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Car Dealership Laws Aren’t Fit for the Electric Age

Car Dealership Laws Aren’t Fit for the Electric Age

Thursday, 6 January, 2022 - 05:00

Car dealerships are, in essence, giant lots staffed by folks trained in the art of emptying those lots as quickly as possible and repeating the process ad infinitum. But 2021 was a strange year for all of us, dealers included. Their lots emptied ... and then quite often stayed empty as supply-chain snafus idled auto factories (see this from Bloomberg News). Figures released this week indicate sales were a bit better than in 2020 — also ravaged by Covid-19 — but roughly a million units fewer than in the before times.

On the other hand, even amid a pandemic, Americans love buying cars and trucks. So while fewer vehicles were sold, they came with surge pricing. Volume was down perhaps 7% compared with 2019, but the gross margin on each vehicle was roughly double.

Even though they squeezed lemonade from last year’s lemon, though, dealerships face a growing challenge to their place in the auto industry.

In November, Rivian Automotive Inc. debuted on the stock market, quickly reaching a $100 billion-plus valuation despite reporting no revenue. It joined a growing list of highly valued electric-vehicle upstarts that together, including Tesla Inc., now rival the market cap of the entire incumbent autos manufacturing sector (see this). Something besides batteries unites the EV crowd: They don’t use independent dealerships, preferring to sell directly to customers.

With any other consumer product, this would barely merit a mention. But dealerships are protected to varying degrees in most states by laws that were passed decades ago to address predatory behavior by the big three automakers. These laws effectively force vehicle sales and servicing to go through independent franchises.

Today’s market is a bit different from the 1950s, however. The big three aren’t so big anymore. This week’s bombshell news that Toyota Motor Corp. overtook General Motors Co. in US sales last year may reflect pandemic peculiarities. But the market was already competitive.

And dealerships, though still fragmented, have moved far from the mom-and-pop model of yesteryear. The top 10 companies together generate more than $100 billion in annual revenue.

Perhaps most important, back when Ike was president, no one had an electric vehicle stuffed with chips and taking software updates over the air. Nor a smartphone connected to a gazillion e-commerce sites.

The traditional dealership model prioritizes shifting vehicles from inventory — clearing that lot — and generating higher margins from servicing after the sale. First-time EV buyers, meanwhile, usually require some hand-holding about things like range, charging options and one-pedal driving. That requires customer education, perhaps over several interactions, rather than the immediate hard sell. And EVs have fewer moving parts, which limits their service potential.

As first Tesla and now other EV makers have sought to sell directly, the incumbents have dug in for a legal ground war. As of today, about two-thirds of the states cap or prohibit direct sales by auto manufacturers.

Michigan — where else? — presents an interesting case study. In 2014, after a Massachusetts court determined that the dealership laws in that state didn’t apply to Tesla because it never had its own dealerships, Michigan tweaked its own statute to ensure that Tesla couldn’t rely on such a loophole. Tesla filed a constitutional challenge, and in 2020 Michigan’s attorney general agreed to effectively allow the company to conduct direct sales and service via a narrow interpretation of the law. But as it became clear that other EV companies would follow Tesla’s example, Michigan legislators proposed a new law that would have effectively prevented any automakers from conducting direct sales or service in the state — except Tesla, via an artfully worded carve-out. The final twist: That carve-out was omitted when the bill passed in the House.

Michigan’s senate never took up the legislation, but the saga to that point already said it all. When lawmakers have to resort to such contortions to protect the old system, the jig is up.

Daniel Crane, an antitrust specialist at the University of Michigan Law School, notes that the dealership lobby has endeavored to recast these laws — explicitly passed to protect dealers — as protecting consumers by lowering prices through dealer competition. Yet, as he writes here, vertical integration is anticompetitive only if it somehow blocks rivals from accessing some vital raw material or sales channel. “There is no suggestion that Tesla or any other firm is hindering inter-brand competition by creating its own critical automobile distribution outlets.” The point here isn’t that dealerships must be eviscerated, but only that they shouldn’t enjoy protected status hindering new entrants.

There’s some evidence that maintaining the outdated state laws hinders EVs that have been developed largely by startups. States that don’t restrict direct sales show much higher penetration of EVs than those that do. Correlation isn’t necessarily causation, of course. But consider two large states, Florida and New York. The latter has far more ambitious targets for decarbonization, including banning sales of gas-guzzlers from 2035, and generous state subsidies for EVs. Yet in terms of EV take-up, it lags Florida, which offers no state subsidies. One difference is that New York caps direct sales — with another one of those weird carve-outs for Tesla — while Florida doesn’t.

Just because a law is hard to defend doesn’t mean it’s doomed. For one thing, auto dealerships can be found in virtually every electoral district and they donate to politicians generously, far more than the manufacturers do.

Yet even the incumbent automakers are now making big investments in electric and vehicle autonomy — and exploring various new ways to sell their products. Back in July, Jim Farley, the chief executive officer of Ford Motor Co., touted the company’s expanding build-to-order book. Sure, those vehicles are still delivered (and later serviced) via a dealer. But having customers select their options and pricing online pushes the dealership toward being more of a fulfillment center.

Dealership laws have helped traditional automakers by acting as a brake on EV startups. But as those startups surpass incumbents in valuation anyway and start changing the way cars are sold and serviced, the laws begin to look less like a defensive moat and more like a restrictive wall.


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