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Appetite for Disruption: Tesla’s Push to Shatter the Car Buying Landscape

By: Bridget Clerkin June 26, 2017
Tesla showrooms, like the one shown here, have been one way for the California automaker to get around state restrictions requiring manufacturers to have a dealership network. Tesla is challenging those restrictions in multiple states, namely Michigan.
Tesla showrooms, like the one shown here, have been one way for the California automaker to get around state restrictions requiring manufacturers to have a dealership network. Tesla is challenging those restrictions in multiple states, namely Michigan.

The future of the auto industry may hinge on three letters, and they’re not BMW, TNC, or DOT.

“I-t-s.” It’s the word found literally and figuratively at the center of a years-long battle over the way automakers sell their products in Michigan. But its ramifications may reach far beyond the state’s borders.

Once removed from a piece of legislation referred to as the “anti-Tesla amendment,” the word effectively banned the California-based carmaker from selling their models in the Great Lakes State, wielded like a tiny shield between an industry that has long found shelter in the shadow of Henry Ford and Silicon Valley’s destructive nature.

But the amendment has faced legal challenges from Tesla nearly from the time of its passage, and, 3 years later, the case is ongoing in Michigan courts.

The issue centers around a state law barring any automaker from selling new vehicles directly to retail customers “except through its franchised dealers.” Michigan removed the word “its” in 2014, in the so-called “anti-Tesla” move, which the company has sued the state over, claiming it was a direct swipe at its business model.

At stake is not just the fate of Tesla’s business in the area, but the way car manufacturers can do business in Michigan at all.

The 2014 terminology fortified the state’s requirement that cars be sold through a dealership model—where automakers ship vehicles for a network of local businesses to sell. It’s long been the status quo for unloading new vehicles across the country, and long been in Tesla’s disruptive crosshairs.

The electric carmaker prefers using Tesla storefronts to sell merchandise to its customers, but the language adopted in the Michigan amendment closed an important legal loophole there, making that direct-to-consumer method not just unwelcome, but illegal.

Nearly every state in the country has laws on the books either severely limiting or outright prohibiting the direct-sell approach, and in each case, Tesla is attempting to blow up that norm.

If the company is successful, it could drastically change the car-selling landscape nationwide. But so far on its journey, it’s been hitting more speed bumps than smooth road.

Shuffle Up and Deal

Detroit makes an especially appropriate backdrop for the battle over car distribution. The Michigan city was home to the world’s first auto dealership, founded in 1898 by William Metzger—who, in a strange twist, got his start selling electric cars, much in the same vein as Tesla’s vehicles.

Metzger’s business model also defied the prevailing retail wisdom at the time, when cars were sold directly from manufacturers via department stores, mail orders, and traveling salesmen.

And it didn’t take long for his innovation to catch on. Just shy of 120 years later, there are more than 16,700 franchised car dealers in the United States alone.

The ubiquitous nature of the business is no accident. Over the years, dealers became wealthy, dealerships gained political clout, and states adopted legislation requiring automakers to sell through such intermediaries—including the statute Tesla is fighting in Michigan.

Auto dealers say the laws help protect against car manufacturers monopolizing markets by preserving the competition bred by multiple sellers occupying the same turf. Dealerships are financially incentivized to offer better services—and better deals—as the model creates a need for referrals and returning customers.

A Tesla service bay. Auto dealers say customer service could suffer if automakers are allowed to sell direct-to-consumers as opposed to selling through a dealer.
A Tesla service bay. Auto dealers say customer service could suffer if automakers are allowed to sell direct-to-consumers as opposed to selling through a dealer.

A two-year study conducted in Texas gave merit to the argument, showing an association between lower prices for certain models and the cars’ availability in the area through multiple dealerships.

A direct-to-consumer approach, on the other hand, would allow manufacturers to set fixed prices for their products nationwide—a possibility that has already come to pass, National Automobile Dealers Association (NADA) spokesman, Jared Allen, pointed out.

“The real question is how would manufacturer-direct sales affect car buyers. And the answer is: It would harm them significantly, through higher prices,” he said. “How do we know this? For starters, because of Tesla.”

Indeed, Tesla CEO Elon Musk sent a strongly-worded e-mail to employees last year calling attention to the importance of a “no discount policy”—despite the company’s notoriously high asking prices, including the $100,000 Model S.

Car dealerships also offer free distribution networks for manufacturers, giving automakers access to their collective $200 billion investment in land, buildings, and infrastructure throughout the country, Allen said.

“The vast majority of manufacturers—including the major automakers—understand that their businesses, their shareholders and their customers are much better served under the franchised dealer system,” he said. “Because of this, you really don’t see manufacturers beyond a few small, emerging market entrants advocating to sell direct.”

