On December 19, 1983, Congressman James Florio's (D-NJ) Subcommittee on Commerce, Transportation, and Tourism held hearings on H.R. 1415, the controversial legislation covering fleet discounts. The hearings were held in the State Capitol in Jackson, MS. Witnesses testifying in favor of the legislation were: Congressman Gene Taylor (R-MO) William Turnbull, National Automobile Dealers Assn.; Al East, East Ford, representing the Mississippi Automobile Dealers Assn.; Carl Herrin, Herrin-Gear Chevrolet, also representing the Mississippi Automobile Dealers Assn.; and Bill Watson, Bill Watson Ford. Witnesses testifying in opposition to the legislation were: George Field, Automobile Importers of America, accompanied by AIA General Counsel Charles Lock-wood; Richard Gillis, American Car Rental Assoc., accompanied by Counsel Alan Kay; Sam Penn, American Automotive Leasing Assn., accompanied by General Counsel Ellis Lyons; Ed Bobit, Automotive Fleet and Leasing Assn. and Automotive Fleet magazine; and Bennett Bidwell, Chrysler Corp.
Congressman Florio opened the hearing and focused on its purpose: "We are here today to hear testimony on H.R. 1415, a bill to prohibit price discrimination in the sale of motor vehicles. This bill was introduced by Congressman Gene Taylor of Missouri, whom we are honored to have with us today. The bill was introduced primarily in response to the alleged practice of manufacturers in providing special inducement to fleet purchasers of automobiles. Many dealers believe this practice unfairly discriminates against them.
"Whatever may be the findings and outcome of these hearings, I would like at the outset to commend Congressman Taylor and the proponents of H.R. 1415 for bringing these issues to the attention of Congress.
"We consider this bill against the backdrop of a period of serious difficulties in the automobile industry. This is an industry that is crucial to the fiber of our economy, to the employment of millions, and to the well-being of cities and towns all across America. I have been an advocate of taking a comprehensive approach to the revival of the auto industry, and I am very glad that we are devoting this hearing to the important facet of the industry's situation addressed in H.R. 1415.
"H.R. 1415 focuses our attention particularly on the role of automobile dealers. They play a vital role in our economy. Dealers probably employ more people than do our domestic manufacturers, with each dealer generating an average of $5.7 million in sales and a payroll of nearly $433,000 annually. It is a very serious matter when we hear it suggested that the network of dealers and the foundation for its effectiveness may be threatened by discriminatory practices.
"Proponents of H.R. 1415 also suggest that inducements provided to large fleet, commercial purchasers are subsidized through higher prices charged to individual consumer purchasers of automobiles. At a time when consumers are struggling to make ends meet in the wake of recession and high unemployment, it is very troubling to hear it suggested that two or three hundred dollars or more may be added to the price of the average automobile because of the practices alleged.
"So we are going to listen very closely today to our dealer witnesses to gain a full understanding of what appears to be a significant issue. At the same time, we are looking forward to hearing the testimony of the opponents of the bill, to see whether they can shed light on the problem and add to our perspective.
"I, for one, do not approach this hearing with prejudgment. I do, however, approach it with concern that we examine the serious questions that have been raised.
"Let me express my appreciation to all of our witnesses for extending yourselves by traveling to this hearing and preparing for it at this holiday season of the year. I look for ward to hearing all of your views."
Congressman Taylor testified first: "Mr. Chairman and members of the subcommittee, I deeply appreciate the opportunity to submit testimony before this distinguished panel this morning.
"I am particularly pleased that the subcommittee is conducting hearings on H.R. 1415, the bill I introduced earlier this year with the hope that Congress would explore the question of fleet subsidies by American automotive manufacturers and foreign automotive importers. Available information shows that more than 19 percent of American automotive production is being sold to leasing companies and other fleet buyers. There is strong evidence that the manufacturers and importers are providing subsidies of between $500 and $1,000 each on these vehicles.
"The fleet assistance programs take many forms: direct rebates, guaranteed prices upon repurchase, free options, cash discounts, advertising payments, and others. The number of vehicles being subsidized and the effect of the subsidization on the automotive consumers and small business franchised dealers of this nation has not, to this date, been fully explored. If the subsidies amount to hundreds of millions of dollars, as some estimates indicate, a serious question arises as to whether the automobile and other motor vehicle consumers are footing the bill.
"I would not presume to suggest improper conduct on the part of any company, but I feel that because of the potentially huge economic effect of fleet subsidies on the American consumer and the small business dealers of this country, this is an issue that should be explored fully by Congress. I want to commend this subcommittee for taking the lead on this important issue.
"Let me briefly state three basic reasons why this legislation, in my opinion, is needed: 1. It stands to save the American automobile consumer money, 2. It would assure a measure of protection for many numbers of small and independent automotive marketing businesses across the nation, and 3. It would help preserve and protect the cornerstone of the franchise system in America as we know it.
"Since it is estimated that nearly a billion dollars a year go into fleet subsidies, it only stands to reason that this amount is made up in the price that the manufacturers charge for vehicles sold to franchised dealers for resale to the public. It is nothing more than simple arithmetic - if the dealer has to pay more for the vehicle because the cost of fleet subsidies is included, the price to the auto buyer has to be higher. I will not belabor you with statistical analyses at this point since that information will be provided to the subcommittee in testimony later this morning. I have no doubt you will discover that fleet subsidies cost the consumer money.
"To many, the car and truck business is viewed as big business. In reality it is a considerable number of small and independent businesses - firms built by the hard work of successful small businessmen and women. The suspected billion-dollar bite that fleet subsidies have taken out of the national auto motive market can well mean the narrow margin of success for a number of these entrepreneurs.
"The small business spirit pervades the industry while at the same time dealer investment, facilities, and equipment collectively has grown to huge retail businesses. In fact, by some reliable estimates, new car and truck franchised dealers now employ more people and occupy more facilities in this country than all domestic auto and truck manufacturers. This segment contributes mightily to our national economy. Based on my years of experience as a small businessman and a firm belief in the free enterprise system, nothing happens in this country until someone buys something and someone sells something. Today the average dealer generates more than $5.7 million in sales each year. Each dealer employs on the average of 27 people on a payroll of nearly $433,000. These car and truck businesses create new jobs and other community businesses. They deserve the protection offered by this legislation.
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"The franchise system has worked extremely well in America. Franchised automobile and truck dealers are the very cornerstone of the time-revered franchise system. It is a manufacturing and distribution loop which has been carefully developed over the past 70 years. When dealer and manufacturer work within the established net work, the system rewards them and the consumer. It has worked very well for years. The manufacturer enjoys steady production cycles and solid employment for its workers. The dealer, with a ready supply of product, can supply what customers want when they come looking. It's a fair system, one that profits good managers on both ends. Today, however, the majority of manufacturers are choosing to ignore long standing franchise agreements and loyal dealers. Increasingly, they are turning to subsidized sales to commercial customers outside the traditional manufacturing and distribution chain.
