Why You Can't Buy a New Car Online

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—By Stephanie Mencimer

Americans can buy virtually anything over the Internet these days—sex, booze, houses—everything, that is, but a new car. If you want to buy a new Ford Fusion, you have to go down to your local dealership and haggle with the car salesmen, an unpleasant and daunting task. The process usually subjects consumers to hours in the dealership hotbox and can add hundreds, if not thousands, of dollars to the price of the car. Wouldn't it be nice if you could cut out the middleman and just order your Prius straight from Toyota?

But you can't. And there's one reason why: the car-dealer lobby, which has worked hard to ensure that this will never happen. Since the late 1990s, car dealers have used their considerable political clout to pass or better enforce state franchise laws that in many cases make it a criminal offense for an auto manufacturer to sell a new car to anyone but a state-licensed car dealer. The laws governing who can sell new cars are among the most anti-competitive of any domestic industry. By creating local monopolies for dealerships and prohibiting online sales for new cars, they constitute a major restraint on interstate commerce; in 2001, the Consumer Federation of America estimated [pdf] that the laws added at least $1,500 to the price of every new car.

These parochial state laws also make the distribution system for new cars incredibly inefficient and expensive, one factor in the financial problems facing the Big Three in Detroit. Online sales would help companies like GM and Chrysler align production to sales better by allowing more people to buy their cars built-to-order from the factory, rather than having Detroit send out truckloads of vehicles to sit around on dealer lots for months in the hopes that a rebate offer will finally entice someone to buy them.

Now that the federal government is bailing out GM and Chrysler to the tune of $13.4 billion, and Congress is demanding major changes in the way they're run, consumer advocates think the time is ripe for Congress to clear the way for online sales as part of its effort to move Detroit out of the Stone Age. You'd think they would find a sympathetic ear among deregulatory Republicans who take great umbrage over any state interference with the free market, but you'd be wrong. Most free-market Republicans have no interest in taking on the car dealers, who are among their strongest local supporters. Since 1990, American car dealers have given more than $66 million to federal candidates, with more than three-quarters going to Republicans.

For decades, Republican governors have been some of the dealers' biggest champions and have signed much of the legislation creating their bulwark against real competition. California legislator Mark Leno discovered just how entrenched these roadblocks are in 2005, when he introduced legislation to let consumers buy hybrid and other low-emission vehicles directly from manufacturers online. The bill came in response to evidence that local dealerships were price-gouging consumers seeking hybrids, which were then in short supply. Environmentalists believed the savings consumers were likely to get by purchasing online would spur more sales for the cleaner cars and encourage automakers to produce more of them.

The bill would have allowed people to order their Priuses online and have the manufacturer deliver them to their doors—or, alternately, they could pick them up at Costco or the local dealership. The bill would have even allowed people to buy the cars on eBay or Amazon. Leno's office estimated that the bill would have little impact on the dealerships, because hybrids accounted for less than 1 percent of all new car sales. But he underestimated the power of the dealers, who were the reason legislation was needed in the first place.

Back in 1973, then-California governor Ronald Reagan signed a law that effectively prohibited any new car dealerships from opening within a 10-mile radius of another existing dealership selling the same make of car. The law was a gift to one of Reagan's "kitchen cabinet" members, Holmes P. Tuttle, and decades later would have made it difficult for hybrid manufacturers to create pickup facilities (which required dealer licenses) for cars ordered online.

Tuttle had famously sold a car to Reagan when he was an out-of-work actor. Tuttle went on to create one of the nation's largest car dealerships and helped fund Reagan's first run for governor. Reagan repaid him by signing the dealer franchise law. "A statutorily created monopoly was signed into law by Reagan to help his friend Mr. Tuttle," says Leno. He says Tuttle had been pushing for a law that prohibited the establishment of any new dealership without the majority support of the dealerships in that part of the state. Instead, he got the 10-mile exclusionary zone. Leno notes that the law was vigorously opposed by California state senator George Moscone, who was later assassinated, along with Harvey Milk, when he was mayor of San Francisco. Moscone labeled the bill "the turkey of the year," and issued a prescient statement observing that the bill would "freeze, for all time, the ability of new car dealers to make money without worrying about competition…How in the name of free enterprise could the governor even consider signing a bill that shuts off any future competition?"

Moscone's objections fell on deaf ears. Today, Tuttle's son Robert, who still owns the family auto chain, is the outgoiong US ambassador to the UK, an indication of just how strong the political clout of the car dealers—and the Tuttle clan—remains. Needless to say, Leno's bill to amend the franchise law never even made it out of a Democrat-controlled policy committee.

His experience isn't unusual. In the late 1990s and early 2000, the auto manufacturers themselves, sensing the potential of the Internet, attempted to challenge state franchise laws that restricted their ability to sell over the Internet. They got clobbered, and in no small part because of Republican governors, who, like Reagan, counted local car dealers as political supporters.

In 1999, as governor of Texas, George W. Bush signed what was then the nation's toughest law in the country banning new car sales online. Egged on by local car dealerships, state regulators invoked the law to help shut down Ford's fledgling attempt to sell used cars online. Ford had started letting people buy used cars on its website; local dealerships delivered them. But Texas regulators cracked down, threatening Ford with $10,000 daily fines for allegedly violating a state law banning manufacturers from selling their products directly to the public. Ford tried to fight back in court, arguing that the state franchise law was a restraint on interstate commerce, but the court was no more sympathetic than the governor. The federal judge hearing the case wrote that if Ford were allowed to sell cars online, "all state regulatory schemes would be nullified" as they "fall before the mighty altar of the Internet." Texas regulators, never known for regulating much of anything, also forced GM to abandon its foray into e-commerce. The automaker had bought a handful of dealerships in the state to use as distributors for cars bought online, but regulators refused to give GM a dealer license. GM gave up and sold off the dealerships.

Texas inspired car dealers in other states to seek similar protections from competition. Arizona, for instance, passed a law that not only blocked manufacturers from selling cars online but also restricted manufacturers from offering other services online, such as financing. Other states followed suit, as car dealers feared predictions that only half of them would survive the next seven years thanks to competition from the Internet. Since then, the manufacturers have largely given up the fight.

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http://www.motherjones.com/politics/2009/0...-new-car-online