Can someone explain to me why it should be illegal for Ford or Chevy to sell their cars directly? Is it really anti-competitive? Apple sells their phones directly, AT&T sells Apple phones directly, and resellers like Best Buy or Radio Shack sell Apple phones, and they're all doing pretty well economically.
Not even arguing that Tesla should be allowed to sell cars without a dealership, why bother preventing direct sales from manufacturers, but only for this specific product category?
But in brief, there is basically a vested power that does not want to allow innovation to disrupt their highly profitable industry. They rely on some fairly outdated laws to protect themselves.
As an example - Official Apple Stores have hurt mom&pop Apple stores. Apple ultimately makes money either way, but they make more money if they sell them at their own Apple store. Why would you go to the mom&pop store if an Apple store were nearby? There have also been reports that they don't give the 3rd party shops new models until much later, so they are at even more of a disadvantage. Try buying that new Macbook Pro the day it's released at a 3rd party store. It probably won't be available.
Back in the day, the dealers banded together so that wouldn't happen to them by making it law.
One thing I don't understand is why the dealers didn't play the manufacturers off each other to mitigate the problems.
I can see that, for Apple dealers, it could be a major problem. Apple products are a specific niche, and you can't take your Apple dealer and turn it into something else with much hope of success. Selling PCs is a pretty different business.
But when it comes to car, surely selling Fords is much the same as selling Toyotas? If Toyota treated a dealership badly, why wouldn't they shop around for a brand that would treat them better? Is it that the American car manufacturing industry wasn't sufficiently competitive for that to work when these laws were being written?
The original intent of these laws was to protect franchisees, who may work very hard to develop a local market, from manufactures later coming in to that same area with direct sales, effectively stealing the market from the franchisee who identified and developed it.
The Tesla argument, which makes sense to me, is that since they have no franchise dealers, there is no reason to prohibit them from selling direct.
It is protectionism for the dealerships. Historically Dealerships were mom and pop shops up in less-populated towns, employing a decent number of people.
So they lobby the government that unless you protect us from the dealers, they will undercut our prices by selling directly to consumers, and we will have to lay off some of our employees, or go out of business. Then our small town won't have said dealerships anymore.
Especially now that we have the internet, these policies are antiquated and end up hurting consumers, by driving up prices. Without the middle-man, cars could be sold at lower prices.
There's also the way the business evolved. Manufacturers don't have unlimited funds to:
1) design cars
2) design factories
3) manufacture cars
4) retail cars
So somewhere along the line someone figured out that cars are somewhat commodity, same as clothing or food. A grocery store sells several brands of food and department stores sell several brands of clothing. Cars could be done the same way.
Manufacturers liked it because it allowed them to grow much faster by selling franchise licenses and use that money for design of cars, factories and to actually build cars. It's an all around win.
But eventually manufacturers grow to the point where they aren't starved for capital anymore, have good market penetration and growth starts to slow. So a natural next step is to cut out the middlemen (the dealers who have paid franchise fees) and start direct-to-consumer sales efforts. This idea didn't sit well with the dealers who had paid those franchise fees and might have assumed they could amortize them over many years.
So laws got passed preventing manufacturers from competing with the dealers that they had sold franchises to.
But Tesla has never sold anyone a franchise ever. They're not doing naughty things to their former customers (the dealers) because they've never had dealers.
REQUIRING them to sell only to dealers doesn't make sense unless you're worried about Ford doing some kind of shady restructuring to get themselves out of all their dealer contracts and to start selling direct to consumers.
It may help to view this set of laws the same way that some people view labor unions.
Labor unions started with positive intentions and were needed to protect workers who were often overworked and underpaid.
Now many feel that labor unions mostly exist to support themselves and make it harder on everyone from corporations to consumers and their effects aren't near as beneficial as they once were.
The internet has made direct-to-consumer sales a much more viable alternative and the car industry has yet to realize it.
By the way, cars aren't the only products sold this way. Try to buy a Stihl chainsaw or a John Deere mower without going through a dealership. Try to buy a traditional name brand mattress or piece of furniture direct from the manufacturer.
There is a start up born nearly every day trying to "disrupt" this business model.
> Apple sells their phones directly, AT&T sells Apple phones directly, and resellers like Best Buy or Radio Shack sell Apple phones, and they're all doing pretty well economically.
