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This article appears in the December 2022 issue of The American Prospect magazine. Subscribe here.
It’s become trendy to mock Tesla in recent years. From the disastrous Cybertruck announcement, to viral clips of exploding cars and Teslas under computer control attempting to drive into oncoming traffic, the company and its egomaniac CEO Elon Musk have lost much of the shine they had five years ago. But as classic American automakers sneered at the nascent electric-vehicle startup, Tesla executed a shrewd business strategy that forwent typical marketing campaigns, and cut independent car dealers from the equation by deploying a direct-to-consumer (DTC) purchasing model for its electric vehicles. However, that move has left Tesla facing an onslaught of legal clashes between independent car dealer associations in many states the company sells cars in.
For example, in Texas, Tesla’s new home, vehicles manufactured there cannot be sold directly to consumers in the state. Instead, they are first shipped across state lines, after which you can order the car online and have it shipped back to a Texas address.
Now, about a decade later, Ford has realized that the future is electric vehicles, and ripped a page out of Tesla’s playbook. Earlier this year, at an industry conference, Ford CEO Jim Farley admitted to attendees that Tesla’s “superior profitability” was because its bottom line did not depend on dealers. He detailed that Ford’s current distribution model is $2,000 more expensive per car compared to Tesla’s. “We have all this inventory sitting around in dealers, in transit, we got to get rid of all that.” That’s why, he insisted, “we got to go 100 percent online.” To not just reach price parity with Tesla, but undercut it, he borrowed another strategy from the company: cutting advertising costs. “Five hundred, six hundred dollars a vehicle on public advertising? Get rid of all of it.”
Farley’s remarks garnered confusion from industry onlookers in the following days. To assuage those concerns, Ford representatives clarified that his comments were “simply discussing” DTC models rather than “transitioning 100 percent.” However, actual details of Ford’s plan suggest at the very least a diminished bargaining power for independent car dealerships, and perhaps, a future where they are retrofitted into service centers for repairs and other boutique perks rather than retailers.
In the clarifying comments, Said Deep, a Ford spokesperson, stated, “Our dealers are a competitive advantage for us as they are closely connected with their customers and communities they serve.” For the future, Deep added, the company’s network of approximately 3,000 dealerships could provide an “outstanding digital experience.”
But what does that look like in practice? Months after the initial announcement, at the annual Ford dealer convention, Farley announced, “When it comes to selling battery electric Ford products that are part of the new Model E division, you’re either on the bus or off the bus and you have just six weeks to decide.” He was referring to Ford’s new two-tiered EV seller certification program: Model E Certified and Model E Certified Elite, and the deadline was the end of October.
The shifting relationship between dealers and automakers is a departure from the outsized influence dealers have typically held.
The new program requires that dealers integrate outside EV specialists for sellers and customers, build speedy charging infrastructure onsite, include ancillary perks such as car delivery or software upgrades via subscription models, and most strikingly, what Ford calls “transparent, non-negotiable pricing.” Although dealerships will be able to set prices, Ford says they will be monitoring car prices to ensure customers are paying exactly what dealerships promised, in addition to monitoring consistent pricing across different customers.
The Model E Certified dealer, designed for smaller enterprises, requires an up-front $500,000, most of which goes toward installing a fast charger for public use, a conservative cost estimate according to Ford. The number of EV orders available to dealers in this tier is restricted to 25 fully electric vehicles, on top of not having demo vehicles available onsite, a move that pushes dealers to opt into the next tier. For Model E Certified Elite dealers, they are subject to an initial $900,000 investment and have no restrictions on the number of EV sales, in addition to requirements for two fast chargers. The next wave of authorizations for selling Ford EVs is not expected until 2027, meaning dealers cannot reapply until 2025. The company also estimates that investments from Elite dealers will likely total closer to $1.2 million because they want dealers to add additional chargers in the coming years.
FORD’S MASSIVE REQUEST FROM DEALERS has stalled the company’s ambitious plans. Days before the Halloween deadline, the company extended it until December 2. Its luxury division of Lincoln Motors is also deploying a similar DTC strategy for dealers, with a December 15 deadline to opt in to Lincoln’s EV program. The Lincoln Motors program requires a $900,000 investment toward infrastructure upgrades, and many Ford dealers also sell Lincoln vehicles—which might mean $2 million in investment to build separate chargers for each brand.
While Ford is restricting the number of EV sales for its lower tier, Lincoln Motors has a single program with no sale restrictions. In a similar move to crack down on dealership price-gouging, in a letter to dealers, the company said: “Dealers may not advertise a lease, retail sales price, discount, or financing offer that is derived from a retail sales price that is above MSRP.” Referring to “client satisfaction” and “favorability,” the letter states, “selling above MSRP negatively impacts the Lincoln Brand.”
In a phone interview with Ross Woodhams, general manager of Woodhams Ford Lincoln in southwest Michigan, I asked if the separate investment requirements from Ford and Lincoln would be difficult for dealers like himself. “I’m not talking about my business with you. I think you’re asking questions you already know the answers to,” he said, and hung up.
The shifting relationship between dealers and automakers is a departure from the outsized influence dealers have typically held. For example, during 2009 negotiations for Dodd-Frank, the House Financial Services Committee passed an amendment exempting auto dealers from the Consumer Financial Protection Bureau’s purview, led by—you guessed it—a former auto dealer, Rep. John Campbell (R-CA).
Democrats aren’t immune from dealer influence. Just this year, Rep. Dan Kildee (D-MI), a member of the powerful tax-writing House Ways and Means Committee, tried passing a tax break for auto dealers. He garnered support from lawmakers on both sides of the aisle, including auto dealer Rep. Donald Beyer (D-VA) and Rep. Carol Miller (R-WV), whose husband runs several dealerships in West Virginia and North Carolina. Back in 2015, the House overwhelmingly passed the Reforming CFPB Indirect Auto Financing Guidance Act, industry-friendly regulation that functionally prevents CFPB from curbing racially discriminatory auto lending practices.
In other words, Congress essentially protected the auto industry’s right to give nonwhite consumers garbage loans, akin to the subprime mortgages that sparked the financial crisis.
Outside of the national political sphere, auto dealers are kingpins in local communities, and exert their clout through powerful trade associations. Will Green, the president of the Louisiana Automobile Dealers Association, said in reference to an antitrust lawsuit filed by Tesla against the state: “Out of state technology companies don’t care about Louisiana’s communities—local dealerships that have operated here for generations do.”
Franchise laws vary by state, but most overwhelmingly favor independent auto dealers. The exceptions are California, New York, and Massachusetts, where Tesla’s anti-monopoly arguments have won in legal battles.
If dealers die out, consumers might benefit in the short term, thanks to the Inflation Reduction Act’s EV tax credit of up to $7,500 for new buyers and the warnings from automakers against dealers’ price chicanery. GM, Ford, Chrysler, and the other big automakers were behind the curve initially on EVs, but they all now have at least some models, and are trying to catch up by cutting costs.
But they might not over the longer term, as auto companies become vertically integrated and cars depend on proprietary software. “We’re going to see very large consolidation and big changes,” Farley said earlier this year. “It’s not motors and gearboxes, it’s gateway modules and software that controls the vehicle.” Cars could become like John Deere tractors, where there is no option aside from the company itself to obtain repairs and service, naturally at a steep markup.
In 2013, Bill Wolters of the Texas Automobile Dealers Association pushed Tesla out of the state. But he warned that if Tesla continued, other American automakers might follow suit. Almost ten years later, it seems that the automobile industry’s response to electrification made Wolters’s fears become reality.
