A different angle on the auto industry bailout

I've heard all the regular theories about the failure of the American auto industry---that the unions have created an unsustainable set of benefits for their retirees ("the unions are to blame!"), the the companies haven't been agile enough to handle foreign competition ("poor corporate culture is to blame!"), that the companies are managed so poorly that there's no way for them to compete ("the management is to blame!").

I had also heard a vague theory that the car companies needed to get out of bad deals with their franchises, but I had no idea what the heck that meant. At least I just heard an explanation on an Econtalk podcast with Michael Munger (Econtalk is hosted by Russ Roberts of George Mason University and is currently my favorite podcast). Munger has been doing some reading about the auto industry and he floated some new information (new at least to me).

Here's the gyst of his analysis: It is illegal in 46 of the 48 continental states for the major auto companies to run their own dealerships. This is ostensibly so that the car companies don't use the threat of setting up their own dealerships to push around dealership franchises.

Car dealerships also cannot close any franchises without paying back the full franchise fee---only the franchisee can make the call to shutter a franchise. Now, on top of that, the car companies are required to produce and market a certain number of vehicles for each franchise. So if GM has a bunch of franchises selling an unprofitable line of cars, it's often cheaper to lose money manufacturing unprofitable cars than to pay back all of the franchisees to close them.

I'm not sure about the history of this legislation; it's very possible that state legislators passed these laws in a good-faith attempt to protect their local car dealerships from the big car companies. But given how the system works, it currently prevents the big three in the US from being nimble, agile, compete 21st century companies.

So let's review:

• The big three automakers in the US cannot legally run their own dealerships.
• The car companies cannot close franchises without paying back the full franchise fee to the franchisee.
  
• The big three must produce and advertise a certain number of (possibly unprofitable) cars for each of their franchisees, or else they need to close the franchise by paying back the franchise fee.
  

So if this analysis is indeed accurate, far from the big bad automaker pushing around the poor defenseless dealership franchises, it looks like the opposite is true, at least in this regard. The only way to get out of these franchise deals, then, is through bankruptcy.

One other angle here is that car dealerships are extremely profitable, especially in rural areas, and are big contributors to political campaigns, especially in the house of representatives. This may explain why congress has had a strong appetite over the decades to bail out the car companies on a semi-regular basis.

After hearing the podcast, I was thinking a little bit about car dealerships, and I remembered hearing something about the relationship between TV ad revenue and car dealerships. If you notice, often the last commercial before the show starts back up is a spot for the local car dealer, which usually involves the owners of the dealership, poor acting and madcap antics ("You simply can't beat our prices! Why am I punching this monkey with a foam hammer? His name is Prices and only I can beat him!").

So it wouldn't surprise me to find out that car dealership franchises are extremely profitable, politically strong, and more than happy to throw the unions and the car companies under the bus to protect the deal they have set up.