The Full Tezt of My Comment Which Exeeds the 4000 Character FTC Form Limit.
Background: It is clearly understood that State Franchised Dealer laws were argued for and duly established, to prevent the benefit of investments made by Franchised Dealerships in establishing vehicle brands like Ford from being extorted by the brand owner after all the heavy lifting of introducing the brand to consumers had been done on their behalf. (Something that Ford in decades past famously tried to do to its dealers, whereby these laws were a justifiable response).
Relevant investments made by Franchised Dealerships (and that Ford and possibly others schemed to extort) included: Years of advertising, signage and other means of establishing and building the OEM's brand-recognition throughout consumer markets, staff recruitment and training for OEM brand-specific sales and service, investing in customer education, acquisition and brand loyalty and finally the franchise fee itself paid to the OEM and upon which the OEM had, to a significant degree, financed the building of its business.
Note that a company such as Tesla Motors Inc., has both generated cash on sales and supplemented it with debt and equity funding to cover all of these activities or their functional equivalents without any assistance from Dealerships. Unlike Ford and every other established vehicle manufacturer prior to Tesla, dealerships have no valid claim to have invested anything into a business relationship with Tesla and cannot therefore rationally or reasonably seek the support of the law for security of returns on an investment that they have not made.
In fact dealerships and dealership associations, if anything, have gone out of their way to hamper and disparage the business and brand of Tesla Motors Inc and sought to divert its customers. Far from having a claim to have obliged Tesla with value creation in good faith, in aggregate dealers have assumed the de-facto posture of a determined competitor to Tesla. Objecting to competition is, anti-competitive (not generally the sort of thing the law is supposed to uphold).
The kind of unfair competition that State Franchise Dealer laws were designed to guard against was specifically in relation to a form of unfriendly act that involved an OEM threatening one or more of its Franchised Dealerships with termination of product supply, essentially forcing them out of business, before seeking to purchase that dealership at a distressed price.
No version of this scenario is applicable to a company such as Tesla that has no third party dealers. It should be noted that there is no law created in anticipation (and for the prevention) of a dealership building cars for sale, which in effect describes the business of Tesla considering it has never assumed the OEM role in relation to a franchisee and has only ever occupied the dealership role in relation to the business of brand building, selling and servicing Tesla branded cars and has done from the outset. By making the cars too there is no residual benefit owing to a third party investment in any way related to the Tesla brand for the Tesla business to unfairly appropriate from any Franchised Dealer. Unlike any other established vehicle brand sold in the USA, Tesla has received the benefit of no such investment by a Franchised Dealer. None has occurred and as a result, in the absence of a perversion of justice, in the case of Tesla or any other company that has neither sought nor received any benefit from Franchised Dealerships, Dealerships have no just cause for complaint and no natural standing under the law.
In fact to apply the spirit of the law justly and evenly; Just like a dealership, a company like Tesla that has from the outset invested independently in consumer brand building and customer acquisition must be free enjoy the fruits of that investment in the consumer market on a level playing field with dealerships that have made similar investments, without undue hindrance and for exactly the same reason that Dealerships expect protection and not obstruction under the law: To honor and to protect that investment rather than to see it enjoyed unfairly by a third party. Case in point: GM, seeking to benefit unfairly from Tesla’s investment in consumer education by promoting its forthcoming electric vehicle as a Tesla competitor that is distinguished by being easier to buy than Tesla’s product in States where Tesla is prohibited from benefiting fully from interest stimulated by Tesla’s investment in the consumer market.
The blanket nature of these State Franchised Dealership laws (in some States preventing a vehicle OEM owning a dealership altogether), removed the opportunity for OEM's to explore alternative avenues to unfairly displacing their own franchised dealerships. For example by setting up shop next door to a dealer and absorbing the dealer’s investment in the OEM’s brand by selling identical product below the dealer’s cost of sales. Mis-applying and lobbying for amendments to these provisions to hinder the business of a company like Tesla in which dealerships have never invested and which in point of fact is a competing dealership, is clearly anti-competitive malpractice.
