Tesla Motors, the California-based electric-car start-up, is anything but an epitome of American-style free-market entrepreneurship.
Its Model S performed and sold better than many critics, this one included, expected. Ditto for its stock price, which is more than $240 per share, though the company’s market capitalization of nearly $29 billion — half that of Ford — strikes many critics, this one included, as unsustainable.
But Tesla’s success would have been impossible without a big assist from government: a $465 million, low-interest Energy Department loan (since repaid); substantial tax credits for purchasers; tens of millions of dollars’ worth of air-pollution credits awarded by California regulators to Tesla and sold to competitors who, under state law, had to buy them.
The (dubious) policy rationale is that a shift to electric cars would lower carbon emissions significantly and that the way to achieve such a shift is by subsidizing the manufacture and sale of a luxury vehicle that only the 1 percent can afford.
In one important respect, however, Tesla stands on the side of the free-market angels: The company’s business plan calls for selling vehicles directly to consumers, rather than through auto dealers — a major challenge to the dealers’ costly, outmoded monopoly on new-car sales in the United States.
State laws generally prohibit anyone but a licensed franchisee from selling new cars. A 2000 report by a Goldman Sachs analyst estimated that direct sales would save consumers $2,225 per new car, assuming an average vehicle price of $26,000.
So far, Tesla’s effort has met with mixed success. It has opened stores in Minnesota, Massachusetts and Washington but struck out in Texas and Arizona. Virginia rebuffed Tesla’s plan for an outlet in Tysons Corner last year. Tesla sued but withdrew the lawsuit in return for a chance to apply for a dealership license.
The company’s most recent defeat came Tuesday, when the New Jersey Motor Vehicle Commission adopted a rule that would effectively force Tesla to close two stores in the Garden State. A Tesla spokesman called it “an affront to the very concept of a free market,” which is hypocritical coming from a government-backed firm — but absolutely true.
The dealer-based distributional system divides the United States into sales “territories,” each one allocated to a dealer, on the theory that a protected market compensates for the risk of investing in a brick-and-mortar building and holding a large inventory of cars.
Long ago, this business model might have made sense, but today technology takes much of the risk out of inventory management — and enables consumers to understand their choices without “help” from a commissioned salesman. In fact, the Consumer Federation of America reported in 2013 that “[m]isrepresentation in advertising or sales of new and used cars, lemons, faulty repairs, leasing and towing disputes” was the top source of consumer complaints to state officials, as it had been in previous years.
The dealer-based system was obsolescent even before the Internet, which is why Detroit automakers tried to streamline it decades ago, only to be thwarted when dealers turned to state legislatures for protection.
As Web-based retail sales of other products began to take off in 1999, a General Motors executive said publicly that 80 percent of new-car sales could be factory-direct orders made online by 2003. He forgot about the dealer lobby, which mobilized to win state bans on Internet sales by anyone except an existing licensed dealer.
The laws’ purpose, and effect, is to head off innovation. Of course, changes might make the car-buying experience more pleasant and less expensive for consumers — but cut dealers’ profits or put them out of business altogether. This is why dealers see Tesla as a mortal threat and are fighting it accordingly.
Meanwhile, even more radical alternatives to conventional dealerships are in the works. Many were on display at the just-completed three-day “Hackomotive” conference in Santa Monica, Calif., sponsored by the automotive Web site Edmunds.com.
According to the New York Times, one new system, Carvoyant, provides a secure means of test-driving new cars without a salesperson — thus refuting a frequently made argument for the necessity of dealerships.
The stage is set for protracted political and regulatory warfare between car dealers and disruptive market entrants. Given the dealers’ proven clout, it would be unwise to bet heavily against them.
Still, Tesla chief executive Elon Musk may be that rare individual who can afford to fight the dealers and can’t afford to lose. I’m no fan of his electric-car dreams or the government subsidies that have enabled them. But in this battle, I’m rooting for him.