Car Dealers Sue Tesla, Citing State Franchise Laws

http://www.npr.org/2012/11/09/164736569/car-dealers-sue-tesla-citing-state-franchise-laws

by joshuahedlund • 14 years ago

86 108 14 years ago

OafTobark2• 14 years ago

These bullshit laws need to be updated. Its no different than someone making anything and then being unable to sell it themselves.

ed_blackburn• 14 years ago

How can such a law be anything but bad for an economy?

loceng• 14 years ago

Well, it creates jobs ... that aren't needed or helpful to others (they're not educating children or providing healthcare services) and inflates costs (profit and money for salaries).

chongli2• 14 years ago

Yeah, in other words an example of the broken window fallacy.

esurc• 14 years ago

The rationale I've heard is that consumers benefit from having a local service location for the brand. Based on that logic, the state limits the franchises to avoid "ruinous competition" (not my phrase) that would threaten that consumer benefit.

The first time I heard the phrase "ruinous competition" used this way, I nearly jumped out of my chair.

But this is why the OP mentions the challenge that Tesla will have in providing local repair service. If it can crack that problem, it may open the door to manufacturer shops of other car models as well.

shawn-butler3• 14 years ago

These laws came into existence to protect dealers from predatory actions taken by manufacturers against the public interest. They have their roots in the Great Depression era when Henry Ford dumped inventory on dealers with "offers they couldn't refuse."

There is a huge imbalance of power in this relationship. Since their creation the statutes have been captured by special interest just like every other regulation.

tomjen32• 14 years ago

The dealers don't care about the economy. They care about themselfs.

Politicians just want to get reelected.

manaskarekar2• 14 years ago

This just sounds like desperate clawing of a doomed business model to me.

datalus• 14 years ago

It certainly is, quote from the article:

"Let's say consumers really liked buying from a factory store. That would put dealers in a tough spot because they've been saying for years that the franchise system is actually good for customers," [Jeremy Anwyl] says.

I think he hit the nail on the head. I would say the franchise system is only good for the franchise owners, not the customers.

thirdtruck• 14 years ago

Exactly right, if the number of "straight from the factory floor" stores here offer any indication. They're turning into the record companies of car distribution.

manaskarekar2• 14 years ago

Indeed. I hate having to deal with car dealers. I can safely say it is one of the worst shopping experiences ever given that the purchase being made is one of the costliest things in my life. And I'm not referring to any particular thing going wrong during the purchase, just the whole experience feels like walking through a field of landmines of gotchas.

cloverich• 14 years ago

Has anyone ever had a good experience at a car dealership?

I remember getting my first car when I was 16. I was so excited, I drove the thing home and didn't realize the car mats weren't in it. I called the next day: "Sorry sir, Car mats don't come with used Vehicles. We do sell them though ($350!!!)"

The thought of car dealerships going out of business and being replaced by a better business model feels nearly too good to be true. Here's hoping its not!

NathanKP• 14 years ago

That is ridiculous. A car is a product like any other product that can be sold. Apple sells phones and MacBooks directly to the public. Outlet malls have clothing manufacturers selling directly to the public. The car dealerships is an outdated model and this is a sign that they are desperate. They are just suing because once the Tesla stores prove to be more efficient other car manufacturers will follow suit.

Osmium• 14 years ago

I have to admit, as an outsider, I can't fathom how a law like this even exists especially in a place like America.

shawn-butler3• 14 years ago

I can recommend reading this paper[0] It discusses the history of the relationship between the auto manufacturers and their dealers and the reason why franchise laws now exist in every state.

Concludes that state regulation is necessary to the extent it neutralizes the disparity in bargaining power between the automakers and the dealers, but that current legislation no longer achieves this and only benefits the auto dealers.

[0] http://EconPapers.repec.org/RePEc:reg:wpaper:628

Shivetya• 14 years ago

Wait till you see the laws surrounding the sale of liquor and cigarettes. There are many protected industries, some protected for business reasons and some for tax purposes.

Tesla is not only upsetting the apple cart when it comes to sales but service; I do not agree with their service side changes because it takes choice out of the hands of the consumer. (disclaimer : I work for a parts distributor who happens to own repair shops too).

Dealers are rightly upset because the current system requires them to put up a lot of money in facilities that must be built to specific guidelines. Throw in having to meet manufacturer set requirements for sales and service they do have a large investment. Contrary to belief, the majority of new car dealerships are very good people who do go out of their way to help people.

redwood• 14 years ago

America has anti-trust laws. Companies are not supposed to be allowed to wield undue market power (e.g. be able to set the price of their type of product). Now this is obviously complex. But basically a lot of anti-trust battles led to the de-verticalization of numerous businesses: from film studios which owned theaters, to Standard Oil which owed oil, railroads, refineries, distribution centers, etc.

