaking new ground in the US. Just as Dell altered its distribution model to better suit customer desires, so too is Tesla. It will be interesting to see if GM or any of the Big Three attempt to follow suit.