'The reality is that 43,000 dealerships is not a reality,' says Zag founder Scott Painter

The once vaunted car industry has been brought to its knees, partly because of the economy, and mainly because of self-inflicted bad management and lack of innovation. Now, the heads of the iconic auto institutions are being dethroned - well, at least at General Motors. While there's a bunch of talk about the government's double standards toward how it's treating Detroit and Wall Street, you won't hear much support to go easy on auto companies from Silicon Valley types.

In this segment, Zag's founder Scott Painter sits down with Bambi Francisco in the second-part interview to talk about why Washington - despite its tough love bailout ultimatum - shouldn't be bailing out the car companies. "It's horrible," he said, referring to government's bailout plans. "We have a protectionist system that prevents market forces from doing their job." The auto industry has to change, and it's not necessarily up to the tax payers to make sure that happens. Why are there 43,000 car dealerships? Painter asked. That's not rational. Bankruptcy would clean out the system and get the car industry operating rationally again.

Zag is a new online car-buying service. It's the second car startup in Painter's career as an entrepreneur. So, he's got a thing or two to say about the auto industry he's trying to modernize.

Watch the interview or read the interview (partly edited).

BF: What is the problem with how cars are being bought today?

SP: I think there is a true retail revolution occurring. I think the way that cars are sold is fundamentally shifting because dealers are looking for customers in all new ways. It really stems from the fact that customers are shopping differently than they have. So the car industry is 100 years old. Customers for 100 years, have been walking into their local car dealership, saying, 'Give me a brochure, Tell me about the car; Is it good?' But thanks to Henry Ford, all cars are good. Today, most customers today get their information via the Web. When they get into the dealership, it's not about getting the brochure at a dealership. It really comes down to a price negotiation which really reflects the fact that a car is becoming more of a commodity than ever before.

The way that commodities are sold is through transparency. That's the ultimate application of the Web. The true promise of the Internet is the power of information to level inefficiencies in markets. And so we're excited that we are a part of that inflection point. I see that the economy shifting is having a catalytic effect on dealers going out of business and it's getting a lot of inefficiencies of the business. The winners are going to be the dealers that are able to control their costs, find customers, and provide a great upfront price. Dealers who embrace it are going to win. Dealers who hold back and try to revolve or focus on the optimization of the price are going to lose and go out of business more quickly now than ever before. It is a revolution and all to the benefit of the consumer and the dealer who actually embraces it.

BF: Your bet is that with services like yours, more dealerships will go out of business?

SP: Well I actually look at it the other way. The dealerships we partner with will thrive. So if you really look at the dealership landscape really look like? I'm from LA but we've got over 200 Ford stores in southern California all selling the same certain brands. There are 60 Toyota stores. The paragon of efficiency. I don't know how many stores you need but it is probably closer to nine. I mean that would give you a Toyota store that would be very convenient for your location and at the same time you wouldn't have competition between the dealers. You would have much more efficient showrooms, much more efficient lots, and you would have a much better margin for the dealer. So I think there has to be a real alignment of the entire business. There has to be pain. Some dealers are going to get out of the business and some dealers will remain to survive. I do believe that we are one of the companies who happens to be in an exciting spot to control the customer at the beginning of the conversation as opposed to waiting for them to walk in the door.

BF: What do you think about government bailouts for the auto industry?

SP: I think it's horrible. I think that markets that are supposed to act rationally. I think part of the reason that we have a problem with the auto business is that we have unions, we have franchise laws, we have a protectionist system that prevents market forces, supply and demand, from doing their job. And, the reality is that 43,000 dealers is not a market reality. The reason why you would have this many is because the franchise system was built on the idea that, 'We could sell more franchises out there, we can get more footprint out there, more service revenue, etc.' Today if you look at what happens in the case of bankruptcy is that you get to get rid of a bunch of creepy things that would prevent the car business from actually behaving rationally. One that has nothing to do with auto retail is equally important is that when the price of fuel spiked 100%, there was a permanent shift in consumer preference for cars that get better gas mileage. And the American car companies, such as General Motors, Chrysler, and Ford really had not prepared their product line-up to match that radical shift in consumer preference. And as a result, you're going to have time to go back and retool the line, and build the product, which is an 18-24 month cycle. So they just don't have product in the line up today. And what that means is that they've got these huge investments in manufacturing SUVs. And, now they've shut down those plants. What are they going to do with these huge investments? It's going to kill them. One of the great things about bankruptcy is you get to write off and get rid of those legacy investments that are no longer applicable and they couldn't have necessarily predicted this but they work caught flat-footed.

BF:Right. Well you are innovating to help the consumer at least.

SP: I think we are innovating to help them (not just the consumer). But we're doing is absolutely the key to success in the auto industry. We are bringing transparency, which is absolutely important. We're bringing an upfront price and we're bringing customers. Right now, if you're a dealer, you are struggling for customers and we've got people who are ready to buy cars. But what they expect in this environment is a great upfront price, a better experience, and a dealer who plays ball.

BF: Well I've always said Washington should look to Silicon Valley or LA or innovation to console their problems as opposed to bailing out Detroit.

SP: I think the free market is a pretty good solution.