Tesla, one of the most innovative car companies the United States has ever seen, has for years struggled to acquire the right to sell its cars directly to consumers; however, notwithstanding its staunch opposition, Tesla is in the process of finalizing a deal that would see Nevada as the host state for its new battery plant.1. The Tesla battery plant would be a major step in mass producing a more affordable electric car, and although Tesla’s sales are either outright banned or at least restricted in 48 of the 50 states, not every legislative body is against Tesla.2. As recently as June of this year, New Jersey, a state that has passed onerous legislation to make selling cars by manufacturers directly to consumers difficult, passed legislation in its house that would effectively repeal legislation designed to retard the growth of Tesla.3. What is clear from Tesla’s ever present fight for the right to sell directly to consumers is that Tesla is not going to go anywhere anytime soon. Consumers demand the cars that Tesla produces, and Tesla’s new battery plant is a major step toward accessing a broader spectrum of socioeconomic classes. That said, many legislators, legislators heavily influenced by powerful automotive dealer lobby groups,4. With the imbalance in bargaining power between the manufacturers and dealers, states enacted legislation to protect the smaller dealer from the larger manufacturer. Independent dealers cling to this protection, and they additionally assert that dealers are pillars of the community and would better serve and protect consumers than would a manufacturer selling directly to customers.
Dealers groups primarily argue that direct sales by manufacturers stifle price competition, limits access to warranty protection, and access to safety recalls.5. The arguments are without merit. First, restricting access to the auto market just because a different sales model is used does not make markets more price competitive; it does the polar opposite. If anything, allowing a direct sales model reduces prices for the consumer because there is no dealer profit built into the direct sale. Second, in terms of warranty and safety, Tesla is competing in a well-developed market where warranties are the standard; in fact, companies have different warranty options that are for purchase and no two companies have the same warranty policy. In essence, consumers can shop for the company that offers the warranty protection they desire; what’s more, Tesla has a warranty program that is numerically better than any of their competitors, offering a warranty with unlimited miles for a longer period of years than its competitors.6. Third, Tesla has every incentive to recall defective products and has already displayed with their new S model sedan that they will initiate a recall for safety reasons;7 additionally, Tesla must also abide by the same safety standards that every other manufacturer has to, as enforced by the National Highway Traffic Safety Administration.
With a set of arguments that appears to grasp for straws, why have state legislators kept the requirement of an independent dealer system to sell cars? It may be the extensive lobbying efforts of dealer groups, bur regardless of the reason, prominent Federal Trade Commission (“FTC”) officials find the selling restrictions to be “bad policy.” Three FTC officials stated that the states’ policies protected dealers, not consumers, and that the reasons for upholding the selling restrictions are outdated.8. For instance, in addition to the arguments previously discussed, dealers further argue that the independent dealer system forces competition among local dealers which drives prices down; they further argue that if manufacturers controlled distribution, they would have monopoly power, set prices, and consumers would have no alternatives. What is missing from the dealer analysis, though, is that the market today is more expansive than in any other time in history. In 1997 the big three auto manufacturers accounted for over 72% of the market.9 As recently as 2013, that percentage has dwindled to 45%. ((Craig Trudell, Detroit Three Zombie Slayers All Gained U.S. Market Share, Bloomberg (Apr. 30, 2013, 4:53pm), http://www.bloomberg.com/news/2013-04-30/detroit-three-zombie-slayers-all-gained-u-s-market-share.htm)). Even if one was to concede that auto manufacturers would actually divert money away from research and development, breach or nullify their existing dealership contracts, and move their sales operations in-house, they still would have to compete directly with each other, bringing about the same price forces that dealers are advocating that only independent dealers would cause. The real difference, a difference dealers seem to overlook between the models, is that prices may actually be lower in a direct sales model because there are no layered dealer profits built into the final price. Missing from the market today are the anti-trust issues of the big three because they do not exercise the control they once did, and the laws that were once established to protect dealers and consumers are no longer needed.
