Forum on Fleet Subsidies and Practices

In the October 20, 1969 issue of Automotive News a letter appeared under the title, "Francis Objects to Fleet Subsidies" which was written by L. P. Francis, the president of Francis Chevrolet Co., Bridgeton, Missouri. The charges against automobile fleet, leasing, and daily rental buyers contained in this letter were, in our opinion, so erroneous, unjustified, and inflamatory that we felt that they should be answered by responsible members of the fleet/leasing/ daily-rental/ and automotive community.

Upon checking with Robert M. Finlay, the editor of Automotive News, we discovered that his magazine had received no rejoinders to Mr. Francis' accusations. Consequently, we forwarded to a small group of our subscribers a copy of Francis' letter asking them to make comment on it and offering the pages of AF as a forum for their replies.

Printed below is the full text of the Francis letter as it originally appeared in Automotive News and the responses of three highly esteemed specialists in the automotive leasing and daily-rental industry. We wish to thank Automotive News and Mr. Francis for granting us permission to reprint the letter. And we offer our appreciation to those of our respondents who took time from their busy schedules to serve the interests of their industry.

Finally, it should be known that this presentation is in no way intended to foment any further ill feeling between the automobile dealers and fleet-oriented buyers. Rather it is offered in the spirit of promulgating understand' between two often hostile camps, only hope that the adage "Blessed are the peacemakers" still has meaning in these troubled times.

A Dealer's Viewpoint

For several years the automobile manufacturers have been engaged in a practice which is detrimental to their franchised dealers and, in my opinion, is illegal.

On a number of occasions and quite consistently our national association has sought to get them to discontinue this practice to no avail. I refer to subsidies granted to fleet and leasing companies granted to governmental subdivisions.

A few years ago a very comprehensive report on this subject was turned over to the Federal Trade Commission by a legal firm representing NADA, but no action has been taken by the commission. The plans vary slightly from manufacturer to manufacturer, but they all result in the leasing company or the large fleet company securing delivery of new cars at prices at or below the dealer's invoice cost.

In the case of governmental subdivisions, such as large purchases by the highway departments and by cities for police use, prices are as much as $1,000 below dealers' invoice cost. These units are all invoiced through a dealer, although in some cases shipment is made directly to leasing companies by the manufacturer.

Most of the purchases are made early in the model season and this results in dealers being denied enough cars in these early months for their normal retail buyers. Although these units are invoiced through franchised new-car dealers, they are not applied against dealers' allotments and are thus completely free of the normal limitations which would otherwise be applicable.

This preferential treatment cannot be justified on the basis of the manufacturer's cost of either production or distribution. Cars are shipped four to six at a time on transports, unloaded and serviced by a dealer, and delivered one at a time to the fleet or leasing company.

In all fairness to General Motors, it was the last to succumb to this practice, which was initiated by Chrysler. General Motors and Ford feel that they must be competitive, even though I think they have serious reservations about the legality of the practice under the Robinson-Patman Act.

The leasing companies even have the option of a guaranteed resale amount, depending on the type unit and the length it is in service, and these cars are then taken back by the manufacturer and distributed through auto auctions and dealers as used cars. Cars that were in service in Florida during the winter months have been brought into our St. Louis market and are now being disposed of here, in competition with normal trade-ins.

Some of the leasing companies, such as Avis and Hertz, take their cars out of service after six months and advertise them for sale at retail at ridiculously low prices, in competition with new-car dealers, who are trying to make a reasonable profit on the same current models.

All of these actions result in prices being depressed.

The average single car purchaser is adversely affected, because his trade in value is lowered by the great numbers of units which are dumped into the market at certain times of the year.

The amount of this business is on the increase.

It has been estimated that the leasing and rental business is approaching 25 percent of the total market and that in a few years it will reach 33⅓ percent. This means that between two and three million vehicles, which were originally purchased at prices below dealer cost, are competing in the same market with the cars owned by individual new-car purchasers numbering between six and seven million.

I estimate that this affects the value of these individuals' cars to the extent of $150 to $200 each. Thus, the savings to these large companies of millions of dollars is being absorbed by individual buyers, whose cars are worth less as a result of favored treatment by the manufacturers.

Our national association has not been able to persuade the manufacturers to discontinue the subsidies or to postpone deliveries at new-model announcement time. Many thousands of new-car dealers throughout the country are greatly disturbed and are vehement in their demand that the manufacturers discontinue these very detrimental practices.

It is my opinion that they will not do so until they are ordered to, either by a court order or by a decision from your office or from the Federal Trade Commission.

