Ever since Henry Ford decided to distribute the Model T through a chain of independent dealers instead of selling it directly to his customers, car dealers have been fighting the factory. And they’re grown increasingly effective in getting state governments to fight that battle for them.
Like every state, New Hampshire law micromanages the contracts that auto dealers sign with auto manufacturers, known as the Auto Dealers Bill of Rights. It stipulates what is and isn’t allowed in the franchise agreements that local car lots sign with Ford, GM, and Toyota. In New Hampshire, it’s covered under RSA 357-C, which has 16 subsections, violation of which is a misdemeanor.
This week, the New Hampshire Senate voted 21-2 to add even more restrictions into the law, to benefit dealers at the expense of car companies.
Car dealers are extremely popular with politicians, and for good reason. They are among the largest employers in town, and pay a lot in local and state taxes. Car dealers are the largest advertisers for newspapers, radio, and TV stations. They sponsor Little League teams and community service organizations. They are reliable political donors. It’s easy to talk yourself into the premise that what’s good for car dealers is good for the economy.
But being pro-business is not the same as being pro-market, or pro-consumer. Car companies insist on strict franchise agreements in order to protect the value of their brands. When they spend millions on national ad campaigns, they want customers to have the same buying experience in Manchester as in Denver. That is the power of the franchise model.
Holding a franchise for Ford, McDonald's, or Dunkin' Donuts holds significant advantages to owning an independent car lot, burger joint, or coffee shop. You get a massive company buying ad time to sell your product, crafting customer expectations about the product you sell. But that only works if you have the same product as every other franchise in the company.
Auto dealers argue that they know best what their customers want. They complain that the factory imposes ridiculous requirements on how often they have to remodel their showrooms, where they have to buy their materials, and how much they get reimbursed for repairs. They agreed to all of these conditions when they signed their contracts, but now insist that they had no real choice. The factory doesn’t give them the flexibility they need to run their businesses, so they need state government to intervene on their behalf.
But they do have a choice. No one is forcing them to sell someone else’s cars. Auto companies can insist on such strict terms in their contracts precisely because owning a local franchise for a popular car line is so valuable.
Politicians who tear up contracts to benefit popular businesses end up hurting consumers. Interfering in contract disputes weakens the economy. It favors incumbent firms over potential competitors. And it invites a massive diversion of time and energy into seeking government protection.
At the state level, that means auto dealers get special treatment. In Congress, it leads to bailouts and trade barriers. Other countries go much further than the U.S. to protect their companies from competition.
I don’t blame car dealers, or any other business, for seeking special treatment. Once government starts picking winners and losers, any rational business will make sure it’s a winner. If you’re worried about corporate influence on government, you should oppose government interference in commerce.
Local dealers have a point. I’m sure some of things the factory makes them do are bad ideas. It’s far more efficient for consumers to work that out through the market than through government second-guessing.
We’ve avoided such anti-market behavior with other types of franchises, but the Senate bill would extend the Auto Dealers Bill of Rights to farm equipment dealers. They say it’s about local control. It’s really just bigger government.
If New Hampshire politicians want to be pro-business and pro-consumer, they’d repeal the state law prohibiting car companies from selling their products directly. We’ve locked the auto industry into a century-old business model, stifling competition and innovation in order to protect incumbent firms.
I’ve got nothing against local car dealers. They are big contributors to the local and state economy. But when they rely on state government to protect them from the terms of their own contracts, they leave themselves vulnerable. Because someday, politicians might turn their affections to someone else.