Observations:
The dealership contention that dealerships are consumer-affiliated counter-parties to OEMs in the matter of recall rectification work is not simply unproven (noting the point raised before the FTC that GM and Toyota recalls following a string of consumer casualties occurred in the context of the dealership business model, but more than that, the inherent conflict of interest is logically at the root cause of consumer lethality. This is because mandatory recall work is a source of uncapped liability to OEMs (in the form of uncapped bargaining power on the part of dealer service centers) making this the primary disincentive for OEMs to act proactively and responsibly towards consumer safety. This conflict of interest with external service agents is also the primary incentive for OEM's to fight NHTSA and similar agencies around the world to deny, contest and to delay acknowledgement of any requirement to recall a known defect and to threaten counter-suits against NHTSA and similar agency rulings until the timing of agency ruling are no longer predicated upon an urgent imperative to save lives but upon the time it takes to build a case to defend the agency itself in the event of an OEM law suit for damages as a result of the recall notice. This is a systematic failure and a recipe for disaster, practically requiring consumers to die before a mandatory NHTSA recall is finally issued and this pertains most especially to those cases that are known to have cost the most lives and have also dragged on the longest without action to rectify a known root cause. For example in the case of the GM ignition switch scandal, the delay in acknowledging the need for a recall was so excessive that it spanned a bankruptcy, $12 billion of net government funding and at least one complete change of senior management to finally admit it and to pay the government back approximately $38 million of its own money in the form of fines. If Tesla is a representative example of the behavior of a vehicle business with an in-house service model that lacks conflict of interest between attending to customer safety recalls promptly and avoiding the threat of third party dealership extortion in the event of a mandatory recall, such a model will likely save a great many lives when compared with the Franchised Dealership model in which that conflict of interest is central and most likely a tragic obstacle to responsible corporate governance.
The potential for uncapped liability to a third party dealership service network is also a source of severely delayed response while OEM’s negotiate with dealer associations such as NADA over the cost of rectification work. Conversely an entity like Tesla that operates service as a cost center is overwhelmingly incentivized to safeguard its reputation for customer safety with expeditious and pre-emptive voluntary correction of safety related issues and to do so at the earliest opportunity where expense is minimized and systematic correction is implemented at the earliest to prevent the expense of recurrence. This is not theory. Tesla has done this in practice in the case of a rear seat latch, titanium underbody shields and more recently a total voluntary fleet recall to check a seat-belt fixture upon discovering one incorrectly installed fixture out of 3,000 vehicles on hand. In all cases Tesla was able to perform a timely voluntary recall via its own compliment of service staff at trivial marginal cost, whereby the same check-up would be prohibitively onerous to acknowledge and to preform via third party dealerships and were in fact an OEM to simply ask its Franchised Dealerships to kindly check a seat-belt fixture during scheduled maintenance, this would most likely if not most definitely result in a dealer association such as NADA out of self-interest launching a frenzied petition for a mandatory NHTSA safety recall rather than for the OEM to simply receive low-cost and timely cooperation that would most expeditiously safeguard the lives of consumers - and encourage the OEM to launch responsible, voluntary and merely precautionary recalls in future.
As an adjunct to the first point, a direct client relationship between consumer and OEM in the case of Tesla logically enables that OEM to discover consumer issues expeditiously and first hand. In the case of Tesla the ability to operate deeply connected vehicles without objections from dealers based presumably on objections to the OEM gaining unfettered insight into warranty work overcharging - a traditional source of dealership revenues that is also argued for as an example of consumer advocacy while increasing the cost of warranty reserves and hence the price paid by consumers for all cars sold under that business model. Tesla is known to be able to detect and diagnose service related issues in advance of those issues affecting the consumer and to become aware immediately and with unfiltered data in the case of an incident (and in the case of a break-down or accident to proactively call the consumer’s cell phone to ask if they are ok). It is also the case that the direct distribution and servicing model eliminates an incentive to obfuscate root cause analysis in relation to multiple vehicles presenting with early and inexpensively rectified symptoms of a common design fault prior to break downs or accidents requiring expensive retrieval and repair at great benefit to the dealership and at great cost to the OEM (and that of the customer in terms of convenience and safety). For Franchised Dealerships there is no incentive for minor faults to be identified, rectified and designed out of future production expeditiously as opposed permitting minor issues to escalate to expensive repairs when left unreported.
As touched on above, the case for Franchised Dealers that they operate as consumer advocates in relation to warranty repair work does not hold water. A strong incentive to exaggerate the extent and expense of warranty repair work results in economic waste and essentially systematic corruption that favours undue value extraction by middlemen, initially at the cost of the OEM and ultimately to the consumer. The cost of excessive warranty work is aggregated by the OEM when calculating the warranty reserve incorporated in the cost of each new vehicle and charged to the consumer with profits. This practice harms the interests of consumers who must ultimately pay in aggregate for perfectly good transmissions replaced where technically the tightening of a bolt or the replacement of a seal would have sufficed.