The idea is to make sure there is market efficiency, e.g. competition, in price throughout, so the consumer doesn't get screwed.

Now the idea of a franchise law like this one is done in a similar vain: it appears to ensure better competition for big car makers to bring their goods to consumers.

The problem is this law is written from a perspective of a couple major car companies that dominate the market.

There has always been an argument that a small player cannot be considered to wield market power, and that thus they should be allowed to be vertical. Apple for a long time avoided any anti-trust issues (while Microsoft didn't) even though it was very much vertical, by being small! Tesla presumably will use the same argument.

Bottom line there are two sides to laws like these: on the one hand, in Tesla's case, they seem anti-competitive. On the other hand they are made to bring about a kind of competition. Clearly the courts will need to resolve this...

dade_• 14 years ago

The NPR story doesn't seem correct, at least according to my understanding that Tesla show room locations do not sell cars, only provide information about them. A car dealership is a business/location that sells cars, and Elon's argument is that a Telsa store does not sell cars and is therefore not a dealership. Sounds like defensible logic against the franchise lobby-law to me, but according to the NPR story a Tesla store sold a car. The law is ridiculous, but it is still the law.

According to the story: Mark Seegar claimed, "he walked past Tesla Motors' Bellevue, Wash., showroom. It's one of a handful of Tesla's company-owned stores. Within five minutes, he'd put down a deposit for an electric car that costs more than $50,000."

Tesla's site: "As it is, our Product Specialists could not sell you a car today under any circumstances, as Model S is already sold out several months in advance and there is no inventory on site. All they can do is get you to consider placing a reservation." http://www.teslamotors.com/blog/tesla-approach-distributing-...

mmariani• 14 years ago

> ...Tesla show room locations do not sell cars, only provide information about them.

Now how much would you bet that this argument will win this case for Tesla?

njharman3• 14 years ago

Depends if jury believes putting down deposit is "buying" or not.

jzd131• 14 years ago

This law is sure to go away. The fact is that the future of car sales is the internet.

Here is an excerpt from my blog: "According to a Polk and Autotrader.com study, 70% of new and used car buyers use the internet while shopping for their vehicle, with 58% of all buyers listing the internet as the most influential element in their car buying process. But the online car buying process doesn’t stop there. In fact, eBay Motors has sold 4.62 million passenger vehicles solely online since its inception."

See the post here:http://salemove.com/buying-a-car-on-the-internet/

mrkmcknz2• 14 years ago

Every now and then we see old laws being used by dying industries take a plunge at stopping innovation. Uber & Air B'n'B are two others that come to mind.

The bigger problem for the dying industries is that they're taking on companies that at their core solve problems and disrupt. As opposed to being pathetic and continuing to prolonge the inevitable, they should focus their efforts on product development/sales channels. Or maybe even become a little innovative themselves.

nickesh_232• 14 years ago

Government and old business innovating???? Nah, lobbying is much cheaper. Just ask SF taxi companies.

gpcz3• 14 years ago

Its easy to say that at the macro scale, but what are you suggesting car dealerships do on the micro scale? Learn how to build their own cars and sell them in defiance of the current laws on the contingency that the judge rules in Tesla's favor?

reinhardt• 14 years ago

No, go out of business and look for a real job.

nhangen2• 14 years ago

They have place in the same way that record labels do.

racbart• 14 years ago

Do their job better and compete. Nobody in his right mind will object Apple for selling in their own stores. Why should car dealers have such unfair advantage to prohibit manufacturers to sell their goods?

jfoutz• 14 years ago

Maybe manufacturers need to change dealer pricing structure. If they're paying millions for licenses, training and equipment, it sounds like the manufacturer treats that like a profit center. Dealers need to accomplish specific goals, if they're a franchise or company store.

11235813212• 14 years ago

I would like to see emerge a car-buying agent. The agent would deal with all manufacturers and used car lots (still a need for this) and help the buyer get exactly what they want at the best price.

However, there will always be some new car retailers because some people like to buy new cars in person and drive them immediately. I think the standards for sales staff will continue to change away from the old commissioned, "pal" model to the new non-commissioned, quant/car nerd model. It is a change that seems to be defining this generation of workers.

callmeed• 14 years ago

Are hotels a dying industry?

adrianonantua• 14 years ago

"First they ignore you, then they laugh at you, then they fight you, then you win.". Looks like victory is pretty close.

vladoh• 14 years ago

I think such laws are about to go away after big players like BMW start selling their cars directly to customers online:

http://www.bloomberg.com/news/2012-07-24/bmw-bets-mouse-clic...

djokkataja• 14 years ago

From the Massachusetts law:

(c) It shall be deemed a violation of subsection (a) of section 3 for a manufacturer, distributor or franchisor representative:

...

