Tesla Could Be Poised For Big Win: FTC To Hear Pros & Cons Of Franchise Laws

[gnxs]

I spent the better part of yesterday morning watching video from the FTC event including the entire session that included Tesla's Lead Counsel. One thing stunningly obvious is that the only people against allowing a direct sales model are the ones with some sort of affiliation with dealers. Any lawyer, economist, or industry expert that spoke and had no "skin in the game" (no bias to either side of the argument) came down firmly on the side of Tesla's argument.

I particularly enjoyed the last speaker in the grouping that included Tesla's rep, I think his name was Dan Crane and he put into words exactly how I felt on the matter. He was also a strong contributor, as was Todd Maron, Telsa's Lead Counsel, during the Q & A session. The 2 most vocal dealership proponents in that session both seemed to fumble through their prepared script when speaking as it was obvious much or all of it was likely not prepared by themselves. To me they came off very badly although admittedly I am biased towards the Tesla business model. It was 4-5 hours of time well spent yesterday, but I'd love to see an edited version of the entire conference put together that's easier to move through.

 

[PeterK]

One other Autoblog article that summarizes the event - it also mentions Dan Crane, a University of Michigan professor: Is the FTC hinting it will change US auto dealership laws?

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And here's an FTC page with the agenda, speaker bios and slides: Auto Distribution: Current Issues Future Trends | Federal Trade Commission

 

[ecarfan]

I notice that other than Tesla and Elio no other car companies made a presentation. How amusing. The traditional automakers don't want to upset their dealers because currently they depend on them to sell their products. I suspect that privately they would prefer to sell direct but they will not admit that publicly.

 

[DrGuest]

In this article,"This is why Tesla is so insistent on selling direct to customers" ,

http://www.autoblog.com/2016/01/21/this-is-why-tesla-is-so-insistent-on-selling-direct-to-customers/

Todd Maron, general counsel for Tesla, explained why this issue is so important for the electric vehicle automaker.
Maron started his presentation this way:

Any discussion of why Tesla sells directly comes back to our mission. Our mission is quite specific. It is to accelerate the world's transition to sustainable transportation. You can say we're true believers and it wouldn't be an unfair characterization. That's our mission because we fervently believe that transitioning to electric vehicles is critical to the health of our planet and simply because we believe that electric vehicles are superior vehicles to their gas-powered counterparts. They're higher-performing, they're more efficient and they're safer than gas-powered cars.
​

 

[jgs]

I particularly enjoyed the last speaker in the grouping that included Tesla's rep, I think his name was Dan Crane and he put into words exactly how I felt on the matter.

Cool, I should watch that. I've corresponded with Crane a little, he seems like a good guy. I wonder if he'd like to go out for lunch with local Tesla owners sometime.

 

[jbcarioca]

I notice that other than Tesla and Elio no other car companies made a presentation. How amusing. The traditional automakers don't want to upset their dealers because currently they depend on them to sell their products. I suspect that privately they would prefer to sell direct but they will not admit that publicly.

I recall that on three separate contracts my consulting company was hired to advise a "major auto manufacturing company" on how to sell direct in the US. Each of them was a major manufacturer. Despite lots of effort all gave up the attempt. Quite a number of global car manufacturers have had exclusive distributivo with one importer or another, In the 1950's a guy named Max Hoffman acted as an exclusive distributor of several famous makes Max Hoffman - Wikipedia, the free encyclopedia and the most famous of them was Jim Moran https://en.wikipedia.org/wiki/Jim_Moran_(automotive)

You need not "suspect". There is a solid historical record to support a preference to go direct. However, their dealer networks are so huge and so well ingrained that it will not happen. So, naturally, if they cannot do it they do not want anyone else to be able to do so. Because car dealers are so wealthly and active politically (check Marco Rubio patron Norman Braman, for one) few have the courage to vote against their power. Texas and Michigan, specifically, will not give up just to serve the car-buying public. The politicans do serve their patrons, after all.

 

[McRat]

I put in a public comment on the FTC site supporting direct sales.

