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Sunday, 20 April 2014

Dealers’ (poor) choice

Tesla obstructionists should be firmly resisted

Tesla’s obstructionists should be firmly resisted. The electric carmaker is under attack from America’s entrenched legions of franchised car sellers. They want to stop Elon Musk’s company from selling vehicles directly to consumers – and have made New York the latest venue for the fight. The dealership model, though, is antiquated and expensive, as the woes of Detroit’s Big Three showed. Government shouldn’t stand in the way of Tesla’s innovation.

What Musk is doing to sell cars isn’t exactly rocket science. He wants to bypass a middleman and go directly to customers. That’s anathema to the U.S. model, which has created a symbiotic relationship between manufacturers and dealers. Automakers book cars as sold once they leave for the sales lots and in return provide the retailers with financing. Over time, the practice has been enshrined in laws across the 50 states.

The setup can have advantages. In theory, it should allow the likes of Ford and General Motors to concentrate on their primary business of building cars. Dealerships provide officially sanctioned service when cars falter. And the money they spend in local communities – from little league baseball teams to helping fund volunteer fire departments – is important.

Unfortunately, they can also impede change. They’re like the off-balance-sheet investment vehicles that caused banks so much pain in 2007 and 2008. For example, shuttering Oldsmobile a decade ago cost GM more than $1 billion, much of which was funneled to dealers. That made it harder for the Big Three to nix unprofitable or wasteful brands and in part slowed expense slashing in the runup to the financial crisis, which ultimately contributed to GM’s and Chrysler’s 2009 bankruptcies.

The dealers have built significant political clout, enough to reverse some of the enforced closures in the auto bailout and to secure an exemption from oversight from the Consumer Financial Protection Bureau. The $11.4 billion Tesla deserves a chance to disrupt the sales-model status quo as much as it does industry design. There’s no guarantee it will succeed. Politicians and the nation’s entrenched dealers should get out of the way and let the market decide.

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A bill has been submitted to the New York legislature to block Tesla from selling its electric cars in the state. Auto dealers have already tried to shut down the carmaker’s stores and service centers in the state as well as in Massachusetts, claiming they run afoul of laws requiring car dealerships to be franchised rather than run by manufacturers selling directly to consumers.

A Massachusetts superior court dismissed the dealers’ case in January. The New York supreme court dismissed the case in April.

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