"Manufacturers are offering- special rates and subsidies to special commercial customers, and these rates and subsidies are not available to all dealers or to all customers. Subsidies threaten the stability of the existing franchised dealer system.
"Mr. Chairman, I have purposely been brief in my remarks here this morning because I know you have a number of witnesses to hear from. Please do not mistake my brevity for lack of conviction that the purposes of H.R. 1415 are true and just.
"My views are shared by nearly 200 of my colleagues in the House of Representatives. When I checked with my Washington office this morning, 183 members of the House on both sides of the aisle had signed as co-sponsors of this legislation. I respectively request the subcommittee in its wisdom to act favorably on this bill. Thank you."
Mr. Turnbull then addressed the subcommittee: "My name is William C. Turnbull, and I am president of the National Automobile Dealers Association, I am also a Buick and Subaru dealer, as well as a CMC and International Harvester medium-and heavy-duty truck dealer from Huntington, West Virginia. In addition, I have a Chevrolet and Oldsmobile dealership in South Carolina. With me today is Frank E. McCarthy, who is Executive Vice President of NADA. On behalf of the association's approximately 18,400 franchised new car and truck dealers, I would like to express our appreciation for the opportunity to testify before you to day on H.R.1415', which is a bill designed to protect the general public and small business franchised automobile dealers from unfair price discrimination.
"Simply put, H.R. 1415 is an effort to bring basic fairness to the pricing of motor vehicles. It would eliminate the preferred class of customers which is now created by manufacturer programs and would allow all purchasers to enter the automotive marketplace on an equal footing.
"So that we can all view H.R. 1415 within the same framework, I would like to say a few words about the motor vehicle distribution system which we use in the United States.
"Manufacturers select individual dealers in local communities to represent various vehicle brand lines. In order to be selected as a dealer, an individual must agree to make a very substantial investment in facilities, working capital, and inventories. Further, dealers are required to maintain minimum levels of staffing and are required to meet stringent operating standards. The dealer is responsible under the terms of his agreement with the manufacturer to provide sales and service representation within these standards.
"Virtually all new motor vehicles are sold by manufacturers to franchised dealers. Title is passed from the manufacturer to the dealer, and the dealer inventories the units for resale to the public. All of the units are invoiced from a standard price schedule. However, the treatment of these vehicles varies widely when fleet incentive programs are considered.
"Units which are designated for delivery to qualified fleets frequently carry with them lucrative financial incentives which are not a part of the regular price schedules and which can only be enjoyed by these fleets. In addition, the purchase transaction in the case of fleets takes on an entirely different character from a purchase transaction by an individual. As we have indicated above, virtually all sales are made by dealers, but it would be well, in order to show what actually happens in the case of fleet sales, to trace the development of a sale to a major', national leasing company as it occurs in the real world.
"Contact is initially made between the manufacturer and the leasing company, and factors like the order quantity and the available subsidies are discussed. The manufacturer may also suggest certain dealers who might be willing to do business with the leasing company on its terms.
"After the initial contact, the leasing company contacts one or more dealers with its offer, which is often in the form of contract. A summary of relevant provisions from an actual contract provides a good example:
" 'For each of the vehicles ordered through DEALER for delivery by dealers elsewhere in the United States (known as Courtesy Delivery Ordering) FLEET will pay DEALER a fee of Ten Dollars ($10.00) per vehicle purchased from and invoiced by the factory up to and including the first Five Hundred (500) vehicles of the 198X model year. For subsequent vehicles FLEET will pay FIVE DOLLARS ($5.00).'
"In other words, the price has been predetermined and the offer to the dealer is one of 'take it or leave it.' NO negotiation takes place with the dealer regarding price. Further terms are similarly predetermined in the offered contract.
" 'DEALER hereby assigns to FLEET any cash incentives, cash rebates or equipment bonuses MANUFACTURER has deemed fleets to be eligible for with respect to vehicles purchased . . .[PAGEBREAK]
" 'FLEET personnel shall per form all administrative functions involved with vehicle ordering for vehicles purchased through DEALER including preparation of vehicle orders, submission of orders to factory, preparation of Manufacturer's Statement of Origin, payment of courtesy delivery fees, forwarding of documentation to the delivering dealer, payment of invoices to MANUFACTURER'S credit subsidiary, and the like.'
"So, while it is technically correct that all fleet vehicles are sold by dealers, what is really happening is that the fleet sets the price, places the order, arranges for delivery, pays for servicing, assigns title by using a power of attorney provided by the dealer, pays the manufacturer, and then pays the dealer a fee for using his franchise. The dealer's role in this entire transaction is surrounded by fiction.
"Fleet transactions are no small part of our industry. During 1982, for example, over one million auto mobiles were sold to fleets. The figures for 1982 are clearly representative of the number of automobiles purchased by fleets in years past and comparable or perhaps greater purchases by fleets will continue in the future. There is, of course, nothing wrong with this magnitude of sales to fleets. The fleets have a need for these vehicles, and the marketplace supplies them.
"The concern arises from the fact that the domestic manufacturers are providing subsidies or discounts to these large corporate fleets in amounts often exceeding $1,000 per vehicle. These fleet discounts are made available by the manufacturers only to a preferred group of corporate purchasers, but not to franchised new car dealers for resale to individual customers. In other words a fleet purchaser can often purchase a vehicle $1,000 cheaper than a franchised new car dealer can purchase the same vehicle for resale.
"The fleet subsidy programs provided by the manufacturers take many forms and various combinations of incentives are offered to fleets during given time periods. Among the incentive programs which have been offered to fleets in the past and continue to be offered today are the following: A. Cash rebates to fleets, B. Special price reductions to fleets, C. Free options, D. Price protection guarantees which assure to fleets that any price increases during a, given time period will not be applicable to fleet purchases, E. Distant delivery credits, F. Guaranteed resale values, G. Advertising assistance, and H. Financing assistance.
"It would probably be well at this point to illustrate some of the types of subsidies which we have listed. The first is cash, whether in the form of discounts or rebates. One example out of many which could be cited involves a General Motors vehicle. When Hertz, for instance, buys a 1984 Chevrolet Citation for one of its Florida rental operations, it receives a cash discount of $800 from General Motors. Then, when Hertz takes the car out of rental service and ships it to Georgia to sell it, General Motors gives Hertz an additional rebate to help defray the cost of shipment.