The main argument for the dealership model was to have service centers available. That didn't work here. My 3 closest dealerships for GM brands shut down. I used to drop off a car or truck and walk back to work at one time. Now it can be a 1 hr trip each way. I live in a heavily populated region with hundreds of dealerships.

What went wrong? The massive dealerships got all the new models first, and got them cheaper. This slowly but surely killed off the small and medium sized dealerships.

If the Dealership Model is to remain, it should at LEAST allow direct ordering from the factory, price is set, then I select which dealership I take delivery at. But that would piss off the Mega Dealers.

 

[Electroman]

Thanks gnxs, for taking the time to listen through and also come here and give us a synopsis. Appreciated.

 

[jbcarioca]

One other Autoblog article that summarizes the event - it also mentions Dan Crane, a University of Michigan professor: Is the FTC hinting it will change US auto dealership laws?

- - - Updated - - -

And here's an FTC page with the agenda, speaker bios and slides: Auto Distribution: Current Issues Future Trends | Federal Trade Commission

And here is the link to Dan Crane pubished paper on the subject. No surprise he had to go to Iowa to get it published: Tesla, Dealer Franchise Laws, and the Politics of Crony Capitalism by Daniel A. Crane :: SSRN

 

[tinm]

Gotta love this pro-dealer argument... it's a "war on car dealers" (I was waiting for the victim-card to be pulled)

http://freebeacon.com/issues/free-market-groups-feds-ignoring-evidence-in-war-on-car-dealers/

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This huge 8-hr FTC video is a bit unweidly, but I highly recommend viewing the panel session on "direct distribution" that involves Tesla.

It starts around the 5 hr 44 min timestamp:

https://kvgo.com/ftc/01-19-2016-Auto-Regulation-Workshop

 

[jgs]

Gotta love this pro-dealer argument... it's a "war on car dealers" (I was waiting for the victim-card to be pulled)

http://freebeacon.com/issues/free-market-groups-feds-ignoring-evidence-in-war-on-car-dealers/

Oh. Grover Norquist. Nothing more need be said.

 

[McRat]

Sidebar - Anyone been to Paris and seen the Car Boutiques on the Champs-Elysees? That is pretty cool. All brands have something like an Apple Store, but with no inventory of cars for sale, or service, just static demos, perhaps snacks and accessories.

You order via a kiosk IIRC.

I thought that was a very cool marketing concept. Never been to a Tesla outlet, but I imagine they are like that?

 

[gnxs]

And here is the link to Dan Crane pubished paper on the subject. No surprise he had to go to Iowa to get it published: Tesla, Dealer Franchise Laws, and the Politics of Crony Capitalism by Daniel A. Crane :: SSRN

I just read all 43 pages. Thank you, the link proved very informative.

 

[Objective1]

So sad. Norquist should defend economic freedom to contract, not oppose it.

 

[hobbes]

One other Autoblog article that summarizes the event - it also mentions Dan Crane, a University of Michigan professor: Is the FTC hinting it will change US auto dealership laws

Like this article!

Coming out of the meeting, the feeling that there might be a change in federal regulations at some point was strong. For now, this is a battle that is taking place only at the state level. See, for example, Tesla's efforts in Michigan, California, or Texas. There is a public comment period open until March 4, 2016. After that, we'll see if the FTC sends up any other signal flares.

 

[wdolson]

I put in a public comment on the FTC site supporting direct sales.

The main argument for the dealership model was to have service centers available. That didn't work here. My 3 closest dealerships for GM brands shut down. I used to drop off a car or truck and walk back to work at one time. Now it can be a 1 hr trip each way. I live in a heavily populated region with hundreds of dealerships.

What went wrong? The massive dealerships got all the new models first, and got them cheaper. This slowly but surely killed off the small and medium sized dealerships.

If the Dealership Model is to remain, it should at LEAST allow direct ordering from the factory, price is set, then I select which dealership I take delivery at. But that would piss off the Mega Dealers.