(10) to own or operate, either directly or indirectly through any subsidiary, parent company or firm, a motor vehicle dealership located in the commonwealth of the same line make as any of the vehicles manufactured, assembled or distributed by the manufacturer or distributor.

http://www.malegislature.gov/Laws/GeneralLaws/PartI/TitleXV/...

dietrichepp• 14 years ago

http://www.teslamotors.com/natick

> The Gallery does not sell cars, but serves as a place to educate visitors about our groundbreaking electric vehicles.

The website does not say this about Tesla's other locations.

protomyth6• 14 years ago

Can they order the car on premises (even if it is a computer with a web browser in the studio)?

nickesh_232• 14 years ago

What a dumb law. I wish I had a dollar for everytime the government tried to stop progress to protect big, archaic businesses (über, sidecar, lyft, Airbnb, you're with me on this one). Anyone smell corruption brewing?

Think about it. How can a government own a car company then legislate against other car companies? I know it's federal gov buying and local gov ruling in this example, but it's a slippery slope nonetheless. It would be like mark Cuban becoming the commissioner of the NBA while still the owner of the mavs. Anyone here think that would end well?

jasonlotito• 14 years ago

By big, archaic businesses you are talking about local car dealerships, right?

mrdodge• 14 years ago

Car dealerships are big business, many of the big new car dealerships are owned by Fortune 500s like Sonic Automotive and Penske Automotive Group.

delinka2• 14 years ago

That's how I read it. Not that you've insinuated otherwise, but if you take a look at the requirements for starting a dealership, they're typically not 'small' businesses.

protomyth6• 14 years ago

It is basically the same type of law that kept studios from owning movie theaters. Separating producers from local sales was a big thing. We can say it is a crap law but there were some very real worries and reasons that lead to it in many industries. Expect if the law is overturned that all the manufactures will replace local dealers with their own showrooms. This isn't about stopping innovation, it's about accumulated history.

mrkmcknz2• 14 years ago

Maybe I'm too naive to see why manufactures having their own showrooms would be such a problem?

politician• 14 years ago

Why does having a Walmart raise such ire in small towns? These types of companies expatriate dollars from local economies. I think that's the reason for the original laws.

jetti• 14 years ago

They have have advantages over non-manufacturer dealerships. For instance, parts would be internal and thus they may get them for just material cost which would allow for either lower service costs or higher margins both of which aren't available at non-manufacture dealerships. You could apply the same scenario to fully finished new cars as well.

rubyrescue2• 14 years ago

Imagine that Ford only allows maintenance at company owned stores, because they don't sell replacement parts to dealers, then they charge $500 for a fan belt, etc.

andrewtbham2• 14 years ago

As a modern example: look at luxotica for an example of a monopoly. They own large shares of the manufacturing and retail for eyeglasses, and they charge exorbitant prices.

They own Oakley, Ray-Ban, LensCrafters, Pearle Vision and Sunglass Hut. They also operate Sears Optical and Target Optical.

They also produce eyewear under license for names such as Coach, Anne Klein, Bulgari, Prada, Polo, Versace, Ralph Lauren, and Tiffany.

http://online.wsj.com/article/SB1000142405274870451890457536...

Making manufacturers divest of retail operations is a way to break up their monopoly.

Herring• 14 years ago

>Separating producers from local sales was a big thing.

That sounds interesting. I'm curious why.

protomyth6• 14 years ago

To expand rapidly (play catchup is the modern term), GM started franchising car sales. No real protections other than the agreements. Then anti-trust laws intruded and it looked like franchising would be illegal (think Standard Oil), but later court cases clarified the difference between the franchise owner and the suppling company. The we go to stopping companies from owning the whole horizontal chain in some industries like theaters and stopping national companies from abusing the local franchisors (like car dealerships).

It is basically the story of stopping evil monopolies combined with need for companies to expand reach quickly in a non-internet world (see Singer sewing machines and GM) dovetailing into more anti-trust laws and then local job protection schemes meshed with laws codifying the 100 year old business model (we are talking stuff that started before automobiles).

Apple doesn't have a problem because they came after. If you think this is screwed up, then don't buy a boat.

andrewtbham2• 14 years ago

The movie studio/theater breakup was an anti-trust case.

http://en.wikipedia.org/wiki/United_States_v._Paramount_Pict....

btw, there is a bug the hn code... add a period at the end of the url to see the link

protomyth6• 14 years ago

Yep, all of these laws have been affected by anti-trust since the Standard Oil case. It is very much a part of these laws being developed.

archildress• 14 years ago

"Tesla is choosing to ignore the law and then is choosing to play outside that system."

