Teslas’s Long Road to Direct Sales

Posted on April 16, 2014 in Environmental Law, The MJEAL Blog | 1 comment

On April 1st of this year, Tesla was banned from selling cars in New Jersey. Jim Appleton, the President of the New Jersey Coalition of Automobile Retails (NJ CAR) was riding high off the victory and could not stop himself from sticking a barb to Elon Musk, Tesla’s co-founder:

“If you’re an internet billionaire, maybe you think the world revolves around you, and the world springs from your laptop. Well, I got news for [Musk]. This is not a new law, Tesla is operating illegally, and as of April 1st, they will be out of business unless they decide to open a franchise.”[i]

The growing gadget press was predictably upset by New Jersey’s decision to prohibit Tesla from directly selling to consumers. One Wired article, pointedly titled, “New Jersey Bans Tesla to Ensure Buying a Car Will Always Suck,” denounced lobbyists and politicians who preach legislation that stamps out innovation.[ii]

But to be fair to Appleton and the New Jersey Motor Vehicle Commission, Tesla should not have been allowed to sell cars in the first place. The protectionist statute clearly prohibits any motor vehicle franchisor “to offer to sell or sell motor vehicles, to a consumer…except through a motor vehicle franchisee.”[iii]

Besides this strict textualist argument, NJ CAR has also emphasized how the law protects consumers. As the argument goes, dealerships are uniquely positioned to provide consumers with in-demand services like warranties. Furthermore, dealerships believe that healthy competition among dealerships can adequately fuel innovation and aid in driving down prices.[iv]

Of course, NJ CAR also likes this law because it gives New Jersey’s dealerships a monopoly on car sales. The law is protecting dealerships first, consumers second, and we should be suspicious of any justification that dances around this point. Let us move beyond a textual analysis to figure out how exactly this law should be applied.

The legislative history of the statute cuts both ways. The Assembly Committee and Industry Committee Statement succinctly states that the bill was designed to “prohibit the manufacturers, distributors and importers of motor vehicles from engaging in a business of new car sales,” lending support to the underlying idea that the statute was designed to prevent manufacturers from selling directly to consumers.[v]

It’s unfair to take a law originally designed to target the Big Three and aim it at a small company like Tesla. Tesla is not the kind of dealership that the Committee was worried about. The Committee statement specified that the law’s purpose was to “prevent the replacement of the State’s independently-owned franchises with manufacturer-controlled dealerships.”[vi] In enacting this law, the Committee was not concerned about a start-up like Tesla undercutting Chevy dealers. It was concerned that Chevy corporate would undercut Chevy dealers. That being said, we should be wary of any argument that puts too much weight on a committee report. Who knows why the rest of the legislature voted for the bill?

With the legislative history split, we turn now to the policy reasons for keeping up the prohibition. Dealerships have asserted that their presence as middlemen drives down prices and keeps customers satisfied, but curiously, they do not cite hard evidence to back up these claims.

That’s likely because the data leans the other way. A 2009 report from the Economic Analysis Group (EAG) of the Department of Justice’s Antitrust Division advocated “eliminating state bans on direct manufacturer sales in order to provide automakers with an opportunity to reduce inventories and distribution costs by better matching production with consumer preferences.”[vii] According to this report, if manufacturers switched to a build-to-order model, they would be able to more accurately estimate consumer demand, which in turn would allow them to run leaner inventories.

The EAG theorizes manufacturers would pass on the savings to consumers as lower prices. In fact, GM did just that in Brazil with its car, the Celta. Consumers could purchase the Celta directly through GM’s website, where they could customize the car’s accessories and colors. Additionally, GM collaborated with suppliers to deliver modules as they were needed, enabling GM to use 50% fewer parts than in an American assembly line. More impressively, GM passed the savings onto the consumers: prices were about 6% lower than for sales made through dealerships.[viii] The evidence indicates that franchise laws like New Jersey’s actually hurt consumers.

To sum up, the textual, historical, and policy reasons are against these protectionist statutes. It might be time to amend the law. In fact, there’s currently a bill in New Jersey’s Senate that is trying to do just that.[ix] As Daniel O’Connor notes in “Tesla, the Auto Dealers, and New Jersey,” entrenched institutions have always relied on “consumer protection” arguments to try to stave off extinction. In the 1920s, that meant that the Horse Association of American lobbied against “less reliable, less efficient” automobiles, and we all know how that turned out.[x]

 

-Percy Olsen is a General Member on MJEAL. He can be reached at polsen@umich.edu



[i] Ben Popper, Auto Dealers Fire Back at Tesla CEO, The Verge (Mar. 19, 2014), http://www.theverge.com/2014/3/19/5525544/new-jersey-auto-dealers-respond-to-teslas-elon-musk.

[ii] Marcus Wohlsen, New Jersey Bans Tesla to Ensure Buying a Car Will Always Suck, Wired (Mar. 12, 2014), http://www.wired.com/2014/03/tesla-banned-ensure-process-buying-car-keeps-sucking/.

[iii] N.J. Stat. Ann. § 56:10-27 (West 1985).

[iv] Daniel O’Connor, Tesla, the Auto Dealers, and New Jersey: Playing the Consumer Protection Card, Disruptive Competition Project (Mar. 11, 2014), http://www.project-disco.org/competition/031114-tesla-the-auto-dealers-and-new-jersey-playing-the-consumer-protection-card/.

[v] Assembly, No. 2117—L. 1985, c. 361.

[vi] Id.

[vii] Gerald R. Bodisch, Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers (2009), http://www.justice.gov/atr/public/eag/246374.htm.

[viii] Id. 

[ix] New Jersey Senate Bill No. 1898, Permits manufacturer to sell electric motor vehicles to consumers under certain conditions (2014).

[x] O’Connor, supra note 4.

1 Comment

  1. I believe the dealership lobby makes some good points. However, cost benefit analysis disprove many of their points. All the services they provide could be provided with true market structures. Businesses could spring up to offer deliveries. Businesses could spring up to sell and service warranties, etc. However, what consumers may lose out on is any sense of loyalty or customer appreciation. If a warranty screws you will they care? A dealership often wants your loyalty so they fight on your behalf.

    That being said, the take away of all this is that IF we keep the dealership model it just proves the whole GOP economic model is faulty. This is a major intervention in the market. The GOP feels it is in our best interest to block free-markets from happening. They may make a good argument about dealerships, but that should be a major concession to the Dems that the government does have a role to play in shaping and regulating the economy. http://www.cdl4sure.com/blog/dealership-vs-direct-sale-cars-in-new-jersey/

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