Tesla asks: What's the point of car dealers?

Marcelo Jaramillo, assistant store manager, (2nd R) shows a Tesla motor company car in a dealership at the Dadeland Mall on June 6, 2013 in Miami, Fla.

Tesla wants to sell its upscale electric cars directly to you, not through a local dealership, like Ford and GM do. The company doesn’t believe conventional dealers will do a good job selling its new and unusual car. And of course, it doesn’t want to share profits with them either.

But it’s proving to be a rocky road. Car dealers are politically powerful and protected by strong franchising laws. The Internet has cut out middlemen of all kinds, yet car dealers haven’t gone anywhere. A combination of history and politics explains why the way we buy cars is so differently than just about anything else.

The politics behind the endurance of car dealerships is pretty simple: State officials are elected to protect jobs and revenue, and car dealerships provide both -- as dealers remind politicians at every opportunity.

“In our state, we have over 87,000 employees,” says Bill Wolters, president of the Texas Automobile Dealers Association. He adds that dealerships provide Texas with billions in sales taxes and economic impact.

But politics isn’t the whole story. Dealerships date back to the very first cars, those unreliable, smoke-belching contraptions. Remember, dealers sell cars and fix them too. At a time when cars broke down frequently, automakers wanted some consistency in how they were repaired. Dealership franchises provided that.

“Having a network of individuals who provided service locally was worth a lot, and so that became the dominant system through which cars were sold,” explains University of Michigan professor Francine Lafontaine, an expert on franchising.

Over the years, dealers felt they needed more leverage. It started when carmakers made dealerships upgrade repair technology to keep up with increasingly complex vehicles. Dealers did so, but wanted assurances that if they invested in expensive new improvements, they’d be able to hang on to their franchises and earn back the money they sunk into them.

“We have to have some guarantee on our side that we’re not subject to the whims of the manufacturer if they would decide to cancel our franchise contract,” as Edmunds.com senior editor Bill Visnic explains the dealers’ thinking.

In the '70s, states passed stronger laws protecting dealerships so carmakers couldn’t go around them. Online ventures and automakers large and small have all tried and failed to do so since. Tesla has a tough fight ahead.

About the author

Mark Garrison is a reporter for Marketplace and substitute host for the Marketplace Morning Report, based in New York.
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Great step I must say. Good for both car makers as well as the buyers. This will cut down the price of the car by a lot and will save the customers from a lot of tension that they face due to involvement of dealers. All they need to do is to provide some good service centers in the field and the things are done. Rightly said whats the point with dealers?

Where does Mr. Wolters (TADA president) think that the Tesla employees in Texas are going to come from? Mars? Texas Tesla employees, both sales and service, will live near their places of work in Texas of course. Their salaries will most likely be deposited in local banks and credit unions. They will buy local groceries. They will pay Texas sales and property taxes. If a Tesla vehicle is sold in Texas, whether by a dealership or directly by Tesla, Texas sales taxes will apply. On the other hand, if Texas consumers have to go to another state to buy their vehicle, Texas will lose that sales tax. Mr. Wolter's argument is absurd.

The truth for consumers in Texas is that every time that they buy a new car or have it serviced at a dealership, they have to pay more in order to fund they very expensive professional lobbyist organizations TADA and NADA. Another truth is that a supermajority of Texans believe that Tesla should not be forced to operate under these anti-competitive dealership laws. See http://www.bizjournals.com/austin/poll/results/11461812

The article states "At a time when cars broke down frequently, automakers wanted some consistency in how they were repaired. Dealership franchises provided that." This argument makes no sense. Why would INDEPENDENT dealerships provide more consistent service than the employees of a single company? It would seem to me that just the opposite would be true.

This article points out that dealerships wanted to protect their investments that were made at the manufacturers behest. This was the original intent of the automobile franchise laws. But this argument clearly does not apply to Tesla -- they have no existing dealerships.

I cannot think of a clearer case of special interest lobbying corrupting the political process. A supermajority of the electorate wants the anti-competitive franchise laws repealed. And the laws themselves are clearly poor economic policy. Yet our legislators keep them in place and we pay for it year after year.

State legislatures should have the integrity to accede to their electorate's very clear wishes and implement good economic policy by repealing the automobile franchise laws. If they fail to do so, the federal government should step in and correct the situation.

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