Planet Money
12:18 pm
Tue February 19, 2013

Why Buying A Car Never Changes

Originally published on Tue February 19, 2013 4:42 pm

"Buying a car sucks," Scott Painter says. "It's something that most consumers fear."

Back in the '90s, Painter started a company to try to change this. "The name of the company was Cars Direct," he says. "The mission was to sell cars directly."

Painter wanted his company to build virtual dealerships that would let people go online and buy cars. But after talking with a few car execs, he realized nobody would even consider his idea.

Painter was stopped by a web of state laws that make it very, very difficult to change the way cars are sold. Laws like Alabama statute 8-20-1-13:

Limitations on cancellations, modification, terminations and non renewals of franchise relationship.

Almost every part of the car buying process is enshrined in laws like this one. They restrict where new dealerships can open, giving dealers the exclusive right to sell within their territory. This makes it almost impossible to create an online dealership.

What's more, the the laws make it very hard for manufacturers to close exiting dealerships. Manufacturers don't have leverage over dealerships if they want them "to provide good customer service, low prices, nice facilities, or anything else," says Yale economist Fiona Scott Morton. "That [dealer] gets to stay as long as he wants, and if he does a bad job, that's just what he does," she says.

Car dealers argue that the laws are necessary to protect dealers' investment, and to protect the jobs of people who work at car dealerships.

"If you just take our organization alone, we employ over 2,000 people," says Tammy Darvish, who runs a group of auto dealerships and sits on the board of the National Automobile Dealers Association. "That's 2,000 families throughout greater Washington that are dependent on us continuing our business operations."

There are plenty other businesses employ lots of people but don't have so much protection from state laws.

That may partly be due to the fact that car dealers have a lot political power. Dealers contribute a big share of state sales tax revenues — as much as 20 percent in some states — and they tend to be big local employers. That makes state and local legislators listen.

Scott Painter now runs a company called true car...that tries to ease the process of buying a car. He's now trying to work with dealers not around them.

"There is no argument by which franchise law goes away," he says. "That is purely a fantasy conversation.

Companies like Tesla, Auto Nation, Costco and even many dealers are pushing to innovate from within the system as it is. All the people I talked to for this story — Tammy Darvish, lawyers for the auto industry, and Scott Painter himself — aid a friendlier, more rational car buying experience would come eventually. But it won't come without your local car dealer.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

MELISSA BLOCK, HOST:

Every year, 14 million Americans put themselves through a process they do not consider fun.

KATHY CHAMPAGNE: It makes me feel manipulated.

TIM NAYAR: I hate the haggling. I hate the lost weekends.

MATT YUEN: I feel stupid, weak and powerlessness, I think. I want to get out of there.

CHAMPAGNE: It also takes forever.

BLOCK: It is buying a new car. And experts confirm what we just heard from Kathy Champagne, Tim Nayar and Matt Yuen, buying a car is one of the most stressful economic decisions most of us will ever make.

Sonari Glinton, with NPR's Planet Money Team, explores why the process hasn't gotten easier.

SONARI GLINTON, BYLINE: Back in the 1990s, a young entrepreneur named Scott Painter looked at how much people hated buying cars and thought: It doesn't have to be that way. So he started a company to fix it.

SCOTT PAINTER: The name of the company at the time was Cars Direct and the mission of the company was to sell cars directly. Buying a car sucks and it's something that most consumers fear.

GLINTON: Now, this was the 1990s and a lot of things were being sold over the Internet and Painter thought, why not become the Amazon.com of cars. Painter took his idea directly to then-head of Ford Motor Company, Jacques Nasser.

PAINTER: We went to Dearborn and we sat down at the top floor of Ford's office building in Dearborn. And Jack came in and everybody is very serious. And he says, you know, what can I do for you?

GLINTON: What Painter wanted was to be a new kind of Ford dealer, a Ford dealer on the Internet.

PAINTER: And I can tell you that that is the most naive question to ask Jack Nasser. Now looking back at it, like there's no way we were going to get a virtual dealer point, nor would they even consider it.

GLINTON: The reason no one would consider it? Here, let me read it to you. Alabama Statute 8-20-1-13: Limitations on cancellations, modifications, terminations and non-renewals of franchise relationship. Almost every state in the union has a law like this Alabama law - laws that protect new-car dealers from people like Scott Painter and other who want to change the way new cars are sold.

Fiona Scott Morton is a Yale University economist who's studied the car industry. She says these laws make Scott Painter's idea of a virtual dealership virtually impossible.

FIONA SCOTT MORTON: There are territory restrictions, so the manufacturer can't add dealerships or move them around without demonstrating a market need, which basically boils down to not being able to move the dealerships around. So the dealerships cannot be tailored to follow the population.

GLINTON: Almost every part of the car buying process is enshrined in law - the territory, warranty reimbursement, termination of contract. They make it hard to reward good dealers with price breaks or punish bad ones. All this, Fiona Scott Morton says, ends up making the car buying process less enjoyable.

MORTON: The manufacturer has a very hard time incentivizing the dealer to behave well, to provide good customer service, low prices, nice facilities, or anything else, because they cannot threaten to take away the franchise. That franchisee gets to stay as long as he wants. And if he does a bad job, that's just what he does.

TAMMY DARVISH: We need these state laws to protect our investment, not just the investment in our business but our investment in the people.

GLINTON: Tammy Darvish runs Darcars, a series of dealerships in Maryland and Florida, and she sits on the board of the National Automobile Dealers Association. And she says it makes sense to protect dealers because they're a vital part of their local communities.

DARVISH: If you just take our organization alone, we employ a little over 2,000 people. That's 2,000 families throughout greater Washington that are dependent upon us continuing our business operations.

GLINTON: There are plenty other businesses that supply jobs, but car dealers have a lot of political power. In each state, dealers contribute as much as 20 percent of the overall sales tax revenue. And together, they're among the largest employers in any state. And each dealer contributes on average $13 million to their local economy. That makes state and local legislators listen.

Scott Painter now runs a company called True Car that tries to ease the process of buying a car. He's now trying to work with dealers not around them.

PAINTER: There is no argument by which franchise law goes away and there is no opportunity for that. It is purely a fantasy conversation.

GLINTON: Companies like Tesla, Auto Nation, Costco, and even many dealers are pushing to innovate the system as it is. Everyone I talked to in this story - Tammy Darvish, lawyers for the auto industry, Scott Painter himself - say a friendlier, more rational car-buying experience will come eventually, but not without your local car dealer.

Sonari Glinton, NPR News. Transcript provided by NPR, Copyright NPR.