"However, up-front price concessions are not the only advantage that fleets gain over the individual consumer. For example, one of the incentive programs which is frequently offered by the manufacturers to fleet purchasers is a program which guarantees to fleets that the resale value of their cars will not fall below a specified amount during a given time period. If the resale value of the car is, in fact, below the specified amount, the manufacturer will pay the fleet the difference. Thus, in many cases large corporate fleets are protected from the unexpected depreciation of their vehicles, while the individual consumer must bear the entire burden of the depreciation in the marketplace.
"Another kind of subsidy comes in the form of free optional equipment. Typically, the optional equipment which is offered to the fleets for free is the kind of equipment most in demand by retail consumers. Air conditioners, tilt steering, cruise control, and stereo radios are frequently added to fleet-ordered cars without charge. This type of subsidy can amount to a significant concession for fleet purchasers. An air conditioner, for example, is generally valued at between $525 and $725, and on any given transaction this may be only one of several concessions granted.
"A fourth form of subsidy is called price protection. It assures the fleet that any price increase announced by the manufacturer subsequent to the fleet order will not apply to the fleet's purchase price. On a vehicle ordered in August, but not scheduled for production until March of the next year, price protection can be worth hundreds of dollars.
"Distant delivery assistance is an additional type of subsidy which is intended to offset the cost of having the vehicle prepared for delivery by a dealer who did not sell the vehicle. Typically the published assistance amount is $50.
"Manufacturers also subsidize daily rental companies by making direct payments to them to help defray their advertising costs. Under the terms of contracts drawn between manufacturers and leasing or rental companies, the leasing or rental firms agree to feature the manufacturers' vehicle by name and picture, and the manufacturer in return agrees to pay a portion of the advertising cost up to a pre-set maximum. Advertising assistance per vehicle purchased by a leasing or rental company is known to run as high as $160, and may be even higher.
"While additional programs have been offered in the past and will continue to be offered, the programs set out above are representative of the types of subsidies or incentives being offered to fleet purchasers.
"These programs cannot be justified on the basis of some quantity sale argument. The largest dealer in the United States cannot buy cars as cheaply as the smallest fleet, although he buys many, many more vehicles than does the fleet. This is a practice that definitely should be stopped. The domestic manufacturers should stop this practice voluntarily, but since they have shown no inclination to do so, federal legislation seems to be the only viable alternative.
"We believe that this practice clearly results in unfair price discrimination to individual consumers as well as to small business automobile dealers. The mischief in this arrangement is that large corporations, which can better afford to pay the normal price of a vehicle, are given the opportunity to purchase vehicles at a price cheaper than those whose resources are substantially more limited-the individual consumer. There is simply no question that the American automobile manufacturers have created a preferred class of consumers through these programs. This, in itself, seems patently unfair to individual consumers, who in the aggregate, purchase many more vehicles than do fleets.
"There is an additional aspect to this practice by the manufacturers that is even more alarming. Estimates indicate that these special cost concessions to fleets amount to hundreds of millions of dollars. We firmly believe that the individual and small business car and truck purchasers of this nation are footing the bill for fleet subsidies through higher vehicle prices. The cost of fleet incentive programs is a part of the overall cost of doing business for the manufacturers, and that cost can only be recovered by higher-basic vehicle prices. These higher prices must then be paid by franchised dealers and passed on to individual non-fleet consumers.
"We know that the economics of the programs are enormous. However, we should note at this point that we have no way of knowing the exact cost of the fleet subsidy practice by manufacturers. The total magnitude of these subsidy programs is known only by the individual automobile and truck manufacturers. In order to adequately understand the full impact of these programs, the manufacturers, at a minimum, would have to disclose, for a specified model year (for example, 1982 and 1983):
"A. A description of all fleet subsidy or incentive programs that were offered by the manufacturer or any of its subsidiaries. B. The total number of vehicles sold to fleets which were given subsidies or incentives under the programs offered. C. The total dollar value of these subsidies or incentives.
"Such information would certainly shed light on this practice which the manufacturers have engaged in for years and would provide the subcommittee with better knowledge and data with which to evaluate the impact on the individual American consumer. We hope that the subcommittee will request this and other relevant information from the individual manufacturers.
"From a public policy point of view, the adverse impact of fleet incentive programs on consumers is undoubtedly the most interesting and disturbing to the members of this committee. However, there is another aspect to this problem that also concerns the small business new car and truck dealer who must compete in the marketplace. Although the franchised dealer body is the largest volume purchaser of all, they are not allowed to participate in the large incentive programs which benefits the fleets. Undoubtedly, the manufacturers grant these generous incentives to fleets on the assumption that sales are price sensitive and if lower prices are offered, more cars will be sold. If this is true in the case of fleets, why is it not equally true in the case of individual and small business purchasers? The dealers are concerned with this.
"A new car franchised dealer is stringently controlled by franchise agreements and state laws with regard to facility and capital requirements. Dealers have very substantial investments in the community in which they are located. They are required by franchise agreements to provide extensive and costly service facilities, trained personnel, and are subject to specific land and building requirements. In addition, dealers are only allowed to sell from approved locations and often must be licensed by the state. Fleets are not subject to any of these requirements.
"Yet, despite the fact that the new car and truck dealers buy many more cars and trucks from manufacturers than do fleets and are subject to stringent and costly requirements, the manufacturers have chosen to give substantial price concessions to fleets that are not available to dealers and their customers - the general public. This is not fair competition.
"There is also an additional problem facing the small business dealer which arises from the manufacturers' fleet subsidy programs The availability of the extremely attractive fleet incentives encourages abuses of the system and creates an incentive to fleets to 'bootleg' new vehicles to the extreme detriment of the dealer in the marketplace. The unreasonably low acquisition cost of vehicles for fleets encourages fleet operators to purchase vehicles in excess of their own needs and to retail these vehicles in direct competition with the dealer. While we have discovered a number of cases in which fleets have sold new cars out of their fleets, we have no way of knowing how many of these transactions are actually taking place since they usually occur quietly and under the table. These transactions can, however, be very lucrative to a fleet operator since it can often purchase the vehicle for $1,000 less than the dealer can purchase it. For this reason, we feel that the practice is much more widespread that we have been able to monitor.
"In the past, manufacturers have published guidelines and requirements which were supposedly designed to prevent fleet purchasers from engaging in this type of activity. These efforts have included such requirements as minimum holding periods and limits on resale. However, manufacturers cannot and will not control this type of activity on the part of fleet operators. The requirements are totally unenforceable, and no effective controls can be developed. The fleet incentive programs are causing these methods of unfair competition and these activities will not stop until fleet subsidy programs are terminated.
"We feel that H.R. 1415 will go far in addressing the problems being encountered by consumers and small business dealers alike. The time has come to ensure fair competition in the automobile and truck marketplace, to preserve the franchise system of motor vehicle distribution, and to eliminate discriminatory practices which injure both dealers and consumers. We think that H.R. 1415 will accomplish these objectives. If there are technical problems with the bill or existing manufacturer programs which should be allowed to continue are prohibited inadvertently by the bill, we hope that, the Committee will address these problems by amendment and enact the basic concepts of the bill into law.