The trick is that they are actually three different business models. Apple makes money on the phones. AT&T makes money on the phone contract. Best Buy or Radio Shack make money on the protection plans and accessories.
Let's say you borrow money, and open a nice profitable dealership. The manufacturer, then decides to steal your profits by raising the wholesale price of cars for you until you are bankrupt, and the manufacturer buys the dealership out from under you in bankruptcy court.
That type of behavior is what created franchise laws in the first place.
You shouldn't have opened the dealership without an agreement with the manufacturer giving you exclusive rights to sell in your market for enough time to justify your investment.
Once upon a time, such agreements were considered anti-competitive. Hence, states passed franchise laws providing similar protections without the exclusivity agreements.
That smells like a just-so story. The grim scenario you describe could happen in any franchise situation. What stops McDonald's from doing this to its franchisees? Not this type of law.
Various laws, court rulings, and even provisions written into the contracts themselves as a result of earlier abuses by other franchises stop this kind of thing from happening to McD franchises.
But make no mistake--this does happen to other types of franchises. These lawsuits simply don't make the news because they're not general-interest or (for HN) tech-interest events.
(2) Car dealerships need expensive inventory of illiquid assets and franchise licenses. If the franchise contracts aren't well written (perhaps collusion between manufacturers prevents competition over franchise rights), then a big auto company can maximize profits by selling franchise rights and then a couple years later looking at volumes of sales for which areas it makes sense to set up their own stores and undercut the franchise owners. The franchise owners need to amortize their franchise costs, but not so for the direct sales shops. The argument becomes that the historical implication has been that in the auto industry selling local monopoly franchise rights has implied no direct competition from the manufacturers.
Perhaps a better law would be that no manufacturer with existing franchise owners in the state can have direct sales in the state.
Except the manufacturers that don't want another manufacturer to able to sell in the state. Especially since that new manufacturer will be selling directly allowing their cars to be sold for less than if a franchise fee had to be amortized into every vehicle sold (in other words, they'll have lower overhead costs), which still affects the existing dealerships who won't be happy as they will be at a slight disadvantage.
This is completely wrong. Dealers own the inventory. Dealers take ownership of the car as soon as the car leaves the factory gate - they own the in-transit cars.
Read the article you referenced. In a floorplanning agreement, the franchise owners have 100% purchased the inventory and are on the hook for selling the inventory. The purchase money is financed with loans using the inventory as collateral. The dealer fully owns the inventory and (in the absence of side agreements or regulations) assumes all of the liquidity risk.
In particular, if a local franchise owner sees the manufacturer opening up its own store down the road, the franchise owner can't (in the absence of side agreements) tell the manufacturer to take back the cars because they want out of the business.
The point is, there is a middle ground between owning everything free-and-clear, and merely acting as a consigning agent for the party that owns everything. Getting a loan for inventory is in that middle ground.
Yet another disgusting misuse of legislation by the dealership industry. I hope that Tesla is able to get enough last minute representation to ensure that this does not pass.
I've always found a lot of the anti-regulation, pro-"disruption" rhetoric in startup culture to be short-sighted, over-simplified, and at times just outright boneheaded, but...
Screw car dealers. Consumers deserve choice, and cowardly attempts to sneak in and remove it in the dead of night like this are horrible. May they all end up out of business and starving in a ditch.
My statement was as follows if anyone cars to piggy-back/draw inspiration.
Hello, I am a constituent and I'd like to voice my opposition to House Bill 1124 in its current form. It has recently had anti-competitive and anti-consumer language attached to it regarding the protections car dealerships receive from the state. If it passes in its current form HB 1124 will cost MO jobs and money by stifling competition and limiting choice in the car buying market.
Great! Thanks for this. Just called Gary Cross and left a message for him, even though his secretary sounded like she had no idea what I was talking about. I'd assume I was the first one.
Edit: Turns out my rep, Gary Cross, owns a dealership in my hometown. Seems like I'm screwed in terms of being represented.
A friend on facebook mentioned it. I'd assume he's related to Dave Cross[0], but like I said, that's just from a facebook friend, so not entirely sure where he figured it out. I'll ask him to make sure I'm not spreading misinfo.
For what its worth, Gary Cross at least has a degree in Automotive Sales[1] and has received campaign contributions from Dave Cross motors. I'd imagine the relationship goes deeper.