State laws vary, but in Washington you can order cars through a broker and have it delivered through any dealer you want. At least with the Big 3 automakers you can go to the fleet manager and get the fleet price for a car which is a fixed price, no haggling. With a fleet purchase you can either buy from dealer inventory or order from the factory.

I haven't bought a car since 1992, but when I bought my Buick it was through the fleet manager and the order went to the factory. When my SO bought her Subaru in 2012 she called around to all the dealers and pretty much did the same thing. Her car was a special order from the factory in Japan. It was actually a mix of trim packages which normally is never built.

 

[ggies07]

This huge 8-hr FTC video is a bit unweidly, but I highly recommend viewing the panel session on "direct distribution" that involves Tesla.

It starts around the 5 hr 44 min timestamp:

https://kvgo.com/ftc/01-19-2016-Auto-Regulation-Workshop

Thanks for the link and Todd nails it!

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Maryann Keller gives examples from the 90's and uses companies from the Big 3 to show how direct sales does not allow savings to customers, but her premise is faulty because Tesla, once again, does manufacturing quite different and better than the Big 3.

Oh, also, her other reasons would make sense if this was another ICE manufacture trying to sell a new car, but an EV is a completely different type of transportation, ergo, none of her data adds up.

 

[tinm]

Thanks for the link and Todd nails it!

I agree, Todd nails it totally.

In fact I wish there were a transcript of his statement because it is concise, specific, to the point, and utterly convincing and persuasive.

I'd like to be able to hand it out to any legislator or other official who in some way could change the laws in my state that's blocking me from getting service or enabling other state residents/taxpayers/voters from visiting a local Tesla store and buying a car.

 

[ggies07]

I agree, Todd nails it totally.

In fact I wish there were a transcript of his statement because it is concise, specific, to the point, and utterly convincing and persuasive.

I'd like to be able to hand it out to any legislator or other official who in some way could change the laws in my state that's blocking me from getting service or enabling other state residents/taxpayers/voters from visiting a local Tesla store and buying a car.

+1.

 

[tinm]

Dammit, what the heck. Todd Maron's speech is the single most important statement I have ever read on Tesla, it and its customers being blocked and harmed by anti-competitive, protectionist forces like the auto dealers and GM. Maron's speech was the pinnacle moment of the entire day at the FTC. Nothing else came even close.

Here. I typed in the whole transcript. Save it. Print it out. Hand it to people. Make use of it. It is compelling. it is convincing. It is like Todd was standing before the Supreme Court making the case for Tesla. It is that good. It's the climactic courtroom scene in a suspenseful Hollywood drama. We know what comes next: Todd doing a classic MIC DROP and walking out of the room with the same calm, dispassionate, business-like, try-to-top-that-I-dare-ya, manner in which he delivered his speech, followed by a swelling crescendo of music and then the newspaper headlines reading "Tesla Wins."

Read it. Share it. It's worth your time.

I'm gonna bold the whole thing because it IS bold.

January 19, 2016.
Federal Trade Commission, Washington, D.C.
"Auto Distribution: Current Issues & Future Trends" workshop

Panel Session on Direct Distribution of Autos.

Panelist Statement from TODD MARON, General Counsel, Tesla Motors, Inc.:

Good afternoon. Thank you for having me, I appreciate the FTC for inviting me here today to speak about this important issue, and Tesla's position on it. Any discussion about why Tesla sells directly, comes back to our mission. Our mission is quite specific: it's to accelerate the world's transition to sustainable transportation. You could say we're true believers, and it wouldn't be an unfair characterization. That's our mission because we fervently believe the transition to electric vehicles is critical to the health of our planet, and simply because we believe that electric vehicles are superior vehicles to their gas-powered counterparts. They're higher-performing, the more efficient, and they're safer than gas-powered cars. All of our actions track back to this mission, and our decision to sell directly is certainly no exception.