"Mr. Chairman, we have intentionally prepared our comments to be brief. We will be happy to respond to any questions that you might have at this time and also provide any additional data responses that, you might like at a later time as you review this matter.
"We sincerely appreciate the willingness of the subcommittee to ad dress this matter and for giving us the opportunity to testify before you today. Thank you."
After proponents of the bill furnished additional testimony, the subcommittee heard statements from bill opponents. Mr. Lockwood spoke briefly about Section 2 of the bill and its impact on the scope and thrust of the Dealer Day in Court Act. The next gentleman testifying was Mr. Gillis:
"Mr. Chairman, my name is Richard J. Gillis, and I am appearing here today as a director and vice president of the American Car Rental Association (ACRA).
"ACRA is the national trade association representing the daily car rental industry in the United States. Our members range from the large, nationally well-known companies such as Avis, National, Budget, and Thrifty, to the smaller systems and smaller companies. A majority of the members of ACRA are small businessmen who rent more than one-half of one million vehicles from some 3,000 locations throughout the United States.
"The members of ACRA strongly oppose H.R. 1415, which seeks to prohibit incentives offered by automobile manufacturers for volume or fleet purchases of automobiles. In our view, H.R. 1415 is bad legislation. It is ill-conceived, anticompetitive and harmful to the manufacturers, new car dealers, fleet purchasers, and ultimately the general public. My comments today, I hope, will explain why. I believe that I am well qualified to discuss this issue because I am not only the president of a large independent rental and leasing company, but also a Ford new car dealer.
"Every year, companies which rent and lease automobiles purchase hundreds of thousands of vehicles. All fleet purchases, with a single exception, are made through dealers all over the country. The exception involves government entities which may purchase their fleets directly from the manufacturer. The prices ultimately paid are negotiated directly by and between the selling dealer and the fleet purchaser. The agreed upon price reflects both the competition of the marketplace and any volume purchase discounts which are made available to the fleet purchaser.
"In short, the price of vehicles sold to fleet purchasers is negotiated in the same way that a dealer negotiates with an individual buying a new car. One has only to look at the classified section of any news paper to see dealer ads offering various types of discounts. The same market forces are involved in sales by dealers to the general public. In fact, fleet purchasers are an important part of the general public. The Congress should not overlook a very important point: members of ACRA are end users of automobiles just like any individual buying from a. dealer. We are not in competition with new car dealers for the sale of new cars to the general public; we buy our cars from dealers for rental or lease purposes. As owners of fleets, our members pay any applicable taxes, bear the cost of maintenance and the loss in value as the car ages. The proponents of H.R. 1415 would like you to believe that fleet purchasers are competitive with new car dealers - this is simply not true.
"There are real benefits that flow from the manufacturers' fleet incentive programs. Discounts for volume purchases is an integral part of our market system, and such discounts have been offered by manufacturers for decades. At the risk of stating the obvious, manufacturers offer volume discounts and incentives to fleet buyers because volume sales offer a variety of very significant benefits to the auto manufacturers. These include:
"1. Improved production planning. Fleet purchasers order their vehicles well in advance of new car introduction dates. Because of the large quantity of vehicles involved in fleet orders, manufacturers can plan the best production schedules for the entire model year.
"2. An immediate market for new models. Volume discounts and fleet incentives stimulate fleet purchasers to order new models which have not yet been tested in the marketplace. Manufacturers can thus be assured of selling a minimum number of vehicles at introduction, without waiting for public acceptance of new models.
"3. Public exposure to new models. Major fleet purchases encourage exposure of new models quickly and in large numbers. A good and recent illustration is the Chrysler K car, which when first introduced was unproved in the marketplace and burdened by serious image problems because of Chrysler's financial difficulties. Advance commitments by the rental and lease industry gave Chrysler the production boost it needed, and perhaps equally significant, placed thou sands of the new models on the road for the public to see and drive. Sales of the K car certainly played a part in Chrysler's recovery.
"4. An improved market for less popular models. Fleet incentives help move less popular cars which might otherwise be slow to sell, causing them to remain in dealers' showrooms or manufacturers' inventories.
"5. Providing a solid sales foundation in a depressed market. During the doldrum days of 1980, 1981, and 1982, when domestic manufacturers experienced one of the worst slumps in recent history, fleet operators continued to buy new cars. It is estimated that 20 percent of the new cars sold in the U.S. each year go into rental or lease service. Without these significant fleet purchases, unemployment in the auto industry would have been even more severe.
"6. Greater annual sales volume. Fleet incentives and volume discounts encourage more rapid turnover of rental and lease fleets. Rapid turnover of fleets stimulates a larger volume of new car sales.
"7. Domestic manufacturers, by offering fleet incentives for volume purchases, have a vitally important competitive edge over foreign manufacturers in the U.S. market. Volume discounts encourage fleet purchasers to buy U.S. made cars for their rental and lease fleets.
"8. Production line efficiencies result from volume sales. Rental fleets are generally ordered with relatively uniform specifications, such as color, trim, and optional equipment. Manufacturers can schedule uninterrupted production runs which result in major dollar savings in their manufacturing costs.
"These are the most obvious benefits to manufacturers of volume sales. Discounts and incentives have proven to be an effective marketing tool which is not limited to fleet purchasers. Manufacturers have traditionally offered dealer advertising discounts, rebates, and salesmen incentives and awards. Manufacturers frequently give cash rebates directly to the end-user customers, and in the past few years, preferential financing rates. These dealer-related incentives are not available to fleet purchasers.
"Volume discounts also benefit the general buying public in several ways. To meet, the needs of the renting public it takes hundreds of thousands of cars. Fleet incentives encourage the car rental industry to purchase and operate attractive, new, fully-equipped fleets of cars to meet consumer demand. Fleet incentives and volume discounts encourage more rapid turnover of fleets. Annual turnover results in the latest, more fuel efficient, and safest vehicles being placed in service and thereafter rapidly going into the used car market. This is a direct benefit to the driving public. Finally, volume discounts to fleet purchasers are reflected ultimately in car rental rates.
"The members of ACRA believe it is unfortunate that a few new car dealers, who apparently have chosen not to participate in fleet sales, are attempting to mislead members of Congress and the general public. They argue that prohibiting fleet incentives or volume discounts will lower the retail price of new automobiles or the wholesale price of new cars to dealers.
"Those dealers who support H.R.1415 claim in their ad campaign that sales to fleet purchasers are made through a 'semi-secret channel of distribution' and that the buying public is 'overcharged $250 a unit on average.' Not only is there no evidence to support these claims, they are utterly false. On the contrary, fleet purchasers earn the incentives and discounts because they help the manufacturers control production costs. Claims that the public is 'being overcharged' on every car they buy and that dealers are by passed in fleet sales are made to arouse public support for a piece of bad legislation. Such claims are made without one shred of factual support.