I find this kind of thing disturbing. How often do companies exploit the legislative process like this but with no opposing side to complain? How much lobbying machinery and back room dealing is designed to achieve precisely this at any level of government? Is there even any way to know, much less do something?
What's more troubling is that this particular case is in no way "back room dealing." It's not kept secret at all. I think most people are aware of this kind of thing and actually think it's a reasonable idea for "consumer protection" or "preventing anti-competitive behavior" or some other talking point that I consider utter nonsense.
Its called "Regulatory Capture" <http://en.wikipedia.org/wiki/Regulatory_capture>. It does not require intense lobbying or backrooms deals. To one side (dealers), this is very, important. To everyone else it is off their radar. So legislators get skewed feedback.
In 2007 we almost had midwifes legalized (widely opposed by nurses and doctors). The legislator behind it used the obscure greek term "tocology" to slip past the opponents' "grep" filters.
Off-topic, that sounds like a dirty tactic I wouldn't support. But I wonder if you're also saying midwifes shouldn't be legalized, if so then your comment would be better received with a reason why.
I didn't mean to convey an opinion on legalization, just to give a flavor of how laws get made. If asked, I'd say check the states that allow midwifes from one of the national accreditors and see how it's going. If it isn't a flaming train wreck then give it a go. (There is an underground midwife trade in the state. I know people who have had assisted home births. It does put the midwife in an awful legal position if something goes wrong.)
I understand this particular piece of legislative manipulation is likely the product of some politically-connected dealers or auto lobbies. It does, however, work as a piece with an apparent fringe campaign that has been remarkably successful in lobbying against urban planning and mass-transit projects in the U.S.[1][2]
Based on some collective delusion loosely connected to a voluntary, non-binding U.N. resolution known Agenda 21, activists, mostly connected to the Tea Party and stirred up by such media personalities as Glenn Beck, have managed to successfully shelve these projects for reasons that can mostly be traced to their being supported by their (assumed Democratic) political opponents.
54 comments
[ 3.5 ms ] story [ 75.0 ms ] threadNot even arguing that Tesla should be allowed to sell cars without a dealership, why bother preventing direct sales from manufacturers, but only for this specific product category?
But in brief, there is basically a vested power that does not want to allow innovation to disrupt their highly profitable industry. They rely on some fairly outdated laws to protect themselves.
Back in the day, the dealers banded together so that wouldn't happen to them by making it law.
I can see that, for Apple dealers, it could be a major problem. Apple products are a specific niche, and you can't take your Apple dealer and turn it into something else with much hope of success. Selling PCs is a pretty different business.
But when it comes to car, surely selling Fords is much the same as selling Toyotas? If Toyota treated a dealership badly, why wouldn't they shop around for a brand that would treat them better? Is it that the American car manufacturing industry wasn't sufficiently competitive for that to work when these laws were being written?
http://ourisman.com/
http://www.koons.com/
http://www.lindsaycars.com/
The Tesla argument, which makes sense to me, is that since they have no franchise dealers, there is no reason to prohibit them from selling direct.
So they lobby the government that unless you protect us from the dealers, they will undercut our prices by selling directly to consumers, and we will have to lay off some of our employees, or go out of business. Then our small town won't have said dealerships anymore.
Especially now that we have the internet, these policies are antiquated and end up hurting consumers, by driving up prices. Without the middle-man, cars could be sold at lower prices.
1) design cars
2) design factories
3) manufacture cars
4) retail cars
So somewhere along the line someone figured out that cars are somewhat commodity, same as clothing or food. A grocery store sells several brands of food and department stores sell several brands of clothing. Cars could be done the same way.
Manufacturers liked it because it allowed them to grow much faster by selling franchise licenses and use that money for design of cars, factories and to actually build cars. It's an all around win.
But eventually manufacturers grow to the point where they aren't starved for capital anymore, have good market penetration and growth starts to slow. So a natural next step is to cut out the middlemen (the dealers who have paid franchise fees) and start direct-to-consumer sales efforts. This idea didn't sit well with the dealers who had paid those franchise fees and might have assumed they could amortize them over many years.
So laws got passed preventing manufacturers from competing with the dealers that they had sold franchises to.
But Tesla has never sold anyone a franchise ever. They're not doing naughty things to their former customers (the dealers) because they've never had dealers.
