Tesla Motors Has Friends At The FTC When It Comes To Direct Sales

APR 24 2014 BY JAY COLE 17

Internationally Tesla Run Into Few Problems With Their Direct Sales Model (such as at this company store in Toronto)

Internationally Tesla Run Into Few Problems With Their Direct Sales Model (such as at this company store in Toronto)

There is a war going on in the United States when it comes to automotive sales; specifically the ability to sell cars directly to the consumer.

And it seemingly goes like this: Tesla Motors VS every state’s auto dealers association.  Sometimes Tesla wins, sometimes they lose (such as recent defeats in Arizona, and ongoing difficulties in New Jersey).

Often when they lose, their CEO Elon Musk muses taking the fight to the federal level; although no such advancement on that front has yet been made.

Today, the Federal Trade Commission (FTC) threw a little gas on that fire by aligning themselves on Tesla’s side of the fight by putting up a blog post entitled “Who decides how consumers should shop?” 

“Dealers contend that it is important for regulators to prevent abuses of local dealers. This rationale appears unsupported, however, with respect to blanket prohibitions of direct sales by manufacturers. And, in any event, it has no relevance to companies like Tesla. It has never had any independent dealers and reportedly does not want them.

Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated. We hope lawmakers will recognize efforts by auto dealers and others to bar new sources of competition for what they are—expressions of a lack of confidence in the competitive process that can only make consumers worse off.”

Check out the entire transcript of that post below – it’s a well thought out read!

 

Who decides how consumers should shop?

(By: Andy Gavil, Debbie Feinstein, and Marty Gaynor)

Consumers once shopped predominantly at their local stores; but first mail order catalogs and today the Internet have created new ways to shop for and purchase a wide range of goods and services. Similarly, consumers once arranged for taxis by hailing one from a street corner or by calling a dispatcher; yet today, smartphones and new software applications are shaking up the transportation industry, creating new business opportunities and new services for consumers.

Tesla Model S Design Studio In China - Company Owned & Operated

Tesla Model S Design Studio In China – Company Owned & Operated

In buying cars, however, these new ways to shop may not be available to consumers. For decades, local laws in many states have required consumers to purchase their cars solely from local, independent auto dealers. Removing these regulatory impediments may be essential to allow consumers access to new ways of shopping that have become available in many other industries.

This very question has been raised across the country, as a still-young car manufacturer, Tesla, pursues a direct-to-consumer sales strategy that does not rely on local, independent dealers.

In this case and others, many state and local regulators have eliminated the direct purchasing option for consumers, by taking steps to protect existing middlemen from new competition. We believe this is bad policy for a number of reasons.

American consumers and businesses benefit from a dynamic and diverse economy where new technologies and business models can and have disrupted stable and stagnant industries, often by responding to unmet or under-served consumer needs. When that occurs in an industry long subject to extensive regulation, existing businesses—like automobile dealers—often respond by urging legislators or regulators to restrict or even bar the new firms that threaten to shake up their market.

Out of 15 million cars sold in the U.S. in 2013, Tesla accounted for a little over 22,000. This hardly presents a serious competitive threat to established dealers. What it could represent is a real change to the way cars are sold that might allow Tesla to expand in the future and prove attractive to other manufacturers, whether established or new ones that have yet to emerge, and consumers. Efforts to litigate, legislate, and regulate to eliminate Tesla’s perceived threat have forced it to battle jurisdiction-by-jurisdiction for the simple right to sell its automobiles directly to consumers.

When the automobile industry was in its infancy, auto manufacturers recruited independent, locally owned dealers to reach consumers in localities across the country. State laws progressively embraced wide-ranging protections for these dealers due to a perceived imbalance of power between the typically small local dealers and major national manufacturers. Dealers persuaded lawmakers that they needed protections from abusive practices by manufacturers. Federal laws, too, developed to protect auto dealers from abuse.

London Tesla Store - Company Owned & Operated (via driving.co.uk)

London Tesla Store – Company Owned & Operated (via driving.co.uk)

These protections expanded until in many states they included outright bans on the sale of new cars by anyone other than a dealer—specifically, an auto manufacturer. Instead of “protecting,” these state laws became “protectionist,” perpetuating one way of selling cars—the independent car dealer. Such blanket bans are an anomaly in the broader economy, where most manufacturers compete to respond to consumer needs by choosing from among direct sales to consumers, reliance on independent dealers, or some combination of the two.

Dealers contend that it is important for regulators to prevent abuses of local dealers. This rationale appears unsupported, however, with respect to blanket prohibitions of direct sales by manufacturers. And, in any event, it has no relevance to companies like Tesla. It has never had any independent dealers and reportedly does not want them.

