Episode 435: Why Buying A Car Is So Awful : Planet Money Why millions of Americans still haggle with car dealers in person, one brand at a time.
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Episode 435: Why Buying A Car Is So Awful

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Episode 435: Why Buying A Car Is So Awful

Episode 435: Why Buying A Car Is So Awful

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There is a process that some 14 million Americans go through every year. It happens in every state, every city, every town every day. Americans of every age, race, creed or class go through it despite the way it makes us feel.

KATHY CHAMPAGNE: It makes me feel manipulated.

TIM NAYAR: I hate the - I hate the haggling. I hate the lost weekends.

MATT YUEN: I feel stupid, weak and powerlessness I think. I want to get out of there.

CHAMPAGNE: It also takes forever.

BLUMBERG: If you guessed what is buying a car - drive on down and collect your prize.


Experts will tell you buying a car is one of the most stressful economic transactions most of us will go through. We're spending a lot of money and we're worried that we're getting taken advantage of. We're afraid that salesmen are using tactics on us.

BLUMBERG: A woman named Kathy Champagne told me she's bought over a dozen cars in her lifetime and the same thing has happened to her every time. Her and the salesman will come to an agreement on the price. She feels like it's done and then they'll say I just have to check with my manager.

CHAMPAGNE: And they go into their manager's office, which has a big glass window so you can see in. And they - and then they can proceed to wave their arms around as if they're arguing. So, you know, we're supposed to think that the salesman is saying, you know, I'm going to lose this sale if we don't come down on the price and the manager says that's ridiculous. We're not going to make any money. That's what we're supposed to think they're saying.

BLUMBERG: And you think it's not - you think there's not actually an argument going on.

CHAMPAGNE: Well, they might be arguing about like baseball or something. I don't - I don't think they're arguing about the price.

BLUMBERG: Kathy Champagne told me that this happens so many times that now when she goes to buy a car, she brings her knitting with her so she'll have something to do during this routine in the manager's office.

GLINTON: And in survey after survey, people rank buying a car as one of their least favorite experiences. And in surveys asking people to rank most and least trusted professions, car salesmen place at the very bottom, below stockbrokers, insurance salesmen and even members of Congress.

BLUMBERG: Which raises a question. Why is it so bad? Why hasn't someone come along with a better way to sell cars, where you don't have to haggle and you can actually trust the salespeople? And for that matter, why is anything about car buying the way it is? Why, for example, isn't there a car store where you could go in and shop for different brands of cars the same way there are electronics stores and clothing stores and grocery stores? You don't have to go to the Tropicana store to buy Tropicana juice and to the Ocean Spray store to buy Ocean Spray juice. So why did Kathy Champagne when she was shopping for her last new car have to go to the Subaru dealer to look at Subarus and to the Audi dealer to look at Audis?

Did it ever cross your mind, like, wait, why isn't there a place where I can buy both an Audi and a Subaru?

CHAMPAGNE: No, that's a really good idea (laughter). No, that would be so convenient (laughter).

BLUMBERG: Yeah, right?

CHAMPAGNE: And it's not - I never thought about that. Interesting.

BLUMBERG: Well, we're going to answer that question for you.

CHAMPAGNE: Oh, good.

BLUMBERG: Yeah, so...

CHAMPAGNE: Oh, I can't wait.

BLUMBERG: It's coming up.

CHAMPAGNE: (Laughter).

BLUMBERG: Hello, and welcome to PLANET MONEY. I'm Alex Blumberg, and I'm joined on the program today by NPR's business reporter Sonari Glinton. Hey, Sonari.

GLINTON: Hey, Alex.

BLUMBERG: You cover the auto industry. That's why you're talking to us today and I want to ask you, do you want to just do the honors here?

GLINTON: Of course. On today's show, why car buying is unlike any other consumer experience out there and why it's so unpleasant and what your local legislators may be doing to keep it that way.


THE POSTAL SERVICE: (Singing) You've got a tattered line of string and you tie it 'round everything that you want to call your own...

GLINTON: We're not the first people to think, hey, there must be a better way of doing this. The business graveyard is filled with them. For example, Scott Painter who way back in the late '90s was going to change the car business - sell cars directly to consumers on the Internet - no haggling required.

SCOTT PAINTER: So the name of the company the time was CarsDirect, and the mission of the company was to sell cars directly. Buying a car sucks, and it's something that most consumers fear and that was really what we were trying to address.

GLINTON: All right, Alex, you're too young to remember the '90s...

BLUMBERG: (Laughter).

GLINTON: ...But the Internet was changing everything. Scott Painter put together a business plan, raised money from investors and set up meetings - lots of meetings. And one of the most important ones was with the then CEO of Ford Motor Company, Jacques Nasser. Here's Scott Painter again.

