In an unprecedented and fairly rare move, three officials at the Federal Trade Commission have gone on the record as siding against efforts to prohibit Tesla Motors’ (NADSAQ:TSLA) direct-to-consumer business model, calling such laws — in place in states such as Arizona, Maryland, New Jersey, Texas, and Virginia — “bad policy” in a blog post published earlier this week.
Andrew Gavil, director of the FTC’s Office of Policy Planning; Deborah Feinstein, director of the Bureau of Competition; and Martin Gaynor, the FTC’s director of the Bureau of Economics were the authors of the statement. According to the trio, the views expressed were their own and not representative of the official stance of the FTC. Still, Reuters reports, it’s unclear as to whether the agency is considering further action — if any — on the issue.
The existing laws are centered around the argument made by automotive dealers that says the traditional dealer model is beneficial for consumers, as it provides competition between dealerships and further helps customers by offering long-term care. However, critics of the model — and there are many — assert that dealers are just another layer added between the company and the consumer, and that dealers are in the business to make money on vehicles that would otherwise be more affordable if they came straight from the factory.
Tesla, however, has a unique argument against the dealership model. While dealers do make money on each vehicle they sell, it’s marginal when compared to the amount that dealers make on service. The vast amount of revenue in a dealership is provided from tire changeovers, oil changes, transmission work, tune-ups, suspension repairs, timing belts, fuel filters, brake work, and on and on and on. And largely, there’s no issue with that.
But there is an issue if you’re Tesla Motors and your only product is electric cars. Electric vehicles don’t need oil changes — there’s no oil. They don’t need timing belts, fuel filters, or transmission work, because electric vehicles don’t have them. In fact, EVs — compared to conventional internal-combustion engines — demand exceptionally low maintenance. Outside of the occasional brake job and tire swaps, there’s little that an EV needs, provided everything is operating as it should.
For those in business school, or who have been through business school, put yourself in Tesla’s position and run the conventional dealer model through a feasibility study. As you may find – and likely will, since it’s assured Tesla has done the same at some point – a Tesla dealer likely won’t be able make ends meet selling cars alone, based on the minimal service that the car requires.
So why wouldn’t Tesla be sold alongside another make or model to piggy-back on that make’s service department? As CEO Elon Musk has said a number of times, there’s a conflict of interest for sellers of electric cars and gasoline cars: Dealers are already more incentivized to push the gasoline car, because they know it will be back for service. Repeatedly. There are certainly exceptions, like the Nissan Leaf, but Nissan can barely say the Leaf is a money-making proposition for its dealers.
“Change can sometimes be difficult for established competitors that are used to operating in a particular way, but consumers can benefit from change that also challenges longstanding competitors,” the FTC officials wrote in their post.