It has always been my understanding that the only way a manufacturer can justify a special price to any consumer is by a showing of a cost saving. Some years ago I was told by a General Motors official that their only legal justification for the special 5 percent allowance they make to dealers on parts ordered on the regular parts order pad, was that the savings in handling costs made it possible to pass this on to the dealers.

Following this line of reasoning, the car manufacturers would have to show that the cars that are built for fleets and leasing companies cost them less to manufacture and distribute than cars built for ordinary customers. This they cannot do, because they are the same cars.

It is very difficult to get new-car dealers to agree to sue their manufacturer, for obvious reasons, but unless we can obtain favorable action from your office, this will probably be the only course of action left to us.

The franchise system of distribution has served the manufacturer and the consumer well, but in recent years it has become apparent that the manufacturers, in their competitive zeal, may destroy this system by introducing policies and procedures which seriously interfere with the maintenance of reasonable volume and profit. Some of the manufacturers have even gone so far as to establish dealers with their own capital and in competition with private capital.

This, together with the subsidy program, and the very costly and difficult-to-administer warranty programs, is causing dealers all over the country to wonder whether the franchise system of distribution can survive.

It is my hope that you will assign the task of investigating the problem of subsidies to one of your ablest assistants, and I assure you that our national association will be happy to cooperate, furnishing any information which may be required. - L. P. Francis, President, Francis Chevrolet Co., Bridgeton, Mo.

The Buyer's Reply

I

The subject of subsidies paid to leasing and/or rental companies has been a matter of debate for some time. In the 1969 model year, CCIC purchased cars from probably as many as 500 dealers in the United States. These dealers merchandised their product to us in the spirit of free enterprise. I wonder if they agree with Mr. Francis.

If the manufacturers did away with their programs to attract fleet business, would this mean that large fleet users would only buy cars late in the model year so as not to inconvenience the retailers from whom they buy? I can't help but think that just as many cars would be delivered to fleet users early in the model year as at present.

Perhaps Mr. Francis should learn the difference between leasing and rental companies. He refers to 6 month turn-ins and disposition of these turn-ins by the manufacturer, but our leasing company requires that all units be kept on lease at least 12 months (actually, average time is about 24 months) and our national staff of Fleet Service Managers sell and dispose of our turn-ins, again in the spirit of the free enterprise system.

One final comment - how many of the 2-3 million vehicles that Mr. Francis says will be in the rent-a-car and leash business are owned by dealer-operates and/or affiliated leasing and rent-a-car companies? The automotive manufacturers have encouraged their dealers to enter the leasing and rent-a-car business. It would seem that the retailing of a single unit as opposed to the leasing of a single unit have much in common. - John A. Blessing, president, Commercial Credit Industrial Corp., Baltimore, Maryland.

II

Thank you for the opportunity to respond to the letter of Mr. L. P. Francis addressed to the Attorney-General of the United States which was published in the October 20, 1969 edition of Automotive News. In that letter, Mr. Francis called for an investigation of what he refers to erroneously as "subsidies" granted to fleet and leasing companies and to governmental subdivisions.

At the outset, you are to be congratulated for focusing the attention of fleet users and lessors to the massive, relentless campaign being waged by NADA and individual dealers like Mr. Francis to eliminate the entire program of allowances on fleet purchases, including all guaranteed repurchased plans. Your readers must be made to appreciate the need to have the full story told so that valid practices are not eliminated to the inevitable detriment of our economy.

Like many clever antagonists, Mr. Francis has couched his opposition in terms of the harm allegedly done to the public, the so-called "average purchaser", charges which do not bear scrutiny, while playing down what I believe to be his real objection, namely that the number of fleets which purchase Chevrolets from him at higher prices (which would really harm the public in terms of higher rental and lease prices and less manufacturer competition) is less than it would be if fleet allowances were discontinued.

Thus Mr. Francis emphasizes the harm to the individual buyer resulting from "prices being depressed", but he fails to appreciate that Avis and other rental cars taken out of rental service within a year are by and large not competing with the average trade-in which is two or three years older. Rather they constitute a wholly new market - the late model used car - for the benefit of that "average purchaser."

