It isn’t an accident. Rather, it is the result of hard-fought efforts by auto dealers to maintain, through state laws, their exclusive role as the place where one can buy a new automobile. Direct sale of autos by manufacturers is against the law in nearly every state, and there's a range of related state laws governing auto dealers’ ability to enter or exit a market. In other words, the model that Dell developed for selling personal computers — enter your exact specifications online, and the computer will be built to order and delivered to your door — is illegal in most states for automobiles. (For a rundown on the structure of the auto industry, check out this paper from Justice Department antitrust economist Gerald R. Bodisch).
Enter Tesla. The maker of innovative electric cars is hoping to be equally innovative in how it sells them. It wants something that closely resembles the Dell model to apply to its popular “Model S” sedan. The company is pushing the Texas legislature to change its own law to make it legal to sell Teslas there directly.
But North Carolina isn’t having it: Last week, a state Senate committee unanimously approved a bill to make the direct sale of autos in the state illegal.
What’s going on here is a battle of raw political power at the state level against the forces of markets. When automakers were first getting going in the middle of the last century, it made sense for them to focus on making cars while letting dealers across the country worry about building showrooms, managing inventory, offering test drives and negotiating with buyers.
Auto dealers also had all the ingredients to become a powerful lobby, particularly in state politics. There are a lot of them; they have millions of dollars at stake in the laws governing car sale; and thus they have the ability and inclination to rub elbows with — and make campaign donations to — state lawmakers. And they have used that influence, with remarkable effectiveness, to slow any efforts to squeeze them out of the vehicle supply chain.
The auto dealers’ argument for exclusivity isn't terribly persuasive. It’s about protecting consumers, they argue, who need to have a licensed dealer around to fix their car if it is a lemon or hold their hand through the purchase process. (Whether the car dealer’s other hand is simultaneously lifting the buyer’s wallet in the form of add-on fees is a different matter)
They present themselves as wholesome, heart-of-the-community types. Here’s the message from John Zwiacher, chairman of the Texas Auto Dealers Association, on the group’s Web site: “In addition to providing essential transportation, Texas dealers employ over 75,000 employees with an annual payroll of $4.0 billion and are a $3.0 billion dollar annual revenue source for our state budget.Texas dealers serve as community volunteers and leaders in every capacity and are essential to the daily lives of every Texan.”
The North Carolina dealers’ association has said much the same: “You tell me they’re gonna support the little leagues and the YMCA?” Robert Glaser, president of the North Carolina Automotive Dealers Association, said in reference to Tesla's strategy, according to the News and Observer.
Those are the kinds of arguments that give the lie to what’s really going on here. Regulations to keep auto dealers from being squeezed out by the automakers are a way of ensuring that a chunk of the automobile supply chain stays in the places where cars are purchased — in the form of salaries for the dealers’ employees, profits for the dealers and financial support for local politicians and various local charities.
It’s understandable that those rationales would appeal to politicians, but they are deeply contrary to the idea of free markets. After all, a generation ago, each city had numerous locally owned department stores that occupied prime downtown real estate, paid their employees decent wages, gave generously to local charities, politicians and chambers of commerce, and were generally good corporate citizens. One by one, they went bankrupt or got bought out. Now there are only a few national department store chains, and much of the share of retail sales that once went to local department stores now goes to big-box chains like Target or online retailers like Amazon.
Essentially, the auto dealers are using their political connections and their legacy of benefiting from regulation to fight the tide of the past several decades, which has been toward leaner, nationally run retail. They have some company: The funeral industry has lobbied to prevent Costco from selling coffins (you can only buy them there in 37 states), and tightly regulated liquor wholesalers in most of the country have maintained their grip on distribution of alcohol.
It’s easy imagine in what direction the auto industry would go if regulations were lifted: Dealers would sit in indoor showrooms much smaller than current car lots, with only a few cars and trucks for customers to see and test drive. Then, when you made a purchase decision, you would enter your preferences for color, finish and features. Your new car would be delivered a couple of weeks later. The dealer would get a smaller slice of the economic pie but also wouldn’t have to pay for a multi-acre lot or keep millions of dollars in car inventory. Prices would be a bit lower, as all that savings in land, inventory and employee salaries would eventually get passed on to consumers. The dealers would be leaner and less profitable -- and would probably have less money or inclination to support state legislators looking for campaign funds.
No wonder the thought makes politicians nervous.