REQUIRING them to sell only to dealers doesn't make sense unless you're worried about Ford doing some kind of shady restructuring to get themselves out of all their dealer contracts and to start selling direct to consumers.
Labor unions started with positive intentions and were needed to protect workers who were often overworked and underpaid.
Now many feel that labor unions mostly exist to support themselves and make it harder on everyone from corporations to consumers and their effects aren't near as beneficial as they once were.
The internet has made direct-to-consumer sales a much more viable alternative and the car industry has yet to realize it.
By the way, cars aren't the only products sold this way. Try to buy a Stihl chainsaw or a John Deere mower without going through a dealership. Try to buy a traditional name brand mattress or piece of furniture direct from the manufacturer.
There is a start up born nearly every day trying to "disrupt" this business model.
There's nothing wrong with the dealership model per se, but it's troublesome when it becomes mandated by law.
The trick is that they are actually three different business models. Apple makes money on the phones. AT&T makes money on the phone contract. Best Buy or Radio Shack make money on the protection plans and accessories.
That type of behavior is what created franchise laws in the first place.
But make no mistake--this does happen to other types of franchises. These lawsuits simply don't make the news because they're not general-interest or (for HN) tech-interest events.
but also
(2) Car dealerships need expensive inventory of illiquid assets and franchise licenses. If the franchise contracts aren't well written (perhaps collusion between manufacturers prevents competition over franchise rights), then a big auto company can maximize profits by selling franchise rights and then a couple years later looking at volumes of sales for which areas it makes sense to set up their own stores and undercut the franchise owners. The franchise owners need to amortize their franchise costs, but not so for the direct sales shops. The argument becomes that the historical implication has been that in the auto industry selling local monopoly franchise rights has implied no direct competition from the manufacturers.
Perhaps a better law would be that no manufacturer with existing franchise owners in the state can have direct sales in the state.
http://en.wikipedia.org/wiki/Retail_floorplan
In particular, if a local franchise owner sees the manufacturer opening up its own store down the road, the franchise owner can't (in the absence of side agreements) tell the manufacturer to take back the cars because they want out of the business.
http://www.npr.org/blogs/money/2013/02/12/171814201/episode-...
Screw car dealers. Consumers deserve choice, and cowardly attempts to sneak in and remove it in the dead of night like this are horrible. May they all end up out of business and starving in a ditch.
My statement was as follows if anyone cars to piggy-back/draw inspiration.
Hello, I am a constituent and I'd like to voice my opposition to House Bill 1124 in its current form. It has recently had anti-competitive and anti-consumer language attached to it regarding the protections car dealerships receive from the state. If it passes in its current form HB 1124 will cost MO jobs and money by stifling competition and limiting choice in the car buying market.
Edit: Turns out my rep, Gary Cross, owns a dealership in my hometown. Seems like I'm screwed in terms of being represented.
For anyone curious, I found the bill. http://www.senate.mo.gov/14info/BTS_Amendments/?SessionType=... Page 31 and 32 appear to hold the money quotes, so check the underlined amendments on those pages.
I'm from Independence, but currently in Tacoma, WA. I have family there though so really interested in getting them involved.
For what its worth, Gary Cross at least has a degree in Automotive Sales[1] and has received campaign contributions from Dave Cross motors. I'd imagine the relationship goes deeper.
[0]http://www.davecrossmotors.com/
[1]http://ballotpedia.org/Gary_Cross
All the time, or at least as often as possible.
How much lobbying machinery and back room dealing is designed to achieve precisely this at any level of government?
All of it. However, it is also sometimes done for things you or I agree with.
Get as many people betting on you as possible, otherwise they could be convinced to bet against you.
In 2007 we almost had midwifes legalized (widely opposed by nurses and doctors). The legislator behind it used the obscure greek term "tocology" to slip past the opponents' "grep" filters.
Based on some collective delusion loosely connected to a voluntary, non-binding U.N. resolution known Agenda 21, activists, mostly connected to the Tea Party and stirred up by such media personalities as Glenn Beck, have managed to successfully shelve these projects for reasons that can mostly be traced to their being supported by their (assumed Democratic) political opponents.
[1] http://www.slate.com/articles/news_and_politics/politics/201...
[2] http://www.nytimes.com/2012/02/04/us/activists-fight-green-p...