Space does not permit rebuttal of Mr. Francis' other vague and unsupported allegations. Instead, I would like to put the matter of allowances in proper perspective. They serve two major functions which cannot be overemphasized; first, they equalize the disparity in used car values of certain makes of cars as against other makes, thereby encouraging the purchase or lease by fleets of these otherwise less-economical cars, and second, they act as an effective advertising and marketing tool by helping to provide a public showroom for all makes and models, not just the cars sold by Mr. Francis. The effect of all this is to enable the manufacturers of cars whose resale prices are not the highest, and equally important, their dealers, to retain a fair share of the rental and leasing market while at the same time creating greater acceptance of their cars among the buying public.

Were these allowances to be withdrawn, one auto maker could conceivably dominate the market to the extreme detriment of the other manufacturers, their franchised dealers, and the "average buyer" for whom Mr. Francis is so concerned. - Edgar J. Dame, Jr., vice president and general manager, car leasing division, Avis Rent A Car System, Inc. Plainview, N.Y.

III

Thanks for the opportunity to comment on the letter to the Attorney General of the United States from Mr. L. P. Francis, a Chevrolet dealer in Missouri. Mr. Francis purports to raise questions on what he calls "subsidies" allegedly granted by manufacturers to fleet and leasing companies and to governmental subdivisions.

I can comment on some of the things that Mr. Francis says, but not on all of them. My experience is limited to the business of leasing vehicles - I have no expert knowledge as to the cost of producing or distributing vehicles or on the state of mind of "thousands of new-car dealers throughout the country."

The Francis letter is so full of intertwined personal opinions and pronouncements that one cannot know where his expertise begins or ends. So, let us pick up each statement as we go;

1. Mr. Francis says that the practice of which he complains is "in (his) opinion, - illegal." I'm not sure why the Attorney General, nor anyone, should rely on Mr. Francis' opinion. Particularly is this so when, as I note from his letter, his association, The National Automobile Dealers Association, previously retained a legal firm who made a comprehensive report to the Federal Trade Commission. It may just be that none of the other persons referred to has found the alleged practices of which Mr. Francis complains to exist - nor, if they do exist, to be the least bit illegal.
2. What are the things Mr. Francis says are "illegal?" First, he refers to "subsidies granted to fleet and leasing companies and to governmental subdivisions" and says these are granted pursuant to "plans (which) vary slightly from manufacturer to manufacturer, but they all result in the leasing company or the large fleet company securing delivery of new cars at prices at or below the dealers invoice cost."

a)      In the case of Hertz, I know of no situation in which we pay dealers less than their invoice cost. I doubt that any such situations exist although I suppose if we looked hard enough we might find a few cases over the years. The plain fact is that in terms of the overwhelming majority of Hertz vehicle purchases Mr. Francis' statement is just not correct. What Mr. Francis is complaining about is not that dealers sell or are required to sell below their invoice cost, but that the manufacturers do something with respect to fleet and lease company business in terms of allowances, depreciation, guarantees and the like, that they do not do with respect to the normal retail customer. I assume that this is true and that there are such programs available to leasing companies or to legitimate fleet operators. But I do not understand how this is hurting Mr. Francis or the franchise system of distribution. Indeed, the manufacturers through such programs may in one analysis have helped the dealers. It may well be that the manufacturer programs have the result of somewhat stabilizing the erratic market which otherwise would result.

b)      But perhaps Mr. Francis is not talking merely about price. He says, I presume with respect to fleet and lease purchases, that "most of the purchases are made early in the model season and this results in dealers being denied enough cars in these early months for their normal retail buyers. Although these units are invoiced through franchised new-car dealers, they are not applied against dealers' allotments and are thus completely free of the normal limitations which would otherwise be applicable. The percentage distribution by months of deliveries received in the 1969 model year by the Hertz Car Lease Division are as follows:

Our projection for the 1970 model year shows an almost identical distribution. It may be that these Hertz figures represent a kind of special situation - but I don't think so. If Mr. Francis would examine some recognized source of information, like the Polk registration lists, I'm sure he would find that fleet, lease and governmental registration as a per cent of total car registrations are about the same in the October-December period as they are throughout the model year. Furthermore, as Mr. Francis' own letter indicated, vehicles for fleet, lease and governmental purposes are generally allocated outside the vehicle allocation to the dealer for retail purposes and thus have no effect on the vehicles available to the dealer for retail purposes. Of course, a dealer can always say that if there had not been a fleet allocation he'd have more for retail sales. On the other hand, many of us in the fleet and lease business know of dealers who sell to us from their normal retail allocation, nor merely the fleet allocation, perhaps because they want to, or perhaps because they have more vehicles allocated than they could otherwise sell.