The arguments of the merits of intra-brand competition is invalid in the absence of its unique frame of reference within the incumbent internal combustion engine vehicle technology market which presents an overwhelming incentive to construct a ‘razor and the blades’ business model (as credited to King Camp Gillette when he famously undercut the market for metal razor handles by focussing on price-gouging ‘locked-in’ consumers on disposable blades, often for years per handle). In the dealership business model the initial sale is the razor. Service is the blades. Without reliable service revenues in the case of an EV, the profit on the initial sale is no longer disposable - hence the irrelevance of this contention concerning intra-brand competition over initial sales price when it comes to EVs. With internal combustion engined vehicles initial price is not the true competitive domain. Service is, and this is typically obscured from consumers in the dealership business model by omission from advertising and in practice wherever possible throughout the entire sales process. So long as the consumer is held captive in a high-profit subscription-like business model then the profit on the initial sale is just a trading variable. There is of course a superficial incentive on the part of internal combustion vehicle OEMs to approve of this model whereby multiple dealers take product to market at suppressed retail margins while the OEM's wholesale margins remain largely in tact - and because the ICE OEM participates in the trade in high-margin OEM-branded service parts and upgrades suppled to captive consumers for years after the sale. Sometimes this razor and the blades principle is taken to the absolute extreme, for example the Hyundai Kia where low–cost cars are provided with a seven year warranty strictly contingent on all aftermarket work and parts being performed in captivity throughout. Nevertheless, all of the very considerable profits derived from this model to the extent that they are realized by dealerships in sales commissions, service labor charged often at considerably more than $100 per hour in excess of the actual cost of that labor and branded parts with enormous retail markups, this plus administrative and advertising expenses - and not expressed in terms of increased product quality nor cost reductions enjoyed by consumers, speaks to a lack of competition from alternative business models. Particularly the lack of competition from any business model seeking to sell an inherently high a reliability, low routine maintenance product. The Franchised Dealership business model has become universally exploitative of the auto consumer for decades owing to a lack of competition, specifically the kind of competition that Tesla represents - and it is this advent of free market competition from a customer-focussed low cost of service business model that is at the rational root cause of Franchised Dealership objections. Clearly not the interests of consumers, as consumers attest in each consumer survey presented.
Following directly on from point 5 above, it should be of interest to the FTC that traditionally ICE vehicles sold via the Franchised Dealership business model are advertised and sold wherever possible with total avoidance of the subject of servicing costs, which is in fact the primary source of dealership profits on ICE vehicles, the primary incentive to sell ICE vehicles to the consumer and the actual key metric of price competition between dealers (or would be in an efficient market in which consumers were correctly informed). Obfuscating on a point of secondary importance to competition (Initial sales price) is a recipe for consumer harm that should probably be addressed, for example in the form of requiring all new consumer vehicle sales from all sources (including Tesla) to prominently advertise full disclosure of comparable routine service costs per typical mile and typical year driven specifically to stimulate price completion on this metric. Pointing to intra-brand competition on initial price is misdirection and factually just the tip of the iceberg in a market where inter-brand (as opposed to intra-brand) service costs are effectively uncompeted at the point of purchase commitment - while intra-brand service price competition once consumers are captive and forced to seek routine maintenance services is far more likely to be non-existent, in other words cartel pricing published with the appearance of an MRSP by the OEM on behalf of a consortium of its Franchised Dealers as practiced by Ford’s ’Service Price Promise Calculator' for example which effectively promotes consumer acceptance of an uncompeted service price quote for redemption at any number of third party Franchised Dealer businesses affiliated with Ford. While acknowledging the just claim of Franchised Dealers for historical reasons not to be forcibly disintermediated by their affiliated OEMs whose brands and businesses they helped to grow, for parties interested in consumer protection, free market competition from new entrants with a new business model such as that represented by Tesla Motors Inc, cannot come soon enough. Obstruction of the latter for the benefit of the former is just unacceptable in a law abiding country.
Trusting this is helpful to the FTC's deliberations,
Yours faithfully,
Julian Cox
[email protected]
