The state of Connecticut is a progressive state, with a strong track record of support for laws and policies that will reduce global warming emissions and a goal of putting over 150,000 electric vehicles on the road by 2025.
Given the policy commitments of the state of Connecticut, one might assume that Connecticut would be a place that would welcome an innovative, important business like Tesla, the largest manufacturer of electric vehicles in the United States. And given the significant fiscal challenges that Connecticut faces, one might think that Connecticut would be excited to see Tesla operate new stores within the state, bringing jobs and tax revenue.
But in fact, Tesla is legally prohibited from operating its Tesla stores in Connecticut.
Under Connecticut’s dealer franchise law, and under the law of many states throughout the country, automobiles may only be purchased through independent car dealerships. Tesla’s cars are sold directly from the manufacturer, which mean that Tesla stores are not welcome in Connecticut.
The problems that Tesla has faced with automotive dealers and state dealer franchise laws represent a combination of unintended consequences, special interest influence, and the challenges of developing new technologies in marketplaces dominated by entrenched interests and outdated laws. The Tesla wars are also a part of a broader story of how changes in technology are impacting laws and regulations governing transportation in the United States.
In this blog post, I want to explore some of the key questions raised by the battle over Tesla. In particular:
- Why do we have dealer franchise laws?
- Why doesn’t Tesla sell their cars through franchised dealers?
- Why do some states allow Tesla stores and others do not? (Hint: it depends on the meaning of ‘its’).
In part 2 of this post, I will look at some of the policy arguments that have been made by auto dealers, by Tesla and by economists on dealer franchise laws.
- What is the justification for laws banning Tesla stores?
- What does the evidence suggest about dealer franchise laws?
- What are the consequences of Connecticut’s ban on Tesla stores?
Why do we have dealer franchise laws?
The car dealership model as we know it today arose in the 1920s and 1930s, as first General Motors, and then eventually all of the “Big Three” American automakers chose to license the rights to sell their cars to independent dealers, rather than selling the cars directly to consumers.
The independent dealership model worked because it allowed both parties to focus on core competencies: the manufacturers could focus on making the best cars possible, while independent dealers made the inroads into local communities that allowed them to most efficiently sell the cars directly to consumers.
From the beginning, one challenge in the independent dealership model is the obvious power imbalance between the “Big Three” automakers who dominated automobile manufacturing, and the thousands of independent dealerships that were licensed to sell their vehicles. Stories abounded of auto manufacturers exploiting their superior market position to gain unfair advantages on independent dealers. For example, manufacturers could force independent dealers to purchase cars that they didn’t want as a condition of maintaining their relationship, or terminate the franchise relationship at will without cause, or coerce profitable dealerships into selling their business at below-market rates.
Beginning in the 1930s and accelerating greatly in the 1950s, legislatures in all 50 states passed a series of laws, known collectively as dealer franchise laws, which were intended to protect independent dealers from abusive practices at the hands of vehicle manufacturers. Among other things, these laws prohibited the Big Three from owning licensed dealerships themselves, or selling cars directly to consumers.
The prohibition on direct manufacturer sales was intended to protect independent auto dealers from unfair competition from their own manufacturers. The classic concern addressed by the ban on direct sales from manufacturers is the independent car dealer who spends money, time and effort building a market for, say, Ford vehicles in a certain town, only to have Ford Motor company jump in and open up a rival direct from manufacturer store that undercuts the independent dealer on price and takes his market share.
By the 1950s when most of these laws were passed, the independent dealer model was so entrenched in the American car market that it was simply presumed that all auto manufacturers would have independent dealerships selling their cars, and that any direct manufacturer sales would necessarily be in competition with an independent dealership. Dealer franchise laws therefore did not contemplate the challenge posed by a company like Tesla, a company that refuses to sell its cars to independent dealerships at all and instead insists that all sales must be direct from the manufacturer itself.
Why doesn’t Tesla distribute through franchised dealers?
Tesla has adopted this policy because they believe that the traditional independent dealership model does not work for electric vehicles. According to Tesla CEO Elon Musk:
Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars. It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business. This would leave the electric car without a fair opportunity to make its case to an unfamiliar public.
Tesla points to the failure of Fisker and Coda as examples of electric vehicle start-up companies that failed because of their reliance on independent dealerships to sell a new technology. In addition, Tesla argues that because electric vehicles have lower maintenance costs than traditional cars, independent dealerships that make money off of service will always have an incentive to steer consumers away from electric vehicles. Tesla offers service for all of their vehicles for free.
Recent studies confirm that, with a few exceptions, most auto dealers in the Northeast are not making enough of an effort to sell electric vehicles. Between January and June of 2016, dealers in the Bridgeport to New York City metro area had 90 percent fewer EVs listed for sale than Oakland, when adjusted for relative car ownership. A recent report by the Sierra Club found that Tesla stores provide EV customers with far superior service, as Tesla was more likely to have EVs available to test drive, more likely to be knowledgeable about state and local incentives, and more likely to be able to correctly answer technical questions about charging EVs, than traditional car dealerships.
A Tesla store looks and feels more like an Apple store than a car dealership. They are placed in high volume, high traffic areas such as shopping malls. They have almost no inventory, as Tesla cars must be ordered individually from the manufacturer rather than sold on site. There is no haggling over price. And Tesla stores sell only Tesla products, including cars and batteries; with the recent merger with SolarCity, Tesla stores will soon sell solar panels as well.
Why do some states allow Tesla stores and others do not?
Over the past few years, courts and legislatures across the country have struggled with the question of whether and how to apply dealer franchise laws to Tesla stores. Some state courts, including Massachusetts and New York, have found that dealer franchise laws are only intended to apply to manufacturers that have licensed independent dealers, and do not provide a cause of action against Tesla stores. Other states, including New Hampshire and Maryland, have recently changed its law to permit Tesla stores through legislation.
States that currently ban Tesla stores include Texas, West Virginia, Utah and Arizona, in addition to Connecticut. Some states, including Virginia and Indiana, allow a limited number of Tesla stores. New Jersey proposed a regulation that would have banned Tesla stores in 2015, but then relented last year, amending the regulation to allow 4 stores in New Jersey.
Often the difference between a jurisdiction that permits Tesla stores and a jurisdiction that bans Tesla stores comes down to minute differences in statutory language. For example, until 2014 Michigan’s dealer franchise law prohibited auto manufacturers from “[selling] any new motor vehicle directly to a retail customer other than through its franchised dealer.”
The word “its” in the statute arguably suggests that the law only applies to manufacturers that have franchised dealers, and thus does not prohibit Tesla stores. But then a legislator allied to the auto industry slipped a provision into an unrelated piece of legislation removing the word “its” from the statute, and just like that, Tesla stores were banned in Michigan.
Beyond narrow questions of statutory interpretation, judges and legislators wrestling with these questions need to consider the purpose of dealer franchise laws. Are these laws meant to regulate a relationship that arose within the context of the independent dealer system? Or are these laws intended to mandate that the independent dealer system must be the only way automobiles are sold in the United States forever? If it is the latter, then the dealer franchise laws represent not only a ban on Tesla, but a ban on all innovation in distribution methods.
Can such a ban be justified? In part 2 of this post, I’ll explore some of the policy consequences of dealer franchise laws and the Tesla ban, for consumers, and for Connecticut.
Posted in: Vehicles
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