"While ACRA can find no validity to the claims of the proponents of H.R. 1415, we strongly urge the Congress to consider the adverse impact of H.R. 1415. Enactment of this special interest legislation would have an immediate effect on fleet purchases. In fact, one of the major national car rental systems has publicly stated that it would rethink its purchasing policy if volume discounts were prohibited by law.
"If the car rental industry kept its fleets for just one additional month because manufacturers were unable to offer fleet incentives, the industry would purchase 8.5 percent fewer cars per year. Using an estimate of 500,000 rental vehicles in the U.S. fleets, this could mean 42,500 fewer new cars manufactured by Detroit, 42,500 fewer new cars sold by dealers, 42,500 fewer cars to be serviced by those dealers, and 42,500 fewer good, late-model used cars available to the public. The dealers who are now urging passage of H.R. 1415 are pointing a gun at their own feet. That is precisely the reason there are many responsible auto dealers who are opposed to H.R. 1415.
"The above estimates involve only rental vehicles. A major fleet lessor recently told Automotive Fleet, a trade magazine, that his company buys 65,000 new cars and trucks a year. 'Every one of those vehicles is delivered and serviced by dealers at a cost negotiated with the dealers. Volume discounting is and has been an integral part of the automobile business at the dealer level since the inception of the dealer franchise system.'
"It is well known that discounts given by manufacturers, wholesalers, and retailers in other industries, for volume purchases, are an integral part of their business. To suggest, as the proponents of H.R. 1415 appear to be doing, that volume discounts or incentives are unusual or harmful to consumers shows a lack of understanding of a competitive free market system. ACRA believes that H.R. 1415 will hinder competition without benefitting any segment of the industry including the dealers and the buying public. In every industry that traditionally uses volume discounts as a marketing tool, volume sales result in cost savings to the seller which the seller passes through to the buyer in the form of a discount. To try to change this proven marketing benefit by legislation would be a travesty in the free market environment.
"Supporters of H.R. 1415 claim the bill will reduce the retail price of new automobiles. ACRA cannot find one cited fact to support that claim. According to the automobile manufacturers, pricing policies of the industry are a function of many factors, and ACRA is unaware of fleet incentives ever being considered as a determining factor of a new car's base price at the wholesale or retail level. Indeed, one may ask, when has a legislative mandate to increase prices resulted in a price saving to consumers? Government price controls simply never work. Price controls on gasoline and their subsequent removal are a recent example.
"If manufacturers were compelled to end their incentive programs, the car rental industry would face some difficult choices. Those choices would include increasing the rental prices to consumers, increasing the age of their fleets, and reducing the size of their fleets - none of which would serve the best interests of the manufacturers, the automotive industry, or the consumer.
"ACRA believes the reasons against passage of H.R. 1415 are compelling. Why then are some dealers urging Congress to ban fleet incentives? They claim that banning fleet incentives will lower the cost of cars to the general public when in fact, the opposite is more probable. One motive generally believed to be behind the introduction and support of H.R. 1415 is the resentment by some new car dealers of car rental companies which dispose of part of their rental fleets directly from their own locations. Although the overwhelming majority of former rental and lease firms are sold to used car dealers via auctions or wholesalers, a percentage of former rental units are sold directly to the consuming public. These cars are sold at competitive prices. The fact that these cars were acquired one or two years earlier through volume discount purchases bears little relationship to the ultimate sale price. Car rental companies are in the primary business of renting cars. At the completion of their term in rental fleets, the cars must be disposed of rapidly to make room for the new vehicles. Thus our members do not have the luxury of waiting to get the best possible price for their used vehicles. Any suggestion that former rental cars are sold cheaper because they were purchased at a discount is simply not true and fails to recognize the market forces at play as fleets are revolved. Car rental companies own their cars and ultimately sell them in any manner that is most profit able or least unprofitable, based upon sound business operations. If a particular model vehicle drops in popularity, the rental companies take a severe loss when the sell the vehicles. Dealers on the other hand, buy their used cars or take cars as trade-ins based on the current wholesale price of the used vehicles and resell them at a profit.
"Congress should not lose sight of the fact that 50 percent of all used car sales in the U.S. are private transactions, not involving dealers. Basic to our economic system is the right of people to sell their property in any manner they see fit. Com petition in the used car market is healthy and beneficial to the buying public. By selling their rental fleets after 12 to 18 months, car rental companies can order new vehicles to restock their fleets, thereby creating work and profit for the automotive industry and new car dealers and making good used cars available to the public at reasonable prices. The Congress should not be asked to upset that healthy competitive balance. H.R. 1415 must be seen for what it is - a special interest bill that will badly serve the public and its supporters.
Mr. Penn then testified:
"Mr. Chairman, members of the subcommittee, thank you for the opportunity to testify in opposition to H.R. 1415.
"My name is A. Samuel Penn, and I am president of the American Automotive Leasing Association (AALA), a nationwide association composed of some 175 companies, some large and some small. These companies are engaged in the long- term leasing of motor vehicles, primarily to commercial and industrial user-lessees, and, to a lesser extent, to consumer user- lessees.
"AALA is the only national association that represents solely the interests of long-term automotive lessors. The member companies of AALA have approximately 1,000,000 vehicles on lease, with an asset value of over $9 billion. These vehicles are purchased in volume by AALA members from franchised automobile dealers and then leased to lessees for a period of a year or more. It is estimated that over 98 percent of these vehicles are made in the United States.
"In general, H.R. 1415 would prohibit an automobile manufacturer from selling a vehicle to anyone at a price lower than the price at which the same model vehicle is sold to a franchised automobile dealer. H.R.1415 would also prohibit the manufacturer from providing to the 'ultimate purchaser' of a vehicle a discount or other incentive which is not provided to all other ultimate purchasers of the same model vehicle.
"AALA opposes H.R. 1415 as an ill-conceived, special interest legislative proposal which, for no valid reason, would restrict motor vehicle manufacturers in providing incentives designed to enable them to sell their products efficiently in various market segments.
"It is not AALA's position that motor vehicle manufacturers must necessarily provide special prices or other incentives to the fleet purchasers of their vehicles. Our position is that the manufacturers should be free to do so when and if they deem it necessary or appropriate. Incentives may be deemed necessary because of general conditions in the automobile market, the competitive situation with respect to particular models and equipment, and other relevant matters.
