People largely purchase new cars and trucks through established auto dealers. These dealers are protected by state laws that prohibit direct sales from automakers. But electric vehicle manufacturers have been trying to change this. A coalition of free-market, environmentalist and consumer advocate groups support them. Dan Crane is the Richard W. Pogue Professor at Law at the University of Michigan and has been working to improve these laws. Michael Van Beek speaks with him for the Overton Window podcast.
In the early days of the auto industry, vehicles were sold through company stores, repair shops, traveling salesmen and even through retailers like Sears. “Dealers began to argue that they were being taken unfair advantage of by the big three car manufacturers,” Crane says.
After getting a franchise agreement from a manufacturer, auto dealers were afraid that the company would open its own store in the area and take their business. “Dealers successfully argued for a series of laws that protected them in their relationship with franchising manufacturers,” Crane says.
Dealers benefited from regulations about when manufacturers could end their agreements, limits on where manufacturers could place other franchises, and requirements that manufacturers reimburse dealers for repairs they made on vehicles under warranty.
“Most states also had some kind of prohibition on the manufacturer selling directly to the public. The idea was that if you’re to induce reliance and investments by your franchise dealers, then you need to let the independent franchise dealers do all the selling,” Crane says.
“This was very much the time of small business protection,” Crane says. “There are a number of different contexts in which states and the federal government passed laws intended to protect small businesses from the unequal bargaining power of the big companies.”
The car retailing business has changed a lot since dealership protections were put in place. “The car dealership model has gone from that mom-and-pop model to a model where the largest dealership networks have billions in sales. They’re multi-state, multi-dealer businesses,” Crane says.
Dealership networks are larger and there is also more competition from manufacturers. “We have about 20 car companies that are competitive in the market,” Crane notes.
The rationale for the old protections changed, too. “Now dealers are trying to say that these laws, which were originally intended to protect them from exploitation by manufacturers, are actually intended to protect consumers,” Crane says. “We can have that conversation, but those arguments really don’t make much sense at all.”
Crane notes that manufacturers like Apple have company stores and independent retailers, and consumers get to pick. That’s unlike the market for vehicles. “Consumers are used to the idea that they get to decide. That they get to figure out, ‘Do I prefer to bargain with a dealer on a lot or do I get to buy it directly from the manufacturer?’” Crane says. “Do the dealers get to impose a one-size-fits-all model from the 1950s that denies consumers who have come to expect that they get to decide. Do you deny that choice to the consumer?”
Electric vehicle manufacturer Tesla has been challenging the direct sales prohibition. “Elon Musk looked at his need to sell cars on a mass market basis and looked at the traditional dealer model and said that there was no way that it was going to work,” Crane says.
It would cost Tesla a lot to build up dealer networks. And Musk thought that dealers were not going to be happy selling electric vehicles that did not need as much service, which is how, Crane notes, car dealers make most of their profits.
Tesla has been fighting with dealers in courts, in regulatory proceedings and in state legislatures.
There has been mixed success, and Crane covers some differences among the states. California passed legislation that prohibits manufacturers from opening stores within 10 miles of an existing franchisee. This allows Tesla to sell vehicles directly because it has no franchisees. A Massachusetts Supreme Court ruling established something similar.
Tesla is operating in Michigan through a legal settlement. The state passed legislation that more explicitly prohibited Tesla from making direct sales. Tesla sued and settled with the state, which essentially allowed the company to do much of what it wanted — building storefronts, letting people test drive vehicles, quoting prices and conducting other activities. “The only thing that technically has to happen is that, when a sale happens, the car has to be sold from an out-of-state entity,” Crane. “That’s not a statute, that’s an interpretation of the attorney general entered into a settlement with Tesla.”
Crane explains some of the complicated compromises that allow Tesla to operate but not other electric vehicle manufacturers. “I am not a cheerleader for Tesla or for Rivian, nor am I a cheerleader against Ford or GM or Honda or anyone else. What I want is generally applicable and neutral laws that let consumers decide how they want to transact with any companies,” Crane says.
“I would personally favor a federal statute that slices through all this nonsense and allows for direct sales of electric vehicles by anyone. But I haven’t seen any political momentum towards that yet,” Crane says. “The dealers have a certain degree of protection from competition that has allowed them to become big, bloated organizations.”
Crane says that lawmakers should care less about whether electric vehicle manufacturers or dealers benefit and more about whether consumers benefit.
“And if you think about this from the perspective of the consumers: I bought many cars from dealers over my adult life. I’ve never once enjoyed it,” Crane says. “Dealers have been complained about to the Better Business Bureau more than any other business in America, including cable companies and debt collectors, which tells you something about their level of satisfaction.”
Crane sees a tough battle over direct sales that has some strange actors fighting it out.
“The story here is that the dealers are powerful businesses and money translates into political outcomes. But you certainly have seen organizations like the Mackinac Center and Americans for Prosperity and the Institute for Justice and other free-market organizations coming out on the side of direct sales. You also get environmental groups like the Sierra Club coming out in favor because they want to push forward EV market penetration. You get consumer groups, like the Consumer Federation of America coming out saying that it’s better for consumers to have a choice,” says Crane.
“It tells you that it’s an unusual-looking window and the politics are unusual and the bedfellows are unusual,” Crane says. “It’s also a beautiful microcosm of how politics works, how public choice theory works, and the difficulties of a political fight even when you have this coalition from left to right, from consumer groups to environmental groups to free-market groups that are aligned on saying that dealers are getting in the way of consumers. That still isn’t enough to change things quickly. So that’s the story to keep an eye on in the future.”
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