A Profitable Protected Franchise

Surprised to know how profitable auto dealership are? So was I.

Franchise laws include prohibiting manufacturers from terminating existing dealers without “good  cause,” requiring the manufacturers to sell through franchised dealers, and protecting dealers from competition by awarding exclusive territories.

These laws favor the dealers so much that when General Motors GM, -0.22% eliminated its Oldsmobile brand it coughed up $1 billion to compensate dealers, and still couldn’t avoid becoming embroiled in lawsuits. Adding to the dealers’ advantage, some states make it illegal to circumvent the dealers by selling cars online.

Dealers are profitable even when manufacturers are floundering because the dealers make money on servicing old cars and selling used ones. One reason servicing cars is so lucrative is because dealers mark up parts by as much as 80%. For example, a dealer may charge $1,800 for a turbocharger that costs around $1,000. So the dealer pockets $800 before adding labor expenses.

Yeah, there’s a reason Warren Buffett wants to get into this business. When you generate a big proportion of state sales tax revenue, you have incredible leverage to get your favoured bills through to protect your business, at the expense of the average man. How can the rest of us avoid paying tax to this cartel? Move to a place with better public transportation and never drive again.

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