"The domestic market for auto mobile manufacturers includes retail purchasers, governmental purchasers, and fleet purchasers. The manufacturers generally define a fleet purchaser as one who registers 10 or more new vehicles of the manufacturer over a period of a year. This would include companies who own their fleets, leasing companies, rental companies, and indeed, the many franchised automobile dealers who are considered fleet purchasers themselves insofar as they are engaged in the business of leasing vehicles to user-lessees. For example, in 1979 out of approximately 10,000 GM dealers, almost 7,000 were also engaged in vehicle leasing.
"It should be noted that fleet purchasers as well as retail purchasers obtain their vehicles only through franchised automobile dealers. Sales to fleets represent a major business opportunity for dealers, and dealers are in competition with each other to obtain this business.
"The manufacturers have a long history of providing different incentives from time to time to the retail purchasers and to the fleet purchasers of their vehicles. An example of an incentive which is aimed at the retail segment is the below- market-rate financing offered from time to time by the manufacturers' credit company subsidiaries, such as GMAC. Apparently, the manufacturers have not found this financing incentive effective for commercial fleet purchasers. At the present time, such financing incentives are offered to retail purchasers and, generally, not to fleet lessors. Manufacturers also offer retail purchasers cash rebates, particularly late in the model year, which are also not made available to fleet purchasers.
"By contrast, other incentives have been offered from time to time by the manufacturers to fleet purchasers but not to retail purchasers. It would appear that these are the incentives which H.R. 1415 is intended to prohibit.
"It should be noted that fleet incentives are made available to fleet purchasers at the manufacturer's initiative for sound business reasons. The manufacturers notify the fleet purchasers periodically of the specific fleet incentives offered and the conditions attached to them. So far as I am aware, these incentives are not sought, demanded, or bargained for by fleet lessors.[PAGEBREAK]
"These fleet programs have taken a variety of forms. For example, in January 1983, Ford offered a 'model resale value guarantee' fleet program applicable to certain 1983 models placed into service prior to the 1984 model introduction and removed from service after the 1984 model introduction, but not later than June 30, 1986. The program consisted of future payments to the purchaser of the difference, if any, between the vehicles' published wholesale value and the resale value guarantee at various periods of time. Incentives such as this are clearly intended to equalize competitive shortfalls among comparably equipped models, to encourage large orders for certain models before the next model year, and a rapid replacement of the vehicles.
"Other fleet programs have included optional equipment invoiced at no charge and cash fleet allowances. These programs are offered across the board to all fleet customers, and apply to fleet sales by those new car dealers who are in the fleet business.
"I cannot speak for the manufacturers as to why programs made available to fleet and to retail purchases are different. I do know, however, that fleet and retail represent different markets, with different purchasing characteristics.
In general, fleet purchasers replace their vehicles every 30 months, whereas the retail purchasers keep their vehicles for approximately five years or more. The fleet market also tends to be far less volatile than the retail market. Therefore, the manufacturers can depend on a more consistent stream of business from fleets than from retail. Furthermore, fleet purchasers buy vehicles in large numbers, and the administrative work in connection with these purchases tends to be more efficient and less complicated.
"Mr. Chairman, fleet programs obviously help the manufacturers to sell large numbers of vehicles more rapidly, more predictably, and more economically.
"Proponents of H.R. 1415 claim that the incentives are unfairly discriminatory. The bill states that its purpose it 'to protect franchised automobile dealers from unfair price discrimination.' But where is the unfair price discrimination? The plain fact is that every incentive made available for fleet sales is also made available to the fleet operations of new car dealers. Where the dealers and the fleet lessors compete in the same market, they are afforded equal treatment. Within the same market, the incentives are offered equally to all purchasers. Thus, there can be no reasonable contention that there exists any unfair price discrimination or unfair competition insofar as the subject matter of H.R. 1415 is involved.
"Should there be any individual cases of abuse with respect to fleet incentives, there is ample federal legislation already on the books to deal with those situations. The Robinson-Patman Act(14 U.S.C. Secs. 13 and 13a) prohibits unfair price discrimination, while the Federal Trade Commission Act (14 U.S.C. Sec. 45) prohibits unfair methods of competition and unfair acts or practices in commerce.
"Advocates of H.R. 1415 have suggested that its enactment would somehow result in lower prices to dealers for their retail sales, which, in turn, would lead to lower prices for the retail purchaser. There is absolutely no support whatsoever for this conclusion. While we are in no position to forecast how the motor vehicle manufacturers would respond to the enactment of H.R.1415, it is certainly reasonable to expect that fleet purchases would be reduced. It is also reasonable to assume that a loss in volume in this high fixed-cost industry would result in higher, rather than lower, prices to the dealers for retail sales.
"Enactment of the bill would be especially harmful to recent improvements in the domestic motor vehicle industry. As noted before, commercial fleets use U.S. made vehicles almost exclusively. The prohibition of fleet programs can be expected to result in a slowdown in the rate at which the fleets purchase new vehicles. Such a result is hardly a good prescription for the continued recovery of the domestic automobile industry and the nation's economy.
"In summary, our association's view is that enactment of H.R. 1415 is not needed to correct any wrongs, and, in fact, H.R. 1415 would create major disruption for the automotive industry."
Mr. Bobit testified next before the subcommittee. His comments appeared in the January issue of Automotive Fleet.
The final gentleman testifying was Mr. Bidwell:
"Mr. Chairman, members of the subcommittee. My name is Bennett E. Bidwell. I'm executive vice president and member of the executive office at Chrysler.
"At Chrysler, my major duties are sales and marketing - one phase of which is the subject of H.R. 1415. Prior to coming with Chrysler, I was president of Hertz, the largest buyer of fleet vehicles. Before that, I was with the Ford Motor Company for many years, also in sales and marketing.
"As that background indicates, I've worked two of the three sides of this controversy. As a manufacturer, I've approved incentives that dealers could offer fleet owners as an encouragement to buy. As a fleet owner, I've accepted incentives from dealers. I haven't been a dealer but feel I have a career-long understanding of where dealers are coming from - until H.R. 1415 was launched, that is. Now I'm not sure.
"I won't lead up to my position. 1984
I'm opposed to H.R. 1415. I think it's based on a faulty premise, namely, that individual car buyers must pay more to make up for incentives given to fleet buyers.
"They don't. In fact, H.R. 1415 stands the real world on its head. Individual car buyers pay less for their cars because of the existence of fleet sales programs.
"H.R. 1415 proposes to ban from auto sales one of the most tried and true and tested marketing principles of free enterprise, i.e., discounts for volume sales. Whether it be groceries, refrigerators, computers, television sets, building supplies, chemicals, or automobiles, a lower unit price is paid for a carload than for a single unit.
"In the case of automobiles, fleet sales do much for carmakers and dealers. Fleet sales are more or less predictable and are planned and scheduled in advance. This enables manufacturers and dealers to cover most of their fixed costs and remain competitive in the erratic retail sales market.