FTC staff have commented on similar efforts to bar new rivals and new business models in industries as varied as wine sales, taxis, and health care. We have consistently urged legislators and regulators to consider the potential harmful consequences this can have for competition and consumers. How manufacturers choose to supply their products and services to consumers is just as much a function of competition as what they sell—and competition ultimately provides the best protections for consumers and the best chances for new businesses to develop and succeed. Our point has not been that new methods of sale are necessarily superior to the traditional methods—just that the determination should be made through the competitive process.

Tesla Store In Palo Alto, California

Tesla Store In Palo Alto, California

Change is a critical dimension of that competitive process. Manufacturers in a variety of industries now reach consumers directly through websites, providing extensive information that was once only available from dealers or by phone or mail inquiry. And consumers routinely turn to the Internet as a convenient way to comparison shop and buy products and services.

Such change can sometimes be difficult for established competitors that are used to operating in a particular way, but consumers can benefit from change that also challenges longstanding competitors. Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated. We hope lawmakers will recognize efforts by auto dealers and others to bar new sources of competition for what they are—expressions of a lack of confidence in the competitive process that can only make consumers worse off.

Andy is the Director of the Office of Policy Planning, Debbie is the Director of the Bureau of Competition, and Marty is the Director of the Bureau of Economics. The views expressed are their own, and do not necessarily reflect the opinion of the Commission or of any individual Commissioner.

Hat tip to Frank for his contribution!

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17 Comments on "Tesla Motors Has Friends At The FTC When It Comes To Direct Sales"

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Nicely put.

It begins….

A very well-written statement by the authors!

While it may be a good start, the disclaimer at the end states it does not represent the view of the FTC. 3 personal opinions is pretty weak.

And the fact that the FTC is not behind it, which represents principles that they should stand for, is really weak.

Several problems with these assessments.

First, the FTC cannot officially support the personal opinions of its employees. The FTC must remain unbiased.

Second, this is a very strong statement because the opinion was written by three people who are heads of various divisions of the FTC. In other words, should the FTC need to act, everybody now knows in which direction the FTC will lean. It is difficult to imagine a stronger statement than this.

In fact, it is so significant that I fully expect some of the more irritating and delusional gop members in Congress to call for the immediate resignations of the authors.

It’s not just about consumer interest but also about producer interests. It’s fundamentally wrong if products that very different in their economics and retail requirements are forced in the same retail model. The producer of the product that fits into that particular model least well will be at a huge competitive disadvantage.

For instance in Tesla’s case there is the problem its product doesn’t generate the sort of maintenance income that the relatively costly franchise dealer system needs to keep funded. The only way to compensate for that would be huge margins on the cars which would make them less competitive with traditional cars.

Basically a leaner more info oriented (mall locations) rather than workshop oriented retail approach is needed.

Agreed Chris though I wish Tesla did not charge the inflated annual service rate. Though it is not mandatory, most owners buy it due to the newness of the technology. If Tesla did not charge this IMO there argument would be stronger.

Mark:

A little confused by your comment. The annual service is optional so I not sure why it matters, especially since Elon has publicly stated that service is run to break-even and not as a profit center.

As to the value, $600 seems reasonable. I seem to remember by MBs and BMWs cost about $80 per oil change and $500 to get the brake pads replaced. I no longer need the oil changes and and things like the brake pads, filters, etc are part of the service.

O

So, if MB and BMW sells brake pads for $600, TSLA is reasonable? Brake pads can cost as little as $15, with good quality at ~$50 and above.

I agree service is optional, so some customers spending for these plans maybe ought to think twice?

Very nice essay. Politicians, beware the will of the people. Let reason plot the course into the future…

Very nice is all it is.
It has to be backed officially and strongly by the FTC to be useful.

Politicians ARE aware of the people.
That is why they manage to persue their own interests and those of their owners without provoking mass protests every other day.

Let reason plot the course?!?
When has that ever happened?
Do you have any basis for thinking that will ever happen?
I envy you optimism, and my most outlanding fantasies is living in a world where reason rules, but: not going to happen…

Awesome!

This will be some good argumentative ammo when the case hits the Supreme Court.Though Musk says he does not want that, I think eventually that will be the last resort to get Tesla into some of the more recalcitrant states. The ADA’s will give up their privilege to bilk customers when it’s pried from their cold dead fingers, figuratively speaking.

Nice piece. Hope it changes some minds. But it’s still a state by state battle for now. Not that it matters. Even in states that try to shut Tesla out, people just order them online or by phone anyway.

It’s about time someone with a bit of influence spoke the obvious about the sheer nonsense coming out of national and state auto dealer associations and the politicians they paid off.

Agreed.