On Tuesday, Michigan doubled down on a state law that forces car manufacturers to sell their vehicles through franchised dealerships. The move is a blow for automaker Tesla, which has been trying to bypass the dealerships in various states with mixed success.
In the wake of that news, an astute reader asked a great question: If Tesla is so interested in getting its products into consumers' garages, why doesn't it just cooperate with existing franchise owners? Or if they prove resistant, wrangle up new ones who'd be willing to carry Teslas in addition to, say, Audis and BMWs?
There's a short answer and a long answer. The short answer, according to auto analysts, is that this has little to do with the dealers themselves and everything to do with Tesla chief executive Elon Musk's desire to keep control of the company's brand. The longer answer requires us to dig a bit into the history of car dealerships in America.
First, more on the short answer: Yes, Musk could easily work with franchise owners if he really wanted to. But if you're a manufacturer, you cede a lot of control to the dealership when you hand over your cars. As anyone who's haggled for a car knows, dealers have a lot of power to set prices. They can give customers a bad experience — causing folks to walk away, vowing never to buy a Volkswagen or a Toyota again.
"Our stores are as much education venues as retail venues — in fact, probably more so," said Diarmuid O’Connell, Tesla's vice president of business development, in an interview Wednesday. "We don't think that we would succeed using an intermediary model where we sell a product that someone else sells to the public."
While there's nothing stopping Tesla from working with franchise owners, said Karl Brauer, an analyst at Kelley Blue Book, the company has a huge stake in maintaining control over its brand. As a relatively new entrant to the auto market, Tesla can't afford to see its image and customer experience splinter into thousands of pieces.
"I think Elon wants to have full control of having the cars retailed through a system he has total say over," Brauer said. "And, two, I think he enjoys the concept of upsetting the apple cart; he enjoys knowing that he's breaking existing conventions on every level."
In other words, Musk isn't just content with introducing a fancy new product. He wants to change the shape of the entire auto industry. That brings us to the longer answer to the reader's question.
To understand what's going on here, we need to look at how dealerships evolved in America. Their initial role as distributors was borne out of economic necessity; in the 1930s and 1940s, manufacturers such as General Motors couldn't afford to both make and sell cars to Americans because of the cost of getting the new vehicles to consumers. Shipping new cars was expensive — particularly in rural areas, which described a large portion of America (remember, this was before U.S. car culture became widespread).
The chart below, using data from the Federal Highway Administration, shows roughly how car adoption slowed in the pre-war period before taking off afterward, thanks in part to the franchise dealership model. (This is a roundabout way of illustrating this, as the U.S. population also grew during this period, but I wasn't able to quickly find data on household car ownership that extended before the 1960s.)
"Manufacturers didn't want to deal with figuring out how to set themselves up to sell cars across the country, so they said, 'Let's enlist private individuals to help,'" said Brauer. "Over the course of the next 50-plus years, the dealers became, truthfully, pretty important elements in these local communities."
Dealerships were big employers in those days — hiring salespeople, secretaries, mechanics and so on. In some places, they probably still are. Their economic power inevitably led to a close relationship with politicians, which bore fruit in the form of laws that protected dealership interests.
Tesla isn't the only one to have tried striking out on its own and selling directly to consumers. In the 1990s, Ford tried to do direct sales — and got shut down by the Texas government. Ford wanted to sell cars through joint operations with dealers as part of what it called the Ford Retail Network. The company also tried to sell used cars online. As Mother Jones reported back in 2009:
But Texas regulators cracked down, threatening Ford with $10,000 daily fines for allegedly violating a state law banning manufacturers from selling their products directly to the public. Ford tried to fight back in court, arguing that the state franchise law was a restraint on interstate commerce, but the court was no more sympathetic than the governor.
Where Tesla might have an edge over Ford, said Brauer, is that Ford's retail operations directly threatened dealerships by taking business away from them. Tesla could indirectly rob dealerships of business if people started buying Teslas from Musk directly. But in a world where franchise owners worked with Musk to sell Teslas, the dealers' dominance would be preserved.
Reinforcing the dealers, however, is probably not what Musk has in mind.