"Fleet sales have a positive effect on jobs. A strong fleet program with orders planned in advance has kept plants operating in periods of reduced demand. And fleet programs enable smooth, steady production and delivery to be scheduled, a distinct cost saving. Fleet sales average some 1,700,000 vehicles a year.
"Fleet sales volume is particularly important for the smaller, marginal car company. Fleet business, including special incentives, has provided a level of production that contributes significantly to the continued existence of these companies.
"If fleet incentives and the sales produced by them had not been present, Mr. Chairman, I think Chrysler would have gone down the tube - the greatest corporate rescue in history would not have happened, and this would have been a major national loss.
"Our conclusion, Mr. Chairman, is that this bill is anti-competitive, costly to consumers, and would inhibit a manufacturer's ability to provide merchandising programs to its dealers.
"Here I should emphasize the fact that all auto sales, to fleet owners or private individuals, are made exclusively through dealers. Only bid for fleet sales to the federal government are carried out by the manufacturer.
"Dealers almost never pass up fleet orders developed by the corporation, at prices agreed to by dealers. Fleet sales represent incremental business and profits to participating dealers.
"The very great majority of merchandising programs is directed at individual retail consumers. In fact, in the 1982 and 1983 model years, Chrysler spent more than four times as much for discount and incentive programs to dealers and retail customers as it spent on fleet discounts. These programs took the form of customer rebates, discount financing programs, and the free, five-year, 50,000-mile warranties, all of which were not offered to fleet accounts.
"The $ l, 000-per-unit numbers thrown around by the proponents of H.R. 1415 are preposterous.
One of the inevitable outcomes of H.R.1415 would be the sharp curtailment of incentive programs for the dealers and retail customers. Without the fixed cost coverage from fleet volume, manufacturers couldn't afford them.
"Since 1937, all automobile sales - including fleet incentives- have been regulated by the Robinson-Patman Act, which forbids price discrimination that would injure competition. This is not a weak law, by any means - and we believe Robinson-Patman has worked well in the public interest. So, as they say, if it isn't broke, don't fix it!
"Here's just one measure of the damage H.R. 1415 would do to our industry. If fleet incentives are eliminated, all fleets would extend the in-service periods of their cars. Right now, it's estimated that the total U.S. rental fleet is some 500,000 cars, with an average service period of about nine months. An extension of this service period for one month would amount to a loss of 50,000 industry sales annually-and that loss would be repeated for each additional month of extension.
"The backbone of American industry is competition. And fleet sales with incentives certainly are firmly within the spirit of the U.S. competitive tradition. To eliminate them in favor of some 'fixed price' policy would fly in the face of existing law of long standing and would bring chaos to the proven, traditional ways of marketing automobiles in the U.S.
"Forced uniform pricing in all 50 states would lead to an auto market so structured and stratified that if would eliminate all competitive bidding opportunities for dealers.
"Elimination of incentives would do nothing but permit the manufacturer with the largest volume to add to that volume.
"And its so-called technical amendments would disrupt manufacturer-dealer relations by denying to manufacturers many of their rights under traditional contract law.
"Now, heading toward my conclusion, I want to warn the subcommittee of the chaos that would cripple the automobile business if the revolutionary ideas in H.R, 1415were enacted into law."H.R. 1415 could strangle the infant auto recovery in its crib.
"It would open the fleet markets in this country to subsidized Japanese cars.
"And since cars directly contribute to about 20 percent of our gross national product - and much more, indirectly-the entire economy could be shocked back into recession, with major losses of jobs and income.
"I'm not exaggerating. People are reading the headlines about the auto profit recovery in 1983 and the good prospects for 1984. Hut too many forget the auto depression of '79-'8l. In those years, the Big Three lost a total of $1.2 billion in North American operations. It'll take a lot of good quarters just to get back to even.
"If Detroit loses its fleet volume base, it loses its overhead - or fixed cost-coverage. And if it loses coverage of fixed costs, then retail car prices have to go up, not down! "If discounts or incentives to car rental companies go away, the cost of renting a car goes up - there's no margin to take out of it.
"And if, as the anti-fleet people claim, depreciation of the individual's new car is accelerated by fleet discounts, then the cost; of buying a used car must, be reduced by the same order of magnitude. And there are a lot more buyers of used cars than new cars.
"In other words, Mr. Chairman, let's first get the economics straight, as they are in the real world. Those facts will do away with any assertion that the public is suffering from these programs. And if there is no consumer penalty involved, H.R. 1415 falls of its own weight - because that is the central contention.[PAGEBREAK]
"I'd add that even if some better system of marketing automobiles could be designed -and I don't deny that this is a possibility - now is not the time for what essentially would be experimentation.
"The current sales pace of cars is excellent, and next year looks even better. After all we've been through, we need a couple of solid years to get back to full health. Let's do that first - manufacturers and dealers - and then take a cooperative and detailed look at how current car marketing practices might be improved.
"Mr. Chairman, I'd be happy to answer any questions you might have."
Some of the most shocking material to come to light during the Subcommittee hearing was correspondence from James C. Miller III, chairman of the Federal Trade Commission, to Congressman Florio. The congressman quoted sections from the following two letters, dated August 19 and December 13, 1983. The first letter reads:
"This letter is in response to your June 23, 1983 letter concerning certain practices in which the automobile manufacturers are alleged to be engaged. In your letter and accompanying attachments, you question a variety of alleged manufacturer practices in connection with sales to fleet purchasers, including discounts, rebates, and free accessories, and possible harm to dealers and to the public arising out of such practices.
"The Commission's staff has been in contact recently with certain dealers and dealer representatives concerning the alleged manufacturer practices you have raised. As a result, the staff is monitoring reports of such practices. Presently, though, there does not appear to be any pattern of concessions provided by manufacturers (e.g., General Motors, Ford) to fleet purchasers that rises to the level of systematic discrimination against dealers. The staff has learned of only a few isolated instances in which discriminatory practices have been alleged; however, it has not been given the names of the parties involved, apparently owing to dealer concern about repercussions.
"In your letter, you speak of situations in which fleet purchasers may resell cars in competition with dealers, such as described in a recent Wall Street Journal article that you enclosed. Staff investigated the allegations in that article immediately after it had appeared and found no indication of manufacturer involvement with respect to resale of new cars by fleet purchasers. Insofar as the entities reported in the Journal article are concerned, the staff learned that the fleet purchaser (Peterson, Howell and Heather) resold new GM cars by exercising a power of attorney it had obtained from Wink Chevrolet, a Detroit dealer; in this instance, the fleet purchaser, as the attorney-in-fact, was acting in the place of the Detroit dealer in making the sales. The staff has been informed that in other similar transactions, dealers are typically the nominal sellers. Based on these facts, there does not appear to be a violation of any law that the Commission is charged with enforcing although it is possible that dealers sales and service agreements may have been violated, giving private causes of action.
