Bloomberg News

Consumer Advocates Back Tesla’s Direct Sales in Dealer Fight (1)

March 20, 2014

Traditional car dealers say Tesla Motors Inc. (TSLA:US)’s model of selling electric vehicles without a middleman leaves defenseless customers at an automaker’s mercy. Consumer groups don’t buy it.

Dealers have sought to block Tesla’s operations in New Jersey, New York, Ohio and other states, saying that laws requiring people to purchase from their franchises encourage price competition and give customers an advocate. Organizations including the Consumer Federation of America and the Center for Auto Safety said manufacturers should be able to sell directly if they want and buyers would benefit from having a choice.

The Tesla dispute highlights a tension between a business model developed eight decades ago to sell Packards and Pierce-Arrows and an era when people can buy everything from books and music to soap and socks online. Consumer groups say that many customers find buying from dealers an ordeal and that they should be able to experience the same ease shopping as with Apple Inc. (AAPL:US) or Amazon.com Inc. (AMZN:US)

“Direct sales to consumers, especially with the Internet now becoming the go-to vehicle for purchasing, are very important,” Jack Gillis of the Washington-based Consumer Federation of America and author of “The Car Book,” a consumer guide to buying, said in a telephone interview.

Depression Era

Restrictions on direct sales took hold in the 1930s as the industry matured, with a combination of company-owned stores and franchise dealers, said David Cole, chairman emeritus of the Center for Automotive Research in Ann Arbor, Michigan.

Laws were enacted to protect dealers because carmakers could strip franchises from established dealers and give them to new ones without grounds, Cole said by phone.

Now, Tesla’s Model S leads in Consumer Reports rankings as the best car of 2014 and traditional dealers are filing lawsuits and trying to persuade lawmakers and governors to block direct retailing by any vehicle manufacturer. New Jersey’s eight-member Motor Vehicle Commission, composed of members of Governor Chris Christie’s cabinet and others, voted unanimously March 11 to block Tesla from selling the car.

“I have no problem with Tesla selling directly to customers, except it’s against the law in New Jersey,” Christie said March 17 at a town hall meeting in South River.

Dangerous Caretakers

Direct retailing puts dealers and their investments at an unfair disadvantage, and franchise laws protect consumers, said Rhett Ricart, president of Ricart Automotive in suburban Columbus. He is a plaintiff in a lawsuit against Tesla that seeks to rescind licenses for its two stores in Ohio.

Having a manufacturer set the cost eliminates consumers’ ability to shop franchises for the best price, and dealers serve as their advocates on warranty issues, or if a manufacturer goes out of business, Ricart said.

Recent questions about why General Motors Co. (GM:US) waited to recall vehicles with an ignition flaw linked to 12 deaths underlines that point, said James Appleton, president of the New Jersey Coalition of Automotive Retailers in Trenton.

“You don’t put the fox in charge of the chicken coop,” Appleton said by phone. “The Tesla business model is patently anti-consumer.”

Gillis of the Consumer Federation questions who is the fox and who the prey.

“We walk into a dealership, and we have to match wits with a seasoned professional who is trained and spends all of their days trying to get the highest possible price,” he said. The market would keep manufacturers from overpricing and force them to provide service, he said

Celestial Conveyance

The Center for Auto Safety, a Washington-based consumer group, doesn’t support allowing manufacturers to sell all of their vehicles directly. That could create a monopoly, Executive Director Clarence Ditlow said. Even so, direct sales are a welcome form of competition, and dealer claims about being champions for customers ring hollow, Ditlow said.

“Dealers are not consumer advocates,” Ditlow said in a telephone interview. “They’re advocating for themselves, and when they try to put on a consumer mantle, it’s really to disguise their pro-dealer position.”

Consumers prefer the direct-sales model and as a new company selling an electric vehicle, Tesla needs it, Chairman Elon Musk, the billionaire co-founder of PayPal Inc. who also runs the rocket company known as SpaceX, said in a March 14 blog posting.

Tesla’s stores must observe the same legal requirements as any dealership in the states where it operates, so “all the same consumer protections apply,” said Diarmuid O’Connell, Tesla’s vice president of business development.

Holding Out

Tesla owners such as Kent Crabtree of Clayton, Ohio, say they gladly pay prices starting at $71,000 for the Model S that can top $100,000 for what they see as the technology of the future. Crabtree, 51, a software engineer, said that “for a computer geek or a technology person, it was like heaven coming to you.”

Crabtree said he drove to Columbus last month to testify against a bill in a Senate committee that would limit Tesla to its two state stores and bar other direct vehicle retailing.

“If someone told Amazon they have to put a store in every city to sell to somebody, you’d laugh,” Crabtree said by phone.

“Why can’t I have the freedom of choice?”

Tesla is part of a wave of changing business models sparked by the Internet and new technology, said Andrew Whinston, a professor at the University of Texas at Austin who studies electronic commerce.

Auto dealers, who make political contributions, sponsor Little League teams and have clout in their communities, have been able to resist the changes in a way that others such as booksellers and travel agents have not, Whinston said.

Dealers spent $86.8 million on state election races across the U.S. from 2003, when Tesla was founded, through last year, according to the National Institute on Money in State Politics, a nonprofit in Helena, Montana. They’ve also pumped $57 million into federal campaigns, the Center for Responsive Politics found. Tesla has invested about $500,000 in state and federal politics, according to data from the two groups.

“If the traditional booksellers had the political muscle of the franchise people in the automobile business, then Amazon probably would have been fighting an uphill battle,” Whinston said.

To contact the reporter on this story: Mark Niquette in Columbus at mniquette@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Alan Goldstein


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