But before getting into the reasons why we chose to sell directly, it's important to appreciate the challenges that we face. In what is probably an obvious statement to everyone in this room, starting a new car company is hard. Just look at the record of the U.S. automakers. Putting Tesla aside, there have been zero successful car companies, new car companies, in this country, in generations. Even the Big Three have had their struggles, with Ford being the only one to never go bankrupt. So this is not easy. And that is all the more true for Tesla, because we're selling a new product, with a new technology, under a new brand, to a public that's unfamiliar with all of it. So it should come as no surprise that the traditional distribution system used by established manufacturers is not automatically the right one for us. We have unique factors at play here.

So why do we choose to sell directly? The answer is for a great number of reasons, and many have nothing to do with the traditional dealer model. They simply have to do with what we believe provides the best customer experience in our estimation, and our believe that in order to achieve our mission, we need to be the ones evangelizing for it. Not outsourcing that responsibility to someone else. Someone who's not a true believer.

But I'm also going to focus on the very many reasons why the franchise dealer model simply would not be viable for us. Here are seven key reasons.

First, traditional dealerships are in large, out-of-the-way locations. This wouldn't work for Tesla. It's why our stores are small, and often in high foot-traffic areas such as shopping malls. We do this for a reason. It's not surprising that when new technology comes out, consumers don't go to it, you need to bring the new technology to the consumer. That's a standard, well-accepted thing, if you go to any business school and learn about new products and new technology, you have to make it convenient for people.

Second, going back to the size point, traditional dealerships are large in size because they carry a lot of inventory. Inventory is the life-blood of a traditional dealership. But we don't have inventory in the same way. Our cars are custom-built for each individual customer. Meaning, they don't get built until they're ordered. This is unworkable, for the traditional franchise dealer.

Third, the franchise dealer model is based on a high volume of fast-paced sales where customers come in already having done their shopping and knowing what they want. Salespeople are then paid by how quickly they can close the deal. The longer it takes, the worse it is for the salesperson, and the worse it is for the dealership. We are different and have to be. Because we're selling a new product, there's an important education process for our customers who do not already come in, knowing what they want. They have many questions. Questions about how to charge at home. How to charge away from home. What is "range anxiety?" How am I gonna solve it? What are the incentives that are unique to EVs? What is the difference between the price of gas and electricity? How does the car actually work? What is regenerative braking? What is "dual motor?" For all these reasons our customers take a long time to study the car, it takes hours. Hours of a patient education process that only we can afford them and a traditional dealership model cannot. We do this because it's our mission to educate people, and we're the ones in the best position to do that.

Fourth, it is well-known that franchise dealerships derive relatively little profit from new car sales. Instead, almost all their profit comes from other parts of the house. Service and parts, trade-in and used car programs, financing products, insurance products, and other add-ons. We can't offer that to any franchise dealer, because we only profit in one way: from new car sales, and new car sales alone. We can't make profit from service, because our cars have far less parts than gas-powered cars. There are no regular service visits for engine tune-ups and oil changes. We don't have oil! We don't have an engine! We don't make money off of financing programs. We don't have insurance products or add-ons. A franchise dealer would look at this and just scratch their heads. They would not know how to make money in this model.

Fifth, traditional dealerships rely on manufacturers to fund their advertising, which we see on TV and the radio and in print media. We don't advertise. And we certainly wouldn't allow, let alone subsidize, someone else to advertise for us. What franchise dealer is going to accept not being able to advertise?

Sixth, and this is probably most important in terms of the economics. Franchise dealers could not make money selling our cars. Could not. And there's a simple reason why. If we, hypothetically, used a franchise dealer in a certain state, we would still be selling online, and in neighboring states we'd be selling from our customer-owned stores. Franchise dealers make profit from marking up the price of the cars sold by the manufacturer. If the franchise dealer marked up the price of our car, no customer would ever buy it from them. They would simply go to us and buy it for less, online or in a neighboring state. No franchise dealer would ever opt into this system for us.

