Tesla, Car Dealers, and Anti-Competitive State Laws

You may not realize it, but car dealers wield an unusual amount of political power in this country. That's partly because they're located in or near pretty much every community everywhere, and also because they're highly organized and clever about using their influence. One of the ways they've done so is get laws passed in state after state making sure that the model under which they operate—one in which independent dealers sell cars, but car companies themselves don't—is the only thing allowed by law. In fact, laws making it difficult or downright illegal for car companies to sell their products directly to customers are on the books in 48 states. This absurd state of affairs hasn't gotten much attention until recently, when Tesla decided it wanted to open its own dealerships to sell people cars.

Among the places it has done this is New Jersey, where the company had opened two stores. But earlier this week, the New Jersey Motor Vehicle Commission passed a rule requiring that all auto sales be done through franchises, making Tesla's stores illegal. Their option now is to either test the rule in court, or convert the stores to "showrooms," where you can look at a car but not actually buy one.

You'd think that if conservatives really believed all their rhetoric about the value of unfettered free markets, they would be all over this issue, advocating for Tesla's side of the controversy and campaigning to break up the anti-free-enterprise car dealer oligopolies. But of course, we're talking about Tesla, and liberals like electric cars, and therefore conservatives feel obligated to hate electric cars, so that probably won't happen.

There are other areas in which the interests of consumers are sacrificed to those of politically influential rent-seeking industries, but this is just so blatantly anti-consumer that it's hard to see how any politician could possibly justify it. As ridiculous as it is, you can, with something approximating a straight face, argue that, say, stringent licensure requirements for hair braiders are vital to protecting consumers' interest in a solid braid and not actually an effort by incumbent braiders to limit competition. (In a 2012 case, a federal judge struck down a Utah law requiring a mind-boggling 2,000 hours of state-approved coursework to open a hair braiding business.) But I've yet to see anyone even try to claim in a coherent way that consumers would be hurt by Tesla (or any other car company) opening their own showrooms. Even the incumbent dealers can't come up with an argument beyond "We were here first!" This is from an article about the topic last year:

Texas is virtually closed for business. The Austin American-Statesman reports: "You can visit one of the two galleries Tesla Motors operates in the state — one in Austin, the other in Houston — but employees can't tell you how much the car costs. They can't offer you a test drive. They can't even give you their website address. And if you buy one, the car is delivered by a third party — in a truck that's not allowed to have Tesla markings."

The state Senate in North Carolina has approved a measure forbidding sales except through franchised dealers. After Tesla opened a store near Denver, the Colorado legislature passed a law to prevent it from opening any more. Illinois, by contrast, allows Tesla to sell cars at company-owned outlets.

The effort to prevent direct sales comes from existing car dealers, who like the arrangement they have. They claim to be trying to prevent "unfair competition," but the competition they prevent looks unfair only to those who profit from a protected market.

Bob Glaser, head of the North Carolina Automobile Dealers Association, told The Associated Press, "It's a consumer protection, and why we say that is a dealer who has invested a significant amount of capital in a community is more committed to taking care of that area's customers."

But deciding who will take better care of an area's customers is normally left up to those customers […]

Glaser conjured another reason that the people at Tesla should not be allowed to operate as they prefer. "You tell me they're gonna support the little leagues and the YMCA?" he demanded. Tesla says, actually, it will — not that sponsoring youth athletics is, or should be, required to do business in America.

That last argument may be farcical, but it gets to the point: car dealers contribute tens of millions of dollars to state and local politicians, and for that investment, they've gotten a system that protects them from competition. That system is of a common type: built through the exercise of political influence, its health is dependent on as few people knowing about it as possible. The state representative can take contributions from the dealers and write a law to protect them, and as long as he doesn't have to justify the law to anyone, everybody's happy. But if he has to actually defend it publicly, then things begin to get uncomfortable.

Tesla is extremely good at working the press, so if they decided to execute a plan to bring attention to these anti-competitive state laws, they could probably do a pretty good job of it. If that happened, I wouldn't be surprised if, one by one, the laws started to fall. And in New Jersey, Chris Christie has a chance to show Republican primary voters what a friend of free enterprise he is. We'll see about that.

Comments

Do you recall how dealerships successfully lobbied Congress to expand the number of dealerships that would be maintained by Chrysler and GM, post-bankruptcy? The NADA has extremely deep pockets and platoons of lobbyists.

Auto manufacturers would benefit from being able to sell cars to consumers online, to the buyer's specification, with delivery to occur shortly thereafter at a nearby showroom. Pricing of vehicles might become more level, less dependent upon negotiations with a particular dealer or the dealer incentives being pushed at any given moment. A cottage industry could emerge, a broker who helps you select the best car for your needs across model lines, arranges a test drive during your lunch hour, and closes the deal at a fair price. But ideas like those give traditional auto dealerships nightmares... smaller lots, small inventories, lower profits, much less leverage with manufacturers, consumers who have more options and can more easily price shop....

Paul writes: "One of the ways they've done so is get laws passed in state after state making sure that the model under which they operate—one in which independent dealers sell cars, but car companies themselves don't—is the only thing allowed by law. "

Ok, this sounds bad.

But, have you figured out why this law was passed?

(And it was passed when auto dealers were in a weak economic position.)

"Glaser conjured another reason that the people at Tesla should not be allowed to operate as they prefer. "You tell me they're gonna support the little leagues and the YMCA?" he demanded. Tesla says, actually, it will — not that sponsoring youth athletics is, or should be, required to do business in America.

"That last argument may be farcical . . . ."

Er, no it isn't. Auto dealers are community-based businesses as a rule, and anyone who grew up in a small town or city knows how important local businesses are not only to the economy, but to the whole social infrastructure of the community. This is something liberals are well aware of when they fret about the destruction of mom-and-pop stores by Wal-Mart (Never mind that Wal-Mart does this by offering much better selection at lower prices). What's astonishing here is that you're adopting the pro-Wal-Mart argument yourself against another set of local businesses. Why? Because it's an eco-friendly (and outrageously expensive) vehicle? You accuse conservatives of knee-jerk opposition here, but your advocacy looks much the same.

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