Once upon a time, U.S. automakers sought to create a hedge against bad times by setting up a franchise system of independent car dealers who had to buy a minimum number of vehicles from manufacturers. Eventually, the system came to symbolize a buffer between automaker and consumer. Car dealers protected the consumers from Big Bad Wolf automakers — or so the story went. Now that this conception is far removed from reality, it’s easy to see why Tesla (NASDAQ:TSLA) has a beef with the traditional auto sales model. Whether the electric car maker can gain widespread traction against a powerful dealer lobby is another story.
During the period of great struggles for General Motors (NYSE:GM) and other U.S. automakers in the early 2000s, many pointed to the dealer system as one reason the manufacturers were handcuffed. Since it’s nearly impossible to dissolve a dealership, automakers have an awfully hard time increasing efficiency with respect to their car lineup. To stop making Oldsmobiles, for example, GM had to get rid of Olds dealers, which became a problem with a billion reasons to avoid repeating.
Tesla offers an alternative to the model with its dealer-free, direct sales system, but auto dealers are flexing their considerable muscle in state legislatures around the U.S. As Tesla found out recently in New Jersey, the chips are stacked against the green car innovator and Wall Street darling. Monopolies are hard to topple, especially when they flood the media with pointed critiques of upstarts that appeal to consumer protection.
In the case of dealers versus direct online sales, the only issue worth examining is the money at stake.
As a Marginal Revolution blog pointed out, auto dealers chip in about 20 percent of a state’s sales taxes. No matter what Tesla CEO Elon Musk is able to do — he could put a Supercharger on every street corner for all politicians cared — he won’t be able to replace that type of funding to state coffers.
The electric vehicle maker also will not be able to fund political campaigns the way auto dealers do. At every state assembly in America, auto dealers are providing the fuel that powers the campaigns of officials in both parties. They donate heavily and have the ear of lawmakers once in power. In American politics, the power of money (see: the Koch brothers, Michael Bloomberg, the National Rifle Association) usually trumps the will of the people. The NRA’s successful campaign to defeat minor gun-control legislation after the Sandy Hook massacre is a perfect example.
Marginal Revolution notes that the consumer most certainly doesn’t win when it comes to dealers (rather than, say, a local auto shop) handling repairs. Repair prices are higher because the automaker is often forced to refund the quoted cost from the car dealer, whether or not it is covered by warranty, and thus a major source of revenue with great profit margins for car dealers is locked into place.
Consumers hate the high cost of auto repairs, but the way the dealer system works they are more or less forced to take service plans. Tesla has a clear alternative on the table, but dealer interests are making it difficult for the green car maker to get a place setting next to state politicians. For now, Tesla will have to wage its battle from the grass-roots level. The unique mix of Wall Street cred and consumer love should give it a fighting chance.