Gerald R. Bodisch:

Automakers General Motors Corporation (GM) and Chrysler LLC have received $17.4 billion in loans under the Troubled Asset Relief Program (TARP) and have indicated that they may need up to an additional $21.6 billion in federal assistance to restructure their operations.(1) As a condition of the loans, the companies are required to develop plans to achieve profitability. Much attention in the plans has centered on getting labor costs under control. Among other measures addressed are ways to cut distribution costs. As part of its cost-cutting effort, GM has announced that it will reduce its dealership network from over 6,200 dealers today to 4,100. The cost of the auto distribution system in the United States has been estimated as averaging up to 30 percent of vehicle price.(2)
 With dealer networks being rationalized as part of cost-cutting initiatives, direct manufacturer sales to car buyers may present an additional opportunity to lower distribution costs. Such sales might range from consumers’ simply ordering assembled vehicles of their choice directly from automakers to a scenario along the lines of the “Dell Direct” build-to-order model that revolutionized the personal computer production and sale process. GM initiated a build-to-order sales model in Brazil for its Chevrolet Celta economy car over eight years ago. In 2008, the Celta was among the sales leaders in Brazil.(3) At the time of the Celta’s introduction, an auto analyst said that build-to-order could result in “spectacular improvements in the company’s competitiveness and profitability.”(4)
 In the United States, however, direct manufacturer auto sales are prohibited in almost every state by franchise laws requiring that new cars be sold only by dealers. These bans on direct manufacturer sales are part of a broad array of state laws that bar manufacturer ownership of dealers and regulate entry and exit of dealers through territorial restrictions and provisions on dealer termination. Analysis of the economic effects of these laws has led some to conclude that they harm consumers and should be eliminated.(5) The focus here is more narrow – state laws banning direct manufacturer sales, since they may be curtailing development of a more cost-effective method of auto distribution.(6)
 The next section offers a brief overview of the auto dealer franchise system. Then the essential features of the direct manufacturer distribution model are described and compared with the traditional method of selling autos. Discussion of the benefits of a direct distribution model to auto consumers and manufacturers follows, along with economic analysis of some of the concerns of dealers. A conclusion addresses the question of federal involvement in this issue.

via: Cameron Bales.