FTC Examines Auto Distribution and Warranties

Panelists question why repairs limited to dealers only.

The Federal Trade Commission (FTC) recently held a one-day public workshop to explore competition and related issues in the context of state regulation of motor vehicle distribution and to promote more informed analysis of how these regulations affect businesses and consumers.

The workshop, titled “Examining the U.S. Auto Distribution System,” consisted of presentations and discussion that focused on the following topics:

• Regulation of dealer location
• Laws relating to reimbursement for warranty services
• Restrictions on manufacturers’ ability to engage in direct sales to consumers
• New developments affecting motor vehicle distribution, including autonomous vehicles, connected cars and the rise of subscription-based automobile sharing services

FTC Chairwoman Edith Ramirez gave an opening statement that included the following remarks:

“The FTC continues to examine the complex system of automobile sales. And we are still asking whether consumers benefit from that system or if change is needed.

“Just as the United States was experiencing significant changes a century ago, the automobile marketplace may be on the precipice of dramatic change today. Manufacturing upstarts like Tesla and Elio, which seek to sell their vehicles directly to consumers rather than through dealer networks, are forcing us to reexamine the way that cars are sold. In addition, evolving trends related to the sharing economy and autonomous vehicles could change the demand for and sale of cars.

“With new changes on the horizon for the automobile marketplace, questions about the impact of regulation on competition and innovation will continue. While some regulation may be beneficial and necessary, regulation can have detrimental consequences for consumers if it harms competition or stifles innovation. We must continue to consider whether the state laws under discussion here today are necessary to protect dealers against abuses by manufacturers, or if they serve some other purpose.”

Much of the workshop focused on state dealer executives offering views counter to academics, think tanks and trial lawyers. It was noted early in the meeting that there are 16,400 dealers with 31,000 points of sale; less than 10 percent are owned by major corporations.

There are numerous issues involved in the dealer distribution debate. First, the dealer-automaker relationship is generally regulated at the state level. Many times, these franchise agreement legislative issues have become quite contentious. Second, more recent automakers arriving on the scene, including Tesla and Elio, have challenged the historical dealer distribution system.

Finally, pressure from increased auto recalls in the past few years — the newer manufacturers, dealership closures, etc. — have only amplified the interest in independents being directly involved in warranty repairs.

During the warranty discussion, dealers noted that less than 8 percent of profits come from service. The warranty panel discussed both the benefits and drawbacks of state regulation in this area, with a particular focus on consumer welfare considerations.

Panelists for the workshop included:

• James Appleton, president, New Jersey Coalition of Automotive Retailers
• Daniel L. Goldberg, partner, Morgan, Lewis & Bockius
• Professor David Sappington, University of Florida
• Richard Sox, partner, Bass Sox Mercer
Moderators were:
• Nathan Wilson, Bureau of Economics, FTC
• James Frost, Office of Policy & Coordination, FTC
Goldberg noted the following in his presentation regarding warranty repairs, specifically, “Dealers Enjoy Substantial Benefits from Their Legislative Monopoly Over Warranty Work”:
• Every OEM that is part of the competition for retail sales offers warranties.
• Warranties help dealers market the sale of new vehicles to consumers.
• Warranty work is immune from competition from manufacturers or independent repair shops. Dealers do not need to advertise, but have a captive customer base.
• Competition and product improvements have increased the average length of warranties in recent years, benefitting consumers and extending the period for which dealers enjoy the legislative monopoly on providing warranty repairs.
• Warranties bring customers to the dealership, expose them to new vehicles on the showroom floor and attract customer-paid work in conjunction with or after warranty coverage ends.

Warranty work gives dealers a captive customer base to impress with the quality of the dealer’s service, thus providing a competitive advantage for post-warranty repair work not enjoyed by independent repair shops.

Numerous questions about independent repairers participating in warranty repairs followed the warranty panel’s presentation. Appleton said that neither manufacturers nor consumers wanted independents to do warranty work on their vehicles.

In addition, he noted that tools were special and expensive, implying that these and other items would be prohibitive for independent shops participating in warranty repairs. Finally, Appleton noted that dealer locations also serve the consumer better than independent locations.

Goldberg supported a marketplace decision for warranty work — as far as determining if a dealer or an independent performs the repair. He also added that independents might need to be appointed or designated for warranty work by manufacturers.

The FTC representatives commented on the importance of the automobile to consumers and the importance of a healthy automotive marketplace to the U.S. economy. The representatives also highlighted how dated regulations affecting auto distribution are and raised questions about who benefits and who is harmed by these dated regulations. The dealers and many of the presenters used the consumer as the primary reason for keeping the current regulatory structure or changing it, respectively.

To view the FTC workshop, go to FTC.gov.