PAINTER: I mean, we went to Dearborn and we sat down at the top floor of Ford's office building in Dearborn and Jack came in and there was Bob Rooi (ph) and a whole bunch of other folks from Ford and everybody's very serious and he says, you know, what can I do for you? And I - and my answer was I'd like a virtual dealer point. I want a franchise and I want the ability to sell anywhere without geographic restriction. And I can tell you that that is the most naive question to ask Jacques Nasser now looking back at it. Like, there's no way we were going to get a virtual dealer point nor would they - would they even consider it.

BLUMBERG: The reason Scott Painter's request was so naive that they would not even consider it - oh, here. Let me read it to you. Alabama statute 8-21-13, Title 8, Chapter 20, Section 5, quote "limitations on cancellations, modifications, terminations and non-renewals of franchise relationships." Pretty much every state has a law like this Alabama law - laws which make it very difficult for Scott Painter, for anyone really, to sell cars in a different way.

GLINTON: Before we explain why, let's just remind everyone the way cars are sold. So there are the manufacturers - so like Ford, Toyota, Volkswagen - they make the cars. The people who sell them and fix them, those are America's nearly 17,000 new car dealers. They're in every town, every city, they make a lot of money. And over the years, they've gotten very good at getting laws passed to protect their business.

BLUMBERG: Fiona Scott Morton is an economist at Yale and she studied the economic impact of these laws and she says that that Alabama law - and almost all these state laws - keep the current dealer system locked in place. So for example, if you're Ford and you want to close a dealership, it's not that simple. Pretty much every state has a provision making it hard.

FIONA SCOTT MORTON: The manufacturer of the new car brand may not terminate a retail dealership without cause, where cause is, you know, something terrible like fraud or whatever. So in other words, if the dealership was established in 1962 in a town with a lot of people and now nobody lives in this town, the dealership cannot be closed by the manufacturer, and also...


MORTON: By law. Unless they were - they were to reach, you know, an agreement which would involve the manufacturer paying the dealership to give up its right.

BLUMBERG: This is the case in almost every state, even when the contract is expired. So if GM has a five-year contract with a dealer somewhere and that contract is up, by law, GM cannot just let it lapse.

GLINTON: They can't just say it doesn't make sense to have a dealership way over here. In many states, they have to ask permission from a special motor vehicle review board. And who's on those boards? Well, usually by law, it's mostly other dealers. Michael Levinson is a lawyer for auto manufacturers.

MICHAEL LEVINSON: I think most manufacturers have the view that it is almost impossible to terminate a dealer.

GLINTON: Fiona Scott Morton says this is at least part of the reason why buying a car can be so unpleasant.

MORTON: The manufacturer has a very hard time incentivizing the dealer to behave well, to provide good customer service, low prices, nice facilities, anything else because they cannot threaten to take away the franchise. That franchisee gets to stay as long as he wants and if he does a bad job that's - that's just what he does.

BLUMBERG: So termination provisions - that is a big part of all these laws. Another part - this is the part that really got in Scott Painter's way when he tried to sell cars on the Internet. Sonari, you want to read it?

GLINTON: All right, Alex. This is from the Massachusetts dealer franchise law. No manufacturer shall enter into a franchise agreement with anyone, quote, "situated within the relevant market area of an existing motor vehicle dealer representing the same line make," unquote.

BLUMBERG: In other words, each dealer has a territory defined by state law and no one is allowed to sell the same brand of car within that territory. So Scott Painter when he was meeting with Ford and saying I want to sell cars on the Internet was basically asking to sell cars in every auto dealer's territory in every state of the country. You can imagine the legal challenges that might bring.

GLINTON: So essentially every part of the process is governed by the state law - who can be dealers and where they can set up shop, which banks can offer financing. These laws even explain one of the weirder things about the auto industry. Why are so many dealerships run by the children or the grandchildren or the great grandchildren of people who started dealerships? As a dealer, the right to pass the business on to a son or daughter is protected in the law whether the manufacturer wants it or not. Again, Michael Levinson.

LEVINSON: And so the result is that manufacturers find themselves with dealers who are not ones that they would have chosen to represent them in a particular marketplace.

BLUMBERG: The - the - the option of giving this dealership to your son or daughter is enshrined in law.


BLUMBERG: (Laughter).

LEVINSON: That's one (laughter) - that's one way to put it yes.

BLUMBERG: The list of these provisions goes on and on. There are laws about warranties, about allowable hours of operation and economists say that all these laws have a cumulative price tag - all these extra dealers in places where they're not needed, the higher price due to the lack of competition. If you are buying a new car, all this stuff adds on average an extra $1,800 to your bill. Last year, we sold about 14 million cars. That means that together as a nation we are spending an extra $25 billion a year - more than we should on new cars.

GLINTON: Now if you talk to auto dealers, they say basically these laws and the extra costs are really necessary.

TAMARA DARVISH: We need these state laws to protect our investment, not just the investment in our business, but our investment in the people.

GLINTON: Tammy Darvish runs DARCARS which is a group of dealerships in Maryland and Florida and she sits on the board of the National Automobile Dealers Association and she says it makes sense to protect dealers because they're vital to their local communities.

