All Over Albany

Why can't you buy a car directly from a car company?

The electric car company Tesla has worked out a deal with New York State to allow it continue selling its cars directly to consumers. The deal, which will involve state legislation, will allow the company to continue operating its five sales locations in the state (all downstate). [Cuomo admin]

Auto dealers across the country have been fighting to keep Tesla from direct sales because it upends the longstanding "dealer franchise" system. Tesla recently won a similar deal in Ohio as the one in New York. But it has also been banned from doing so in a handful of states. [The Verge x2]

So, why are car sales set up the way they are? Why can't you just buy a Civic off the internet from Honda? Why are you required to buy via an intermediary?

From a piece last year in the American Bar Association's Franchise Lawyer by Roger M. Quinland:

In the early twentieth century, independently owned automobile dealerships were a rarity. Automakers sold vehicles through department stores, by mail order and through the efforts of traveling sales representatives. The prevailing delivery system was direct-to-consumer sales.

In 1898, automobile enthusiast William E. Metzger established what is generally believed to be the first car dealership, a General Motors franchise. ...Today, tens of thousands franchised auto dealers conduct business across the United States.

Direct automaker-to-consumer sales are now prohibited in almost every state by franchise laws requiring that new cars be sold only by licensed, independently owned dealerships. The specific prohibitions in these laws vary from state to state, but most are based on two underlying principles. The first principle is that allowing automakers to sell cars directly to customers will endanger the businesses of automobile franchisees, which presumably do not have the economic resources to compete with manufacturers on vehicle pricing. The second principle is that consumers need a knowledgeable, independent sales intermediary who is capable of guiding individuals through the buying process and can later be called on for support in the event of difficulties with the vehicle.

The promotion of these principles is evident in various state franchise regulations. New York State, for example, has its Franchised Motor Vehicle Dealer Act (see, NY Vehicle and Traffic Law, Title 4, Article 17-A), which prohibits any automaker from possessing ownership in a dealership offering its vehicles. ...

Quinland predicts Tesla's chances of completely breaking dealers' grip on sales isn't likely.

But in a recent blog post, Tesla founder Elon Musk argued the current dealer franchise rules in states -- and New Jersey, specifically -- are stifling innovation:

The evidence is clear: when has an American startup auto company ever succeeded by selling through auto dealers? The last successful American car company was Chrysler, which was founded almost a century ago, and even they went bankrupt a few years ago, along with General Motors. Since the founding of Chrysler, there have been dozens of failures, Tucker and DeLorean being simply the most well-known. In recent years, electric car startups, such as Fisker, Coda, and many others, attempted to use auto dealers and all failed.

An even bigger conflict of interest with auto dealers is that they make most of their profit from service, but electric cars require much less service than gasoline cars. There are no oil, spark plug or fuel filter changes, no tune-ups and no smog checks needed for an electric car. Also, all Tesla Model S vehicles are capable of over-the-air updates to upgrade the software, just like your phone or computer, so no visit to the service center is required for that either.

Going a step further, I have made it a principle within Tesla that we should never attempt to make servicing a profit center. It does not seem right to me that companies try to make a profit off customers when their product breaks. Overcharging people for unneeded servicing (often not even fixing the original problem) is rampant within the industry and happened to me personally on several occasions when I drove gasoline cars. I resolved that we would endeavor never to do such a thing at Tesla, as described in the Tesla service blog post I wrote last year.

The rationale given for the regulation change that requires auto companies to sell through dealers is that it ensures "consumer protection". If you believe this, Gov. Christie has a bridge closure he wants to sell you! Unless they are referring to the mafia version of "protection", this is obviously untrue. As anyone who has been through the conventional auto dealer purchase process knows, consumer protection is pretty much the furthest thing from the typical car dealer's mind.

Tesla's up against a big foe -- there are tens of thousands of car dealerships in the country. Then, again, Musk has his own rocket ships, so he's that going for him, too.

photo: Tesla FB

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tags: cars, New York State, tech