I should point out that if I were a dealer I would consider it a good marketing practice to sell vehicles early to renting and leasing companies. Many prospective vehicle purchasers use a renting company's car in the early days of a model year to test drive new cars and develop a preference for future purchases. Availability of vehicles to the renting and leasing company early could well result in greater sales of vehicles later.

3    Mr. Francis indicates that, for a variety of reasons, the alleged favoritism shown to the leasing companies results in a. loss on the sale or trade-in of a used car by retail customers which he estimates at $150.00 to $200.00 per car. I think Mr. Francis' conclusions are wrong; I know that his "facts" are.

a)      He says that the rental and leasing business "is approaching 25 per cent of the total market and that in a few years it will reach 33⅓ per cent." I don't know where he gets such figures. Much as I would like our business to be that healthy a proportion of the market, I know of no responsible person who has said, nor of any estimates which indicate, that the entire fleet lease and governmental business is much in excess of 10 per cent of the market. Mr. Francis' estimate is thus in error in the whopping amount of about 100 per cent!

b)      He says that the leasing companies have the option of a guaranteed resale amount (dependent on the type of unit and the length in service), that those vehicles are taken back by the manufacturer and sold as used cars and that, therefore, cars in service in Florida during the winter are brought into the St. Louis market and sold in competition with normal trade-ins. Some of the manufacturers do have guaranteed depreciation programs which are applicable for vehicles held over varying periods of time. These guarantees are related specifically to market values of vehicles which, when taken back by manufacturers, are distributed almost entirely through automobile dealers. The information that I have with respect to such plans indicates not that their sales depressed the market, but that, in fact, they are generally at the market's top for the type of vehicle concerned. In fact most dealers appear to be eager to get those cars which they dispose of as used cars. As for Mr. Francis' example of cars used in Florida during the winter months and then disposed of in the Spring - such a program creates an additional market for the dealer for a type of vehicle which would not otherwise be on the market as a used vehicle. Far from depressing the market, such vehicle disposals extend the market by creating a whole new line of merchandise! As all of us know, the individual buyer of a Chevrolet, Ford or Plymouth does not normally trade these in six months or in even a year but generally tends to hold the vehicle for three or four years. In this regard, it is wholly incorrect to talk of the number of vehicles under such plans as comprising 25 per cent or even 10 per cent of the market. I believe vehicles under such plans do not constitute even 10 per cent of the 10 per cent of the market which is represented by fleet, leasing and government purchases.

4.   I am unable to determine any logical basis for Mr. Francis' statement that "many thousands of new car dealers through the country are greatly disturbed and are vehement in their demand that the manufacturers discontinue these very detrimental practices." If there is such a feeling on the part of dealers, it is certainly not evident to us at Hertz. We are frequently solicited by dealers with whom we have dealt year in and year out for over a decade. As a matter of fact, at some times in the year, we are solicited by dealers with whom we have not previously dealt and who offer prices below that which we have traditionally paid and below that we will normally pay.

      Because of space limitations this letter must be confined basically to a refutation of the points raised by Mr. Francis. But there are, I believe a number of affirmative reasons which should be mentioned at least here for somewhat different handling by manufacturers of fleet, leasing company and governmental purchases than is the case with respect to an individual purchaser. Manufacturers afforded the availability of large scale purchases are in a better position to keep plants open and running which might otherwise be closed or slowed down, with consequent savings of costs which otherwise would be incurred under guaranteed compensation agreements. Mr. Francis is, I'm sure, aware of the possibilities that faced certain manufacturers if they had been unable to compete on the basis of such plans. These manufacturers might now be completely out of the fleet business and perhaps completely out of the automobile business. I suggest that the effect of this kind of reduction of competition would be much more costly to the consumer than anything which he attributes to existing arrangements.

      There are economics of which I am sure every dealer is aware in the treatment of fleets as compared to the individual purchaser. Mr. Francis himself, would I think, be able to supply us with examples of the kind of post-sales care required with respect to the individual to whom he sells a vehicle as compared to that required with respect to the fleet purchaser or leasing company to whom he may sell 10 or more.

      The present system of automobile manufacture and distribution in this country is one of the more shining examples of our competitive system operating under a legal framework but free from direct governmental supervision. I do not believe that Mr. Francis - and any other dealers whose thinking he may reflect - do either their industry or themselves a service by calling for direct governmental intervention in an effort to restrict competition. A wise man once indicated that inviting the camel to put his nose under the edge of the tent may eventually result in the camel occupying the whole tent.- Hubert Ryan, vice president and general manager, car leasing division, The Hertz Corp., New York, N.Y.