Archives For direct distribution

As we have reported frequently on this blog (see, e.g., here, here, herehere, here and here) the car dealers have been making remarkably silly arguments in their fight to prevent Tesla from distributing its electrical vehicles directly to consumers. Now, I’m embarrassed to report that they’ve succeeded in moving from silly to disingenuous in my home state of Michigan.

Here’s what happened. In May of 2014, a bill was introduced in the Michigan Legislature to amend the statute dealing with car manufacturer-franchisee relationships. The bill did only one thing substantively—it prohibited manufacturers from coercing dealers not to charge consumers certain kinds of fees. Nothing at all to do with Tesla or direct distribution. Then, on October 1, in a floor amendment, the bill was altered to add a provision at the end of statute reading “this section applies to a manufacturer that sells, services, displays, or advertises its new motor vehicles in this state.” In a single day and as far as I know without any debate, the bill was passed with this new proviso 38-0 in the Senate and 106-1 in the House.

There was only one motivation for the addition of the proviso. Since losing in the Massachusetts Supreme Court in September, the dealers have recognized that decades-old dealer protection statutes may not be interpreted to apply to a company that wants to distribute its cars without using dealers at all. They saw an opportunity to bolster the statute in a way that would make it harder for Tesla to win under the existing law as it did in Massachusetts. And they realized that, on the eve of a close election contest in Michigan, no one would be paying attention to the seemingly innocuous language slipped into an uncontroversial bill at the last minute.

The bill is now sitting on Governor Rick Snyder’s desk for signature or veto. I wrote him a letter today asking him to veto the bill, if for no other reason than to allow the issue to be fairly and openly debated in Michigan. There’s mounting evidence that almost no one in the Legislature had any idea that they were taking sides in the Tesla wars.

What’s particularly infuriating is that the dealers are apparently arguing that the amendment has nothing to do with Tesla. Their argument apparently is that since the original statute already applied to Tesla, the amendment can’t be about Tesla. Instead, they assert, it’s just meant to clarify that “all manufacturers” are covered by the statute. This is beyond disingenuous. There’s no doubt that the dealers inserted this language to deal with their fear of a repeat of Massachusetts in Michigan. There’s no other logical explanation for the amendment. I mean, if not Tesla, who’s the manufacturer they were worried might not be covered by the existing legislation? GM? Ford? Sorry, guys, we’re not idiots.

Politics is dirty; crony capitalism is often the way of things. We shouldn’t be shocked. But nor should we stand for this kind of nonsense.

Tesla Wins Big in Massachusetts

Dan Crane —  18 September 2014

On September 15, Tesla won a big victory in Massachusetts. As we have previously chronicled at length on TOTM ( see, e.g., here, here, herehere, here and here), the car dealers are waging a state-by-state ground war to prevent Tesla from bypassing them and distributing directly to consumers. The dealers invoke 1950s-era franchise protection laws that are obsolete given the radical changes in automotive market in the intervening years and, in any event, have nothing to do with a company like Tesla that doesn’t use dealers at all. In Massachusetts State Automobile Dealers Ass’n, Inc. v. Tesla Motors MA, Inc., -2014 WL 4494167, the Supreme Judicial Court held that the dealers lacked standing to challenge Tesla’s direct distribution since the Massachusetts statute was intended to protect dealers from oppression by franchising manufacturers, not from competition by manufacturers who didn’t franchise at all. As we have previously detailed, there is no legitimate pro-consumer reason for prohibiting direct distribution.

What I found most telling about the Court’s decision was its quotation of a passage from the dealers’ brief. As readers may recall, the dealers have previously asserted that prohibiting direct distribution is necessary to break up the manufacturer’s “retail monopoly,” create price competition, and ensure that consumers get lower prices — arguments that are facially ludicrous as a matter of economics. But now listen to what the dealers have to say in Massachusetts:

Unless the defendants are enjoined, they will be allowed to compete unfairly with the dealers as their model of manufacturer owned dealerships with remote service centers will allow Tesla and Tesla MA financial savings which would not be available to Massachusetts dealers who must spend considerably to conform to Massachusetts law. This could cause inequitable pricing which also [could] cause consumer confusion and the inability to fairly consider the various automobiles offered.

