Tesla and the Car Dealers' Lobby: Will an Innovative, New Carmaker Bring about a Long-Overdue Change to the Automobile Industry?

By Crane, Daniel A. | Regulation, Summer 2014 | Go to article overview

Tesla and the Car Dealers' Lobby: Will an Innovative, New Carmaker Bring about a Long-Overdue Change to the Automobile Industry?


Crane, Daniel A., Regulation


Tesla Motors, the offspring of entrepreneur Elon Musk (who brought us Pay-Pal and SpaceX), is the most exciting automotive development in many decades and a marquee story of American technological dynamism and innovation. The company's luxury electric cars have caused a sensation in the auto industry, including a review by Consumer Reports calling Tesla's Model S the best car it ever tested.

Despite the acclaim, Tesla faces enormous challenges in penetrating an automotive market that has been dominated for a century by internal combustion engines. Not only must it build cars that customers want to drive (and ultimately produce them cost-effectively), but it must build the battery-swapping and charging infrastructure that makes charging as easy and reliable as pumping gas. Those are tall orders.

But Tesla's research and development, technological, and infrastructure challenges seem to be dwarfed these days by political challenges mounted by the powerful car dealers' lobby. Tesla has chosen a direct-to-consumer distribution model, one that bypasses traditional franchised dealer networks. The carmaker is operating its own showrooms and interacting with consumers directly over the Internet. Not surprisingly, that model has struck a deeply negative chord with car dealers who prefer not to be cut out of the action. The dealers have responded by invoking decades-old laws aimed at curbing direct distribution by car manufacturers, and seeking new legislative or regulatory decisions aimed at closing any loopholes that might allow Tesla to distribute directly. Thus far, the dealers have succeeded in blocking Tesla in states like Texas, South Carolina, and New Jersey, and are continuing to mount their campaign on a state-by-state level as the company tries to grow its footprint.

The dealers have been successful largely because of their political clout in local elections, where they make significant campaign contributions. They have attempted to justify the direct distribution bans as a form of consumer protection and public safety regulation. Slowly, consumers are waking up to the fact that the dealers' arguments are completely unfounded. Consumer protection and public safety have nothing to do with those restrictions; they are protectionism for car dealers, pure and simple.

ORIGINS OF AUTOMOTIVE DISTRIBUTION RESTRICTIONS

State laws restricting direct distribution of automobiles are not a new phenomenon. They grew out of intensive lobbying efforts by car dealers in the 1930s-1950s, in response to perceived abuses of the franchise relationship by car manufacturers. At that time, the car companies were large, powerful, and few in number. Manufacturers would secure contracts that imposed draconian terms on the dealers. According to a 1956 U.S. Senate committee report, franchise agreements of the 1950s typically did not require the manufacturer to supply the dealer with any inventory and allowed the manufacturer to terminate the dealer at will without any showing of cause. Conversely, the manufacturers could often force dealerships to accept cars whether the dealers could sell them or not. Thus, the franchise agreements were perceived as shifting risk downward to dealers and reward upward to the manufacturer. Ford and General Motors, in particular, were accused of using their superior economic leverage to play extreme hardball with the dealers.

The dealers made some headway in the courts challenging the franchise agreements as contracts of adhesion--that is, contracts in which one side has all the bargaining power and uses that power to its advantage. But the relief the dealers ultimately needed was legislative. During the 1930s-1950s, the dealers pressured Congress to enact a statutory scheme protecting the dealers, but they got relatively little of what they wanted. A 1940 study by the Federal Trade Commission, which had been encouraged by the car dealers, did find some franchising abuses by manufacturers, but the report's headline was that the use of manufacturer power to squeeze the dealers actually created intense retail competition, to the benefit of consumers. …

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