Break the Auto Dealers’ Sales Monopoly … for All Automakers

Published April 8, 2014

For many decades in most states, the auto dealers lobby has persuaded legislators to make it illegal for automakers to sell their products directly to buyers. Instead, new-car buyers must buy from independent auto dealers, who first buy from the automakers.

The ban on direct sales is coming to a head because of billionaire investor and auto tycoon Elon Musk, who owns Tesla Motors Inc., maker of an electric car whose sale price starts at nearly $70,000. Musk wants to sell his company’s cars directly to consumers but is being thwarted by state laws that make the practice illegal.

Giving automakers—all automakers—the option to sell directly to consumers would be great for competition, and competition is great for consumers.

Musk made a little headway last week in New York, where Tesla has five retail stores. New York car dealers wanted the state to shut them down, but they reached an agreement allowing them to remain open. However, any additional Tesla stores in New York must be owned and operated by an independent auto dealer. The protection for auto dealers is in an amended franchise reform bill. The “grandfather” clause protecting Tesla’s existing stores in the state would apply only to manufacturers of zero-emission vehicles. As of this writing, the state legislature has not voted on the bill.

But across the state line in New Jersey, at the behest of local auto dealers, the state is giving Tesla Motors until April 15 to pull its annually licensed stores out of the state.

Though it’s good Musk is forcing the issue, he’s not doing so on the consumers’ behalf. He’s forcing it for the good of his already heavily subsidized company. There’s no good reason only zero-emission vehicles should receive special treatment in this regard. Musk’s cars already have the benefit of a $7,500 federal tax credit for buyers, with additional state tax credits available in many states.

Auto dealers “have a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none,” Musk wrote on his company blog. “Moreover, it is much harder to sell a new technology car from a new company when people are so used to the old. Inevitably, they revert to selling what’s easy and it is game over for the new company.”

For their part, the auto dealers argue they’re protecting consumers and are more than just a middleman in new-car transactions.

“The franchised dealer network, which as you know has been the topic of much recent debate, is the most efficient and cost-effective way of selling and servicing vehicles anywhere,” wrote Forrest McConnell, III, chairman of the National Automobile Dealers Association, at the NADA’s Web site.

Automakers always seem to be coming out with innovations, so Musk’s complaint falls flat. Automatic transmissions, fuel injection, overhead cams, antilock brakes, power windows, disc brakes, rotary engines, front-wheel drive—these and other features were all unknown until an automaker introduced them. Car dealers have always sold cars with new technologies even though people were “so used to the old.”

As for the auto dealers, they’re just using their political muscle as big generators of sales tax revenue to get local and state government officials to protect them from competition.

If every car manufacturer had the freedom to choose how to sell its products, car buyers would have more choice in how to make their purchases. With their stranglehold on new-car sales broken, independent dealers would have more incentive to lower or eliminate the fees they often tack on, improve their services, and make the car-buying experience more pleasant.

More work for auto dealers, maybe. Big benefit for car buyers, definitely.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute in Chicago.