Translation: Direct distribution leads to cost savings that are reflected in lower (“inequitable!”) prices to consumers.

Surely right, since a Justice Department study found that direct distribution could save over $2,200 per vehicle. But coming from the car dealers?  Who would have thunk it?

Earlier this week the New Jersey Assembly unanimously passed a bill to allow direct sales of Tesla cars in New Jersey. (H/T Marina Lao). The bill

Allows a manufacturer (“franchisor,” as defined in P.L.1985, c.361 (C.56:10-26 et seq.)) to directly buy from or sell to consumers a zero emission vehicle (ZEV) at a maximum of four locations in New Jersey.  In addition, the bill requires a manufacturer to own or operate at least one retail facility in New Jersey for the servicing of its vehicles. The manufacturer’s direct sale locations are not required to also serve as a retail service facility.

The bill amends current law to allow any ZEV manufacturer to directly or indirectly buy from and directly sell, offer to sell, or deal to a consumer a ZEV if the manufacturer was licensed by the New Jersey Motor Vehicle Commission (MVC) on or prior to January 1, 2014.  This bill provides that ZEVs may be directly sold by certain manufacturers, like Tesla Motors, and preempts any rule or regulation that restricts sales exclusively to franchised dealerships.  The provisions of the bill would not prevent a licensed franchisor from operating under an existing license issued by the MVC.

At first cut, it seems good that the legislature is responding to the lunacy of the Christie administration’s previous decision to enforce a rule prohibiting direct sales of automobiles in New Jersey. We have previously discussed that decision at length in previous posts here, here, here and here. And Thom and Mike have taken on a similar rule in their home state of Missouri here and here.

In response to New Jersey’s decision to prohibit direct sales, the International Center for Law & Economics organized an open letter to Governor Christie based in large part on Dan Crane’s writings on the topic here at TOTM and discussing the faulty economics of such a ban. The letter was signed by more than 70 law professors and economists.

But it turns out that the legislative response is nearly as bad as the underlying ban itself.

First, a quick recap.

In our letter we noted that

The Motor Vehicle Commission’s regulation was aimed specifically at stopping one company, Tesla Motors, from directly distributing its electric cars. But the regulation would apply equally to any other innovative manufacturer trying to bring a new automobile to market, as well. There is no justification on any rational economic or public policy grounds for such a restraint of commerce. Rather, the upshot of the regulation is to reduce competition in New Jersey’s automobile market for the benefit of its auto dealers and to the detriment of its consumers. It is protectionism for auto dealers, pure and simple.

While enforcement of the New Jersey ban was clearly aimed directly at Tesla, it has broader effects. And, of course, its underlying logic is simply indefensible, regardless of which particular manufacturer it affects. The letter explains at length the economics of retail distribution and the misguided, anti-consumer logic of the regulation, and concludes by noting that

In sum, we have not heard a single argument for a direct distribution ban that makes any sense. To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies. It is discouraging to see this ban being used to block a company that is bringing dynamic and environmentally friendly products to market. We strongly encourage you to repeal it, by new legislation if necessary.

Thus it seems heartening that the legislature did, indeed, take up our challenge to repeal the ban.

Except that, in doing so, the legislature managed to write a bill that reflects no understanding whatever of the underlying economic issues at stake. Instead, the legislative response appears largely to be the product of rent seeking,pure and simple, offering only a limited response to Tesla’s squeaky wheel (no pun intended) and leaving the core defects of the ban completely undisturbed.

Instead of acknowledging the underlying absurdity of the limit on direct sales, the bill keeps the ban in place and simply offers a limited exception for Tesla (or other zero emission cars). While the innovative and beneficial nature of Tesla’s cars was an additional reason to oppose banning their direct sale, the specific characteristics of the cars is a minor and ancillary reason to oppose the ban. But the New Jersey legislative response is all about the cars’ emissions characteristics, and in no way does it reflect an appreciation for the fundamental economic defects of the underlying rule.

Moreover, the bill permits direct sales at only four locations (why four? No good reason whatever — presumably it was a political compromise, never the stuff of economic reason) and requires Tesla to operate a service center for its cars in the state. In other words, the regulators are still arbitrarily dictating aspects of car manufacturers’ business organization from on high.