Removing outdated laws will provide a more efficient market for Tesla to grow, while encouraging more innovative automotive companies to build and sell their cars in the United States. However, the onerous restrictions placed on the direct sale of cars by manufacturers, forces consumers to rely on the internet to procure Tesla vehicles in states that have banned or disrupted their sales, which results in an inefficient market to conduct business. In spite of all the legislative hurdles states are implementing, the market for Tesla’s cars is continuing to grow and states like Nevada and states that repeal dealer protection laws will be the ones reaping the rewards. States that continue to ban or restrict Tesla will miss out on jobs and tax revenues, all while doing their part in stifling innovation. Innovative technologies will continue to shape the way our economy functions, and laws entrenched in the clutches of reasoning akin to Stare Decisis that do not adapt to evolving times should be removed. With the coming of a more affordable electric sedan, a wider market of buyers, and only a handful of states being able to take part in Tesla’s success, it is hopefully only a matter of time, and rightfully so, before more states cut the red tape.
Scott Sonner, Nevada offers Tesla up to $1.3B for battery plant, msn news (Sep. 11, 2014, 9:30pm), http://news.msn.com/us/nevada-offers-tesla-up-to-dollar13b-for-battery-plant ↩
Mark Rogowsky, After The New Jersey Ban, Here’s Where Tesla Can (And Cannot) Sell Its Cars, Forbes (Sep. 11, 2014, 9:30pm), http://www.forbes.com/sites/markrogowsky/2014/03/15/after-the-new-jersey-ban-heres-where-tesla-can-and-cannot-sell-its-cars/ ↩
Sean Gagnier and Amy Wilson, N.J. bill would let Tesla sell cars directly, reversing ban, Automotive News (Sep. 11, 2014, 9:30pm), http://www.autonews.com/article/20140325/RETAIL07/140329929/n.j.-bill-would-let-tesla-sell-cars-directly-reversing-ban ↩
Tiffany Kaiser, Tesla Motors Still Looking to Win Against Dealerships, But Auto Dealers have Lobbying Cash, Daily Tech (Sep. 11, 2014, 9:30pm), http://www.dailytech.com/Tesla+Motors+Still+Looking+to+Win+Against+Dealerships+But+Auto+Dealers+have+Lobbying+Cash/article33844.html)). will continue to oppose Tesla’s sales models based on their outdated and often misplaced arguments.
To fully appreciate the arguments against direct sales by manufacturers, it is important to understand why we have an independent dealer system in the first place. Direct sales from manufacturers to consumers were not uncommon in the early 1900s, but when Ford created the assembly line that changed. With mass production established and the ability to reach new markets, Ford decided it made more sense to use a dealer distribution network to sell its cars. By essentially outsourcing sales to dealers, Ford could focus on its manufacturing process and improve its vehicles. Ford was one of the first companies to establish the independent dealer model, and dealers, through their relationship with the manufacturer, invested tremendous amounts of capital into inventory and showrooms. ((Gerald R. Bodisch, Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers, Economic Analysis Group Competition Advocacy Paper, May 2009 at 2 ↩
See Dan Crane, Tesla and the Auto Dealers Lobby, Truth on the Market (Sep. 11, 2014, 9:30pm), http://truthonthemarket.com/2013/06/24/tesla-and-the-auto-dealers-lobby/ ↩
Chuck Jones, How Much Could Tesla’s ‘Infinite Mile Warranty’ Cost The Company, Forbes (Sep. 11, 2014, 9:30pm), http://www.forbes.com/sites/chuckjones/2014/08/18/how-much-could-teslas-infinite-mile-warranty-cost-the-company/ ↩
Christopher Jensen, Citing Charging Concerns, Tesla Issues a Recall, The N.Y. Times (Sep 11, 2014, 9:30pm), http://www.nytimes.com/2014/01/15/automobiles/citing-charging-concerns-tesla-issues-a-recall.html?_r=1 ↩
Andy Gail, Debbie Feinstein, and Mary Gaynor, Who decides how consumers should shop?, Federal Trade Commission Blog (Apr. 24, 2014, 11:00am), http://www.ftc.gov/news-events/blogs/competition-matters/2014/04/who-decides-how-consumers-should-shop ↩
Gerald R. Bodisch, Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers, Economic Analysis Group Competition Advocacy Paper, May 2009 at 9 ↩
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