Should Tesla be allowed to skip the middleman?

Proquest LLC

WASHINGTON - Tesla Motors CEO Elon Musk wants to sell you a car, but your state government might not let him.

Why? He wants to deal directly with you, bypassing the independent dealerships that have acted as middlemen in the car industry for close to a century.

In California'sSilicon Valley, where Tesla is based, the disruption of existing practice is encouraged. It leads to innovation and breakthroughs. But in the auto industry, Tesla has been vilified by auto dealers, who want state regulators to limit Tesla's offerings to consumers.

Tesla is an unlikely warrior in the fight against excessive government interference in the marketplace. Its all-electric cars have long made it a darling of the environmentalist left and the Obama administration, which provided the company a $465 million low- interest loan to develop its technology.

Nor has Tesla been shy about taking government assistance elsewhere, recently securing $1.3 billion in concessions from Nevada taxpayers to locate a battery factory near Reno.

But outside of Nevada, the firm has not received so warm a welcome. The reason is Tesla's distribution system.

Instead of using independent dealers, Tesla sells its cars directly to the consumer, using company-owned outlets to show Tesla's vehicles to prospective buyers, with the actual sale often occurring online.

Cutting out the middleman in this way could save consumers substantially: according to one study, direct sales could knock more than $2,000 off the price of a new car.

But cost isn't the only reason Tesla wants to deal directly with its customers. Tesla's electric cars are different than the vehicles consumers are used to buying and dealers are used to selling. Tesla is concerned that traditional dealerships will not have the expertise, or incentive, necessary to educate consumers about its product.

Outside the auto industry, such direct-to-the-consumer systems are nothing new - think of Apple stores or direct sale models long used by PC manufacturers Dell and Gateway.

But in the world of auto sales, they are unheard of and - dealers argue - they are downright illegal. Indeed, 48 states bar or restrict direct sales by auto manufacturers.

Citing these laws, auto dealers have fought in state after state to block Tesla from engaging in direct sales. Some dealers even question pre-sale marketing in Tesla's showrooms.

As a result of dealer litigation and lobbying, Tesla currently is banned from selling vehicles in four states, and limited or being challenged in nearly a dozen more.

The dealers say that these restrictions are necessary to protect consumers. But from what? Price gouging by manufacturers?

Tesla is hardly in a position to "gouge" its customers. And if the concern were higher prices, why would dealers complain, since they would benefit if Tesla prices itself out of the market.

Another argument is that local dealers ensure better service for consumers, since they have more invested in the community. But Tesla has much invested as well, and wants to invest more in local communities by establishing company-owned showrooms.

In any case, if service from an independent auto dealer were so valuable to consumers, then they would have little reason to worry about Tesla's challenge.

There simply is no economic argument for restricting direct sales. The real issue is not consumer protection, but protection of the dealers themselves. As one auto dealer in Columbus, Ohio, bluntly put it: "I don't want 'Hydrogen Motors' to come along five years from now or some other Mickey Mouse thing to come along and then just jack up the industry."

This does not mean that direct sales are necessarily a better way to sell automobiles. It may very well be that traditional independent dealerships do, in fact, offer consumers a better deal. But the choice should be up to consumers, not regulators or auto dealers. Let the competition begin.

James Gattuso is the senior research fellow in regulatory policy with the Roe Institute for Economic Policy Studies at The Heritage Foundation (heritage.org), a conservative think tank on Capitol Hill.

By Jonathan Collegio

McClatchy Washington Bureau

McLEAN, Va. - Roughly 16.4 million new cars and light trucks will be sold this year, virtually all through America's franchised new- car dealerships.

Local independent dealers provide the most competitive, efficient and consumer-friendly model for the buying, selling and servicing of cars - and policymakers should work to strengthen the franchise model.

New-car dealers compete fiercely for their customers' business - and that competition in sales and financing drives prices down. In many major metro areas, multiple stores across and within brands compete for the business of every customer, and that competition incentivizes the lowest cost distribution model for virtually any consumer good anywhere.

So-called "middleman costs" are a myth in the car business. Margins in auto retailing are 1 percent to 2 percent compared to more typical retail margins of 12 percent to 15 percent.

Fierce retail competition between auto dealers drives down costs and profits. If factories owned all its stores, competition would be eliminated. Not only would all of the retail costs still exist - the land, buildings, workers and advertising - but the incentive to limit those costs would no longer exist. Meanwhile, consumers would have far less bargaining power because different stores would not be competing for their business.

Local dealers also provide great service to their customers, especially for warranty and recall claims. Because dealers get paid by factories to perform warranty and recall work, they are incentivized to take the side of their customers. These incentives do not exist with factory-owned stores.

Dealers also provide a huge economic benefit to local communities. While businesses on Main Street have been decimated in many local communities over the past several decades, dealerships are the backbone of many local economies.

Dealers are huge backers of their local communities, providing 15 percent of state and local tax revenue across the country. Local new- car dealerships employ more than 1 million people nationwide, providing well-paying jobs that average $52,500 in wages, plus benefits.

The benefits of the franchise model are clear, but ultimately it's up to each state to determine how new cars are sold and serviced and to enact licensing laws and consumer protection statutes that are best for its citizens.

Cars are special purchases, usually the second-most expensive purchase a consumer will ever make. They require licensing and insurance to operate, financing to purchase, contain highly- regulated hazardous materials like fuel and batteries, and if operated incorrectly, can hurt or even kill people.

For these and other reasons, the U.S. Supreme Court has upheld the right of states to regulate the buying and selling of cars and, through the legislative process, every state has found that the franchise model serves its citizens best.

The work of dealerships is best undertaken by local businesspeople with skin in the game, who know the gritty details of their local economies and communities.

Far off manufacturers and regional managers cannot match the efficiency of local dealers, and in experiments where they tried - for example, in cities in California, New York, Oklahoma and Utah in the 1990s - manufacturers were unable to compete with local dealers.

No business model in America is more efficient, competitive or decentralized than the network of franchised new-car dealerships. The franchise model allows manufacturers to do what they do best: design, build and market great new vehicles, instead of investing in a low return-on-investment, capital intensive retail business where local businesspeople have a real advantage.

High-volume manufacturers from America and abroad recognize the value of local dealerships and embrace the franchise model as the best system of retailing new cars. The franchise model should be strengthened.

Jonathan Collegio is vice president of public affairs for the National Automobile Dealers Association.

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