Even worse, however, the bill is constructed to be nothing more than a payoff for a specific firm’s lobbying efforts, thus ensuring that the next (non-zero-emission) Tesla to come along will have to undertake the same efforts to pander to the state.

Far from addressing the serious concerns with the direct sales ban, the bill just perpetuates the culture of political rent seeking such regulations create.

Perhaps it’s better than nothing. Certainly it’s better than nothing for Tesla. But overall, I’d say it’s about the worst possible sort of response, short of nothing.

Mike Sykuta and I, both proud Missourians, recently took to the opinion section of the Kansas City Star to discuss pending state legislation that would bar automobile manufacturers from operating their own retail outlets in the Show Me state.  The immediate target of the bill is Tesla, but the bigger concern of the auto dealers, who drafted the statutory language we criticize, is that the big carmakers will bypass independent dealers and start running their own retail outlets.

The arguments in our op-ed will be familiar to TOTM readers.  We begin with three fundamental points:  (1) Distribution is an “input” for carmakers.  (2) Producers, if left to their own devices, will choose the more efficient option when deciding whether to “buy” the distribution input (i.e., to sell through independent dealers, who pay a discounted wholesale price) or “make” it (i.e., to operate their own retail outlets and charge the higher retail price).  (3) Consumers — who ultimately pay all input costs, including the cost of distribution — will benefit if the most efficient option is selected.  In short, the interests of carmakers and consumers are aligned here: both benefit from implementation of the most efficient distribution scheme.

We then rebut the arguments that a direct distribution ban is needed to break up monopoly power, to assure adequate aftermarket servicing of vehicles, or to encourage appropriate safety recalls.  (On these points, we draw heavily from International Center for Law & Economics’ letter to Gov. Chris Christie regarding New Jersey’s proposed anti-Tesla legislation.)

Go read the whole thing.

As Geoff posted yesterday, a group of 72 distinguished economists and law professors from across the political spectrum released a letter to Chris Christie pointing out the absurdities of New Jersey’s direct distribution ban. I’m heartened that both Governor Christie and his potential rival for the 2016 Republican nomination, Texas Governor Rick Perry, have made statements, here and here, in recent days suggesting that they would support legislation to allow direct distribution. Another potential 2016 Republican contender, has also joined the anti-protectionist fray. This should not be a partisan political issue. Hopefully, thinking people from both parties will realize that these laws help no one but the car dealers.

In the midst of these encouraging developments, I came across a March 5, 2014 letter from General Motors to Ohio Governor John Kasich complaining about proposed legislation that would carve out a special direct-dealing exemption for Tesla in Ohio. I’ve gotta say that I’m sympathetic to GM’s plight. It isn’t fair that Tesla would get a special exemption from regulations applicable to other car dealers. I’m not blaming Tesla, since I assume and hope that Tesla’s legislative strategy is to ask that these laws be repealed or that Tesla be exempted, not that the laws should continue to apply to other manufacturers. But the point of our letter is that no manufacturer should be subject to these restrictions. Tesla may have special reasons to prefer direct distribution, but the laws should be general—and generally permissive of direct distribution. The last thing we need is for a continuation of the dealers’ crony capitalism through a system of selective exemptions from protectionist statutes.

What was most telling about GM’s letter was its straightforward admission that allowing Tesla to engage in direct distribution would give Tesla a “distinct competitive advantage” and would create a “significant disparate impact” on competition in the auto industry. That’s just another way of saying that direct distribution is more efficient. If Tesla will gain a competitive advantage by bypassing dealers, shouldn’t we want all car companies to have that same advantage?

To be clear, there are circumstances were exempting just select companies from a regulatory scheme would give them a competitive advantage not based on superior efficiency in a social-welfare enhancing sense. For example, if the general pollution control regulations are optimally set, then exempting some firms will allow them to externalize costs and thereby obtain a competitive advantage, reducing net social welfare. But that would only be the case if the regulated activity is socially harmful, which direct distribution is not, as our open letter explained. The take-away from GM’s letter should be even more impetus for repealing the direct distribution bans across the board so that consumers can enjoy the benefit of competition among rival manufacturers who all have the right to choose the most efficient means of distribution for them.