DARVISH: If you just take our organization alone, we employ a little over 2,000 people. That's 2,000 families throughout greater Washington that are dependent upon us continuing our business operations.

GLINTON: And it's not just the jobs. They buy ads in the local newspaper. They sponsor the local little league teams. They're important to the local charities and the economies of their communities.

BLUMBERG: Now this is not the sort of argument that sways economists. In their paper on dealers, Fiona Scott Morton and her co-author write, quote, "if additional subsidies to little league and local newspapers are desirable, artificially high profits for auto dealers would be a peculiarly inefficient way to provide such subsidies." As we say in the economics world, Sonari - boom.

GLINTON: But Tammy Darvish makes a second argument - that the dealer business is unique. The barriers to entry for a car dealer are incredibly high. They have to lay out the costs upfront. They buy the cars from the manufacturers, often before they're even finished being built. They have to service those cars and they have to buy parts - thousands and thousands of parts. It's a lot of money out of pocket. So if the manufacturer, say, were to set up another dealer across the street or decided to stop selling cars to that dealer, the dealers could lose millions and millions of dollars.

BLUMBERG: Now again economists would say lots of businesses have high upfront costs but manage to survive without special legal protection. But Tammy Darvish, she doesn't see it that way.

DARVISH: It's a significant investment and we signed up for it.


DARVISH: But as, you know, a part of that all we asked for was the little protection and I think we deserve that.

BLUMBERG: Now there is a history here, a history between the auto dealers and the auto manufacturers, a history that goes back a century and that helps explain where a lot of these laws come from. So our current system of lots and lots of local dealers all over the country, it goes back to the 1920s. Back then the problem of how to sell a car it was actually a pretty thorny one. Cars were big and expensive and they were harder to move around the country than they are today. There was no interstate highway system and cars back then needed a lot of repairs. So a huge network of localized dealers with service centers attached, that made sense as a distribution system.

GLINTON: This system worked very well for everyone. Things changed though during the Great Depression. Nobody was buying cars, but manufacturers kept making them and then they made dealers buy them and they said basically if you don't buy our cars, we're going to cancel our contracts with you. Now remember this is long before there was competition from the Japanese or the German automakers. These were the largest and most powerful companies in America and they were not always nice and essentially they pushed the little guy around. And in this case, the little guy was the local car dealer.

BLUMBERG: Over the years, a dynamic emerged. Dealers felt manufacturers couldn't be trusted and that the dealers needed protection - legal protection. That's when these laws that we've been talking about first started to appear. The first franchise law was passed in 1937. Over the next couple of decades, many others followed.

GLINTON: Now that's how we got where we are today. Of course it's a very different world now. The big three automakers - Ford, GM and Chrysler - they used to be some of the largest and most powerful companies ever. Now, not so much.

BLUMBERG: Dealers on the other hand, because of all these legal protections they've managed to pass, have become even more powerful. In each state, dealers contribute as much as 20 percent of sales tax revenue. Auto dealers taken as a group are usually one of the state's biggest employers. They contribute an average of $13 million to their local economy. So if you're a state legislator and the 15 auto dealers in your district want to keep these franchise laws in place, you tend to listen.

GLINTON: So this is how we got to the world that Scott Painter, the founder of CarsDirect, found himself in. Since the late '90s, he's fought against the world, but finally last year, he had to give up.

PAINTER: There is no argument by which franchise law goes away and there is no - there is no opportunity for that. It is purely a fantasy conversation.

GLINTON: Scott Painter has a new business, truecar.com and it works within the existing system. The idea is much more modest, so no revolution over here, folks. No trying to sell cars over the Internet. At TrueCar, you put in your zip code and you find out what other people paid and then it'll point you to a local dealer who promises to sell you that car at a no-haggle price. Meaning Scott Painter often has to do business with dealers, the people he used to fight against. And they occasionally remind him they won.

PAINTER: I remember having coming out of one of these meetings and one of these dealers that's a huge detractor - just thinks that we're the worst thing in the world for the business - you know, came and said I think that you went through all this transformation and all this change because we made you. You didn't really want to do it. And I'm there and I'm in front of 20 or 30 people and I just said, you know what? In thinking about your question, you're right. I probably wouldn't have changed had it not threatened the survival of the company.

GLINTON: Everyone we talk to in this story - Tammy Darvish, lawyers for the auto industry - Scott Painter himself said that his original dream - a friendlier, more rational car buying experience - it'll eventually come around, but it won't be without your local car dealer.


THE POSTAL SERVICE: (Singing) You've got a tattered line of string and you tie it 'round everything...

BLUMBERG: As always, we welcome your thoughts, questions, comments. You can contact us at Facebook, Twitter, Spotify. Also we really, really want to know more about you. Please take our survey at npr.org/money or at planetmoney.com. I'm Alex Blumberg.

GLINTON: And I'm Sonari Glinton. Thank you for listening.


THE POSTAL SERVICE: (Singing) I've got a tattered line of string and I tie it 'round everything that I want to call my own but it never seems to hold

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