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Auto subscriptions programs face hurdle in state laws

With vehicle subscription plans such as Book by Cadillac and Care by Volvo gaining momentum and clientele, some states are scrutinizing the models and their implications for dealership franchise laws and state revenue streams.

It has led to a temporary ban on subscription programs in Indiana and an on-hold proposal in California that would have required that any automaker subscription plan go through its dealers. They are among the first states to look at how to treat vehicles in the growing number of subscription programs offered by manufacturers and dealers — or even whether regulation of the programs is necessary. New Jersey dealers also are seeking regulatory changes.

Dealers want to make sure they're not left out of a new business stream and that their margins are protected for the long run, while automakers want to be able to offer mobility services and advanced technology to consumers absent new and complicated statutes and regulation. The differences in opinion could lead many states in the next few years to review how subscription programs are handled.

"The sense that I'm getting from the legal team is we can expect to see more legislative action on this over the next year or two" in even more states, said Larry Dominique, CEO of PSA North America. French automaker PSA is considering vehicle subscriptions as part of its entry back into the U.S. market.

In California, dealers don't want to compete with automakers that aren't including them in their programs, said Brian Maas, president of the California New Car Dealers Association, which represents 1,300 franchised new-car dealers.

"We want to make sure that any subscription program done by a franchisor is done with its franchisees," Maas said.

Many dealership groups — small and large — are keeping an eye on the potential legislation.

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"We're familiar with what's going on," David Hult, CEO of Asbury Automotive Group Inc., the nation's No. 7 retailer based on new-vehicle sales, told Automotive News. "It's so much in its infancy going on, it's so easy to fear the dealer supply chain is going to be left out."

That already has been a point of contention in some automaker subscription plans where dealers have had a limited to nonexistent role.

California, Indiana

At least 3 states are looking at legislating how vehicle subscriptions are handled. California: Language requiring automaker subscriptions to go through dealers was stripped from a bill this year in a compromise between dealers and manufacturers who will further discuss the issue.Indiana: A ban on vehicle subscriptions runs through May 1, 2019, while legislators study how the programs should be regulated.New Jersey: Dealers are lobbying for subscription program vehicles to be classified differently for registration purposes, though no bill has been introduced.

Language that would have prohibited automakers from offering subscription programs outside of their dealer network was part of wide-ranging dealer franchise legislation proposed in California earlier this year. But the subscription provision was stripped out of the bill after the Alliance of Automobile Manufacturers and the California dealer association agreed to discuss the issue further, Maas said. A new bill addressing vehicle subscriptions could be introduced as early as 2019, he said.

Lawmakers in Indiana are studying automaker subscription programs this summer after Gov. Eric Holcomb, a Republican, earlier this year signed a moratorium on any vehicle subscription program — by automakers or dealers — that is effective through May 1, 2019. A hearing on vehicle subscriptions is scheduled for Sept. 27, and a bill could be filed by the end of December, said Rep. Ed Soliday, a Republican who is chairing the committee with oversight of the matter.

Soliday described the moratorium as a compromise to provide more time to review facts from dealers and automakers.

Indiana dealers are concerned about being compensated for the vehicle flips and warranty work, Soliday said. They also want to ensure healthy inventory numbers for dealerships if manufacturers want to shift more vehicle allocations to subscriptions.

More concerns exist regarding the automakers' varying approaches to subscriptions, plus how sales tax, registration, title and toll collection will be handled for vehicles in the programs, he said. Soliday said dealers' representatives have told him that they "might be able to live with the Volvo model."

Care by Volvo is a two-year program Volvo has said will be available nationally. Vehicle use, insurance and maintenance are rolled into one payment. Customers can elect to exchange their vehicle after a year if they renew for another 24 months. When signing up, a Volvo concierge coordinates with a local dealer for vehicle delivery.

Some California dealers, however, have concerns about Care by Volvo, including whether Volvo is competing with dealers because sign-up happens on Volvo's website or through Volvo's app, Maas said.

Dealers receive a payment for each Volvo subscription they handle, Maas said. But some dealers are worried Volvo could cut that amount at any time and "there's nothing the dealers can do about it."

Haiken: Dealers need protection

Dealer pushback

Matthew Haiken, chairman of the Volvo Retail Advisory Board and dealer principal of two Volvo dealerships in New Jersey, said he met with Volvo executive management this month and discussed dealers' prime concern.

"What happens down the road if this takes off and you try to cut our margin, or you try to cut us out completely?" he said. "We need to be able to protect our margins based on the expense structure that we have in the dealership."

Dealers also are anxious about other automakers offering subscription models and paying dealers only $250 to $500 to deliver vehicles, he said.

Haiken described the current payment from Volvo to dealers as less than the typical margin on a new vehicle but better than some automaker payments to dealers on competing subscription programs. Haiken declined to provide specific amounts. In many cases, the delivery process is actually longer with a subscription plan, he noted.

Haiken wants dealers involved with helping customers choose a vehicle for subscription at the dealership. Volvo also should end its call center service in favor of consumers working directly with dealerships, he said.

In late April, a group of dealers met with Anders Gustafsson, senior vice president of the Americas for Volvo, Maas said, and the company has been exchanging letters with the dealer association, which is analyzing whether Care by Volvo complies with California law.

"The success of Care by Volvo in the United States is firmly rooted in the partnership between Volvo Cars and its retail partners," Volvo spokesman Jim Nichols told Automotive News. "We continue to collaborate and innovate together."

Automakers fight ban

The Alliance of Automobile Manufacturers, which represents 12 automakers including Volvo and General Motors, wants to ensure its members can offer varying business models including subscriptions. Automakers are seeking to end the subscription ban in Indiana.

"The alliance supports the ability of consumers to access as many transportation mobility options as possible and encourages innovative policies that offer the most affordable options to consumers," Bryan Goodman, a spokesmanfor the alliance, said in a statement.

GM deferred comment to the alliance. It offers Book by Cadillac, an $1,800-a-month vehicle subscription service operating in New York City, Los Angeles and Dallas that allows 18 vehicle flips within a year of signing up.

Global Automakers, a trade association representing international nameplate carmakers, did not respond to requests for comment.

In New Jersey, dealers also have been lobbying the past few months about creating a different classification for subscription vehicles, said Jim Appleton, president of the New Jersey Coalition of Automotive Retailers. A bill could be introduced in the fall, he said.

Jeremy Paolone, who runs Flexdrive subscription operations for Holman Automotive Group in New Jersey, said he would like to see a different license plate for subscription vehicles. Appleton said the unique plate could help law enforcement track the vehicle.

Paolone said he's not "scared of competing" with automaker subscription plans but is more concerned about trying to simplify the regulatory processes around the vehicles so he can grow the Flexdrive model for Holman, which ranks No. 18 on Automotive News' list of the top 150 dealership groups based in the U.S. He now is following rental car rules and has to pay taxes associated with that.

"We want to cut out the extra cost, cut out these extra taxes and costs and fees and work flows that are slowing us down and costing us more money," he said. "We want to have a competitive product for the customer. We want to make it as advantageous as possible to have a nice, flexible experience. Frictionless mobility is what we're striving for."

Jackie Charniga contributed to this report.

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