DEALER'S CHOICE.(The Talk of the Town)(companies preferring automobile dealers for sales)

When General Motors was the biggest and most profitable auto manufacturer in the world, its strategy was to provide "a car for every purse and purpose." G.M. offered a panoply of distinctive brands, each targeted at a particular category of buyer--Buick for the successful but conservative driver, Cadillac for the wealthier and more flamboyant, and so on. This was a tremendously successful strategy in the days when G.M.'s domination was unchallenged. But now, with G.M. losing billions of dollars a year and struggling to restructure, it just looks like a waste of time and money. When analysts talk about how to turn G.M. around, most start with the need to slim down the company and get rid of less popular brands. (Buick and Pontiac are perennial nominees.) It's an eminently sensible approach, but it's unlikely to happen anytime soon, because it would challenge the interests of some of the most powerful players in today's auto industry--car dealers.

Car dealers, with their low-production-value TV commercials and glad-handing tactics, seem like the archetypal small businessmen, and it's hard to believe that they could sway the decisions of global corporations like G.M. and Ford. But, collectively, they have enormous leverage. Dealers are not employees of the car companies--they own local franchises, which, in every state, are protected by so-called "franchise laws." These laws do things like restrict G.M.'s freedom to open a new Cadillac dealership a few miles away from an old one. More important, they also make it nearly impossible for an auto manufacturer to simply shut down a dealership. If G.M. decided to get rid of Pontiac and Buick, it couldn't just go to those dealers and say, "Nice doing business with you." It would have to get them to agree to close up shop, which in practice would mean buying them out. When, a few years ago, G.M. actually did eliminate one of its brands, Oldsmobile, it had to shell out around a billion dollars to pay dealers off--and it still ended up defending itself in court against myriad lawsuits. As a result, dropping a brand may very well cost more than it saves, since it's the dealers who end up with a hefty chunk of the intended savings.

You'd think that what's bad for G.M. would also be bad for the people who sell its cars. But G.M. makes money (when it does) on new cars and on the financing of loans. Dealers, by contrast, make most of their money on servicing old cars and selling used ones. So dealers can thrive even when the automaker languishes. And at the state level they often have more political influence than automakers do. In the late nineties, for instance, local dealers were challenged by companies that wanted to sell cars over the Internet. In response, some states, including Texas, actually passed laws making it illegal to have a business selling cars online (unless you already owned a local dealership), and regulators told Internet ...