"There also does not appear to be a law violation with regard to the discounts, rebates, and free accessories that the auto manufacturers have been giving to fleet purchasers. While various of these practices have been going on throughout much of the 1983 model year, publicized concessions have been made available to all fleet purchasers. In any event, reasonable quantity discounts are permissible under Section 2(a) of the Clayton Act.
"In addition to these publicized concessions, it has been alleged that some manufacturers grant discriminatory advertising allowance to selected, large rental and leasing firms. The Commission has previously issued complaints against General Motors and Ford in this regard, charging violations of Section 2(d) of the Clayton Act and Section 5 of the Federal Trade Commission Act. The case against GM is currently awaiting an initial decision by an administrative law judge. The Commission accepted a proposed consent agreement with Ford I have is subject to public comment for (SO days, until August 29, after.
Which the Commission will decide whether to make it final. "If you have any further questions on this matter, please do not hesitate to contact us."
In many people's eyes, however, the most, definitive and impressive statements made during the hearings were sections of Mr. Miller's letter of December 13 to Congressman Florio, which in its totality reads:
"Thank you for the opportunity to comment on H.R. 1415, a bill to protect franchised automobile dealers from unfair price discrimination in the sale by the manufacturer or importer of new motor vehicles, and for other purposes.
"In general, this bill would require that an automobile manufacturer sell all similarly equipped models to all of its dealers at the same price; that any restrictions imposed on any dealer either be imposed on all other direct purchasers (including non-dealers) or be unenforceable; and that all other sales inducements, whether in the form of discounts, rebates, or other price or non-price terms, that are provided to any ultimate purchaser be given to all other ultimate purchasers of that model vehicle. The bill would declare that every new automobile dealer's franchise agreement shall be deemed to incorporate the prohibitions of H.R. 1415. Finally, the bill would facilitate dealer suits under 15 U.S.C. Sect. 1222 (Dealer's Day in Court Act) for failure of the manufacturer to comply with the franchise agreement.
"While the stated purpose of H.R.1415 is to protect franchised automobile dealers from unfair discrimination in price, allowances, and services, its prohibitions extend beyond those in the Robinson-Patman Act (15 U.S.C. Sect. 13). For example, differences in price are flatly banned without any requirement that, injury to competition be demonstrated. The bill even prohibits differences in price to purchasers who are not in competition. Moreover, none of the defenses to a price discrimination suit, such as a showing that the lower price was justified by cost savings or was offered in good faith to meet, the equally low price of a competitor, would be available.
"Section 1 A(a)(l) of the bill would appear to require a manufacturer to charge a single, uniform nationwide price to all dealers and any other direct purchasers or direct lessees for similarly equipped models and to charge no less for such models to any other direct purchaser or lessee. Unlike the Robinson-Patman Act, H.R. 1415 would not permit the manufacturer to show that a difference in price is justified by, for example, reduced transportation costs for delivery to a dealer closer to the factory. Arguably, under this bill a dealer in Hawaii might be entitled to sue a Michigan manufacturer for charging a higher price to that dealer than to one located a mile from the factory. By failing to take into account cost differences or competitive conditions, this section of the bill would restrict the ability of manufacturers to compete with one another and could lead to distortions in the competitive process without any countervailing benefits.
"Section LA(a)(2) would prohibit a manufacturer from imposing any restriction on a dealer which is not imposed on every other direct purchaser. Under the distribution system presently in effect, new vehicles are usually sold through dealers with some direct sales to non-dealers, such as the federal government, the American Red Cross, and others. Those direct, purchasers are not required to agree to the restrictions and requirements placed on dealers, such as floor space, use of the manufacturer's trademark, provision of services to retail customers, and others. Arguably, Section lA(a)(2) would invalidate many of the provisions of the franchise agreements unless those direct purchasers were placed under the same restrictions as the dealers.
"Section l A(a)(2) would have the effect of prohibiting manufacturers from developing alternatives to the current, distribution system. It would bar direct sales to large fleet, purchasers unless those purchasers were bound by all of the restrictions and requirements placed on dealers (showroom, display, and service facilities, parts inventories, etc.). There seems to be no valid reason to prevent manufacturers from making direct sales to fleet purchasers if they determine that changes in their distribution system would be efficient.
"Section 1A(a)(3) flatly prohibits car manufacturers from discriminating in granting rebates, discounts, refunds, promotional services, additional equipment, or any other inducement or benefit. This section would go beyond Subsection 2(a), (d), and (e) of the Robinson- Patman Act which prohibit various forms of price discrimination and discrimination in granting promotional allowances and services. The language 'any . . . inducement or benefit' would prevent the manufacturers from delivering vehicles directly to large volume purchasers as well as other practices by which manufacturers presently differentiate between consumers purchasing one vehicle at a time and firms, such as the large rental and leasing firms, that purchase thousands of vehicles a year. Thus, manufacturers would be barred from, for example, passing along any savings in selling or delivery costs to large volume purchasers.
"Section l A(b)(l) concerns sales to governmental entities and would appear to permit manufacturers to sell to dealers (or others) for resale to governmental entities at a price lower than the general price other wise mandated under Section lA(a)(l). However, all sales of cars to dealers for resale to the government would have to be at a uniform price for similarly equipped models. This requirement would prevail even if one dealer were selling hundreds of vehicles to the federal government or a state government in a single order while another dealer was selling one automobile to a town. Section lA(b)(l) makes no allowance for cost justification, meeting competition, or other defenses that would be available under the Robinson-Patman Act, which also exempts sales to the federal government.
"We note also that Section l A(b)(l) would subject direct sales to the federal government to the strictures of Section 1A and would also apply the restriction of Sections l A(a)(2) and (3) even if the 'purchaser' referred to in those sections is a government entity. Thus, the exemption purportedly created by Section l A(b)(l) is extremely limited in scope, and the bill as a whole could well result in substantially increased costs to all levels of government.
"In summary, the Commission believes that H.R. 1415 would restrict the ability of manufacturers to adopt a variety of business practices that are presently lawful and procompetitive. The bill would impose unnecessary rigidity on the distribution of automobiles and would probably injure, not help, competition, consumers, and, in the long run, dealers. To the extent that discrimination in sales, whether in terms of price, service, or other dimensions of competition, is causing competitive injury, the Robinson-Patman and Federal Trade Commission Acts provide adequate means of addressing such problems.
"For the foregoing reasons, the Commission respectfully recommends against enactment of H.R. 1415.
"By direction of the Commission."
Asked what will happen next, Congressman Florio told AF: "We will take the information back, compile a report, and share it with other subcommittee members. Then we informally arrive at a consensus as to what path to take with the bill; that should happen by mid-May. If we do decide to go ahead with the bill, we will then decide what preliminary cuts and modifications should be made."
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