Finally, number seven, there's a clear conflict of interest. Returning to our mission, we don't simply believe that EVs represent a nice complement to gas-powered cars. We believe it's imperative that they be replaced entirely by electric vehicles. Even if we wanted to outsource the responsibility of communicating this message, it would be impossible for traditional dealers to convey this adequately. This isn't a knock on them, but dealers are not fundamentally committed to the mission of EVs. WE are. And they make 99% of their revenue off of gas-powered cars. If you're opening a Yankee team store, are you going to ask a life-long Red Sox fan to manage it? And what if he's still selling Red Sox gear out of another store down the road, or even worse, in the same store?

You don't need to take my word for it when I say these factors make the franchise dealer system not viable. Many independent studies have been done including from Consumer Reports and others, and they've all showed that franchise dealers uniformly either decline to sell electric vehicles, or are simply ineffective at doing it. So this is not a matter of principle. It is, but it goes further. It's the difference between succeeding and failing, between fulfilling our mission, and not.

Now, in the few states where we can't sell directly, there's harm to consumers and I'm going to go through them quickly. But, customers have to travel out of the state if they want to touch and feel a car and learn about it. This is harmful to them. IF they wanna finance the car, they're unable to take advantage of the lower finance rates that we've negotiated for them -- with no profit to us -- we have relationships with banks where we've negotiated good deals for customers. We can't do financing in states where we can't sell directly. And overall basic economic principles dictate that when competition like us is excluded from the marketplace, prices rise, innovation declines, and the consumer is harmed. This is the very essence of why competition is so important and why monopolies are harmfull.

Now, there's one thing that there's just no dispute about. Consumers have weighed in on this. Surveys have been taken, and it is overwhelmingly in favor of our ability to sell directly. We put surveys on, I believe the 86% is the lowest support we've received in any of these surveys. Usually they're in the high 90s. Consumers absolutely want the choice of how they buy their cars.

Now, quickly I'm going to discuss the statutes. One might think that we're actually really disadvantaged here. That's not true. It's a very, very small minority of states that restrict our ability to sell directly. Most are all sensible, in my perspective, they regulate the relationship between two parties: the manufacturer and their affiliated franchise dealers, because as we've heard throughout the day, franchise dealers believe that manufacturers are prone -- their affiliated manufacturers are prone to doing unfair things to them, and so states have regulated that relationship. But of course that has nothing to do with us. States with laws that have a blanket prohibition on manufacturer direct sales are in the clear minority. It should come as no surprise, because dealer protection laws were never aimed at giving dealer monopoly over everyone else. They were framed at protecting dealers from specific actions from their own affiliated manufacturers.

Briefly I just want to show that in the rest of the world, this is not an issue. The only place where this debate ever takes place is in the U.S. We're totally unrestrained in our ability to sell anywhere else.

Now, our opposition comes from two groups. Primarily from dealer groups, and secondarily from General Motors. In my view and the view of many others, dealer opposition is driven by protectionist interest, and a desire to cement a monopoly on the distribution of cars. Other reasons have been provided, but they're all make-weight. None of them are correct.

With respect to GM, their position boils down to this: because they voluntarily chose generations ago to use a certain business model, everyone else that comes after should be required as a matter of law to use the same model. Now, that's code. That's code for "Tesla's able to sell the product to consumers for a lower price than we're able to through the franchise system, and we don't think they should have that advantage and be able to serve customers in that way, that is bad policy." Real quickly, I wanna show a quote that the CEO of General Motors just made. She said, "unlike some EV customers, Bolt EV customers never have to worry about driving to another state to buy service or support for their vehicles." This shows that their interest here is purely competitive. They're actually touting their ability to try to block us from selling directly, and then compare the fact that our customers can't buy our cars as easily as theirs.

In conclusion, on the flip-side of the GM and dealers, there's an extremely large tent of consumers, economists, legal experts, academics, policy think tanks, the FTC has weighed on this, it's universally in favor of our positions. In conclusion, whether you're interested in consumer protection and ensuring consumers have choice in how they buy products, whether you're interested in promoting competition in free-market principles, whether you're interested in promoting innovation and just think the best car should be capable of being sold, whether you're interested in protecting the environment: regardless of which of those angles you come from, you recognize that direct distribution, particularly for a company like Tesla, is critically important. Thank you.


MIC DROP.