Is there a statement more indicative of the fear of innovation in archaic industries?

Let's hope that laws like this begin to vanish and clear the way for innovation.

If they don't, I'm sure Mr. Musk will find a workaround. They could essentially setup their retailing operation as a separate legal entity and work around this.

And that's what big auto needs to understand - legal ploys to stop progress will only be met with more legal maneuvers. How about cessation of belly aching and movement toward a change in the product and retail model?

delinka2• 14 years ago

"Separate legal entity" isn't quite enough. It also can't be owned by the manufacturer.

wilsaj• 14 years ago

Would a parent corporation that owns both the manufacturer and a separate distributor work?

beedogs• 14 years ago

Did the horse-and-buggy dealers sue the automobile industry when it was starting to threaten them, too?

njharman3• 14 years ago

Don't know but I'd bet dinner and beers for "Yes, as hard and often as they could"

tomjen32• 14 years ago

Absolutely. Mackinac Island banned cars in 1898 (properly easier back then than now), with the official excuse that they would 'scare the horses' (http://www.hal.state.mi.us/mhc/autoshow/vehicles/mackauto.ht...)

They are still banned their today, but properly mostly because the town use it as a turist attraction.

rhplus• 14 years ago

In the UK, the Locomotive Acts[1] restricted speed and weight of autos and imposed signaling rules (cars had to be preceded by a walker with a red flag!) and required yielding to horses. Arguably, these laws hindered early automobile development and public acceptance and helped the development of railways and trams.

I'm not sure about the US, but by the early 20th century the American auto industry was on the offensive, setting up shell companies[2] to buy up and dismantle inner-city trolley lines.

[1] http://en.wikipedia.org/wiki/Locomotive_Act

[2] http://en.wikipedia.org/wiki/Great_American_Streetcar_Scanda...

walru• 14 years ago

--"Let's say consumers really liked buying from a factory store. That would put dealers in a tough spot because they've been saying for years that the franchise system is actually good for customers," he says. --

This is like saying the shit the horses leave behind is good for the road/environment and also smells nice. I think we all know the real answer.

There's a sea change on the horizon.

nhangen2• 14 years ago

I love it. Tackling both the electric car and dealership problem at the same time. This is what disruption looks like.

bjornsing• 14 years ago

As a Swede I'm always amazed to hear about this type of US laws. I know Sweden represents socialism to Americans, but when it comes to this kind of intervention in the market it's much less accepted here than in the US.

deepGem• 14 years ago

I'm curious to know what other consumer products are sold through dealerships (In the continental US). Why would any law make it mandatory for a manufacturer to sell their items through a dealership. Just curious.

larrywright3• 14 years ago

I think it's a sure sign you're on to something when the incumbent businesses try to use outdated laws to stop you.

larrywright3• 14 years ago

Car sales has always struck me as an industry that was ripe for disruption. Why do we still need car salesmen?

nlh• 14 years ago

Same reason we need any type of human salespeople -- sometimes people don't want to do all the research & comparisons by themselves and its nice to have someone guide you in the right direction.

Now - that being said - I don't disagree with the sentiment here. The traditional car sales model sucks and I think is ripe for disruption. But don't necessarily throw the baby out with bath water ;)

For example - I bought an espresso machine for a friend the other day. I called one of the better retailers out there and spoke to a super-helpful saleswoman who talked me through the various options, gave me differences between models, what's worth paying for and what's not, and based on my personal preferences, helped me pick the right one. It was a totally pleasant experience.

But what made it particularly excellent was that she wasn't (to my knowledge) pushing one particular brand/model. She had at her disposal about 20 different brands and guided me to the "best fit" based on my needs.

Maybe that's an opportunity for car dealers in the future -- maybe manufacturers sell directly and we get independent "car sales consultants" who don't work for a particular brand....?

larrywright3• 14 years ago

After reading this, I think what I really object to is the sales process. The whole act of wheeling and dealing and never really feeling like you got the best deal.

johnrgrace• 14 years ago

We need car salesmen so every new car can be sold at a different price, thus capturing max revenue from consumers.

huhtenberg• 14 years ago

Any bets on how this is going to play out?

scott_meade• 14 years ago

"FREE Butterball Turkey Certificate with every test drive!"

I got this ad in the mail today from a local Jeep dealer. Dealers clearly have no clue. Could you ever imagine Tesla thinking up such a dumb promotion?

Car Dealers Sue Tesla, Citing State Franchise Laws

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