Igniting the Spark Plug

Tesla may represent a small portion of the market, but it brings huge name recognition to the issue, along with the deep pockets of Silicon Valley and its billionaire CEO.

The company is pushing hard against the current dealership model, with its efforts supported by a number of organizations, including a cadre of economists and the U.S. Department of Justice, which officially recommended the direct-to-consumer approach in an economic analysis conducted after the auto industry’s near-collapse in 2008.

The Association of Global Automakers—a group including international brands such as Toyota, Honda, and Nissan—have also filed a letter with the Federal Trade Commission arguing on behalf of less stringent dealership laws, saying that allowing manufacturers to sell directly alongside dealerships would broaden the marketplace and further increase competition.

In Michigan, Tesla is putting these arguments to the legal test. The company is currently embroiled in a lawsuit against the state’s governor, Rick Snyder, along with Secretary of State Ruth Johnson and Attorney General Bill Schuette, over a rejected bid there for dealership and service facilities.

Tesla is suing Michigan's Republican Governor, Rick Snyder, for signing legislation that block's the company's direct-to-consumer model of selling cars.
Tesla is suing Michigan's Republican Governor, Rick Snyder, for signing legislation that block's the company's direct-to-consumer model of selling cars.

The application was vetoed, the state said at the time, because Tesla couldn’t produce the required proof of contract with an independent auto dealer to sell its products. But, according to Tesla’s lawyers, the legitimacy of that decision depends on what the definition of “its” is.

The state based the move on the 2014 amendment to legislation prohibiting automakers from selling new vehicles directly to retail customers “except through its franchised dealers.” Signed into law by Snyder, the “anti-Tesla” amendment removed the word “its” from the statement, which Tesla executives claimed was specifically targeted at the company.

The change seals up a loophole the company has used in other states to sell or market their vehicles through “gallery” stores—shortening and strengthening the legal connection between auto manufacturers and their network of dealerships in Michigan.

Still, the electric car maker is fighting the decision, subpoenaing the governor and a number of other high ranking state officials earlier this month for a trove of e-mails and other communications in the lead-up to the 2014 passing of the bill. Among others, the company specifically went after State Senator Joe Hune (R-Hamburg), who has received donations from the state’s Automobile Dealers Association and whose wife’s law firm lobbies on behalf of auto dealers there.

When reached for comment, Secretary of State representatives referred only to the office’s previous statements around rejecting the application. A spokeswoman from Tesla also pointed to previous remarks the company has made on the matter.

“Tesla will continue to fight for the rights of Michigan consumers to be able to choose how they buy cars in Michigan,” she said. “Giving auto dealers a monopoly on sales benefits them, but harms consumers.”

A Patchwork Process

Michigan is not the only place where Tesla is fighting state dealership laws, but it may prove the most important. A decision in the company’s favor there could not only allow it access to a large and desirable market, but set a legal precedent for its retail model.

That could come in handy should the company pick any other courtroom battles across the country—a scenario that may be one of few remaining options for Tesla, which is struggling to gain legislative support for its direct-sales method in a number of other states.

In West Virginia, the company was shut down 2 years ago when Governor Ray Tomblin signed a law prohibiting manufacturers from selling their own vehicles. Louisiana ratified similar legislation this month.

A bill in Connecticut could be decided at any moment—leaving the company’s future up in the air—while one in Texas introduced this year was simply left to die in the state legislature, leaving Tesla without an option to sell directly in the Lone Star State.

Four states outright approve of Tesla's direct-to-consumer model, while it is completely banned in 3 others, and 'in dispute' in 15 more. The rest of the country allows Tesla to sell direct-to-customers to some extent.

Another case lingers on in Virginia, where Tesla faces an appeal by the state’s Automobile Dealers Association of a 2016 decision made by the Virginia Department of Motor Vehicles to allow the company to sell directly there.

Still, Tesla has seen some legislative bright spots.

In New Jersey, Governor Chris Christie reversed a ban on the direct-sales model in 2015. Tesla officials also convinced Indiana lawmakers to reconsider the approach last year, as the governing body was on the verge of approving their own version of an “anti-Tesla” amendment.

All told, only 4 states outright approve of the direct-to-consumer model, while it is completely banned in 3 others, according to CNN. Meanwhile, the retail theory is “in dispute” in 15 states, while the company’s sales method is allowed—but limited—in most others.

Confronted with a checker board when it needs a blank slate, the company’s legal road could go on for years—but if Elon Musk gets his way, he could well circumvent his woes here, and start all over again on Mars.

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