4 ms·
(1) Local protectionism but also (2) Car dealerships need expensive inventory of illiquid assets and franchise licenses. If the franchise contracts aren't we
by KMag 13y ago
(1) Local protectionism
but also
(2) Car dealerships need expensive inventory of illiquid assets and franchise licenses. If the franchise contracts aren't well written (perhaps collusion between manufacturers prevents competition over franchise rights), then a big auto company can maximize profits by selling franchise rights and then a couple years later looking at volumes of sales for which areas it makes sense to set up their own stores and undercut the franchise owners. The franchise owners need to amortize their franchise costs, but not so for the direct sales shops. The argument becomes that the historical implication has been that in the auto industry selling local monopoly franchise rights has implied no direct competition from the manufacturers.
Perhaps a better law would be that no manufacturer with existing franchise owners in the state can have direct sales in the state.
- mortenjorck 13y agoPerhaps a better law would be that no manufacturer with existing franchise owners in the state can have direct sales in the state. As arbitrary a distinction as that may be, it honestly sounds like this would satisfy everyone involved.
- jrs235 13y agoExcept the manufacturers that don't want another manufacturer to able to sell in the state. Especially since that new manufacturer will be selling directly allowing their cars to be sold for less than if a franchise fee had to be amortized into every vehicle sold (in other words, they'll have lower overhead costs), which still affects the existing dealerships who won't be happy as they will be at a slight disadvantage.
- webmaven 13y agoBasically, a manufacturer that wanted to sell direct would have to buy out the dealerships first.
- AaronM 13y agoIts my understanding that dealerships maintain no inventory of vehicles, at least not new vehicles, on their books.
- jcampbell1 13y agoThis is completely wrong. Dealers own the inventory. Dealers take ownership of the car as soon as the car leaves the factory gate - they own the in-transit cars.
- jessaustin 13y agoCompletely wrong? http://en.wikipedia.org/wiki/Retail_floorplan http://en.wikipedia.org/wiki/Retail_floorplan
- KMag 13y agoRead the article you referenced. In a floorplanning agreement, the franchise owners have 100% purchased the inventory and are on the hook for selling the inventory. The purchase money is financed with loans using the inventory as collateral. The dealer fully owns the inventory and (in the absence of side agreements or regulations) assumes all of the liquidity risk. In particular, if a local franchise owner sees the manufacturer opening up its own store down the road, the franchise owner can't (in the absence of side agreements) tell the manufacturer to take back the cars because they want out of the business.
- jessaustin 13y agoThe point is, there is a middle ground between owning everything free-and-clear, and merely acting as a consigning agent for the party that owns everything. Getting a loan for inventory is in that middle ground.