Is Tesla Really the Problem?

Tesla Motors has been playing whack-a-mole with state governments around the country trying to open dealerships without opening franchises. Dealerships up until now have been protected by a patchwork of laws across the country that prevent manufacturers from opening up their own stores and force them to sell through independently owned franchise dealerships and other restrictions.

In the beginning, this wasn’t the case. The first dealership was established by William Metzger in 1897 to sell Waverly electric cars and in 1899 Oldsmobiles. Prior to that vehicles were sold by mail order, through department stores, or by travelling sales reps. As more dealerships opened and the industry evolved, the rules changed and now almost all states have rules protecting auto dealership franchise owners from competition from the manufacturers.

There were two main reasons for these bans. The first is to protect the businesses of dealership franchises, who are significant contributors to local employment and economies, from unfair competition from manufacturers who could undercut them on cost; the second reason is to place an independent sales intermediary between the customer and the manufacturer who can help with the purchase and will be available if difficulties arrive with the vehicle. That all makes sense, but…

The Economy Is Changing

And that includes the auto dealership industry. Amazon has blown up the business model of independent music and book stores; Uber and Lyft have thrown a wrench in the taxi industry; Netflix is threatening cable; and don’t get me started on the publishing industry. Pick an industry and you’ll see how the new economy is changing it. You can fight the change, like the hotels in New York City, with no guarantee of success. But are we looking at the problem in the wrong way?

Is It Really About Tesla?

Many state dealership associations have opposed Tesla’s business model and some have even filed lawsuits, but is it really about Tesla? After all Tesla only sold between 18,000 and 20,000 Model S cars in the US in 2013 (exact numbers are hard to come by); if they’re about to take over the auto industry they’ll need to sell more cars than that. The real fear is that the GMs, Fords, and Toyotas et al. will start opening their own dealerships and run the franchise dealerships out of business. After all if they can cut out the middle man and increase their profits, why wouldn’t they?

Is there Another Way?

If the real problem is not Tesla itself, but the major manufacturers coming in and opening the own stores and undercutting franchise dealerships, then we need to update the laws to address the realities of the new economy not just defend the status quo. These laws could prevent manufacturers from taking over the local franchise dealership industry and still allow for experimentation by others such as Tesla. For example states could:

  • Ban manufacturer dealerships from selling below cost
  • Prevent manufacturers from opening dealerships within a certain distance (say 20 miles) from their franchises
  • Ban manufacturer dealerships from selling multiple brands

I’m sure there are other ways to prevent a wholesale takeover by the big manufacturers while still allowing for innovation. The important thing is that we focus on the real problem and not get distracted by red herrings with electric engines. What regulations do you think should be added, updated and changed, or removed completely? Let us know if the comments below.

Michael Bowen

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