Tesla will not be able to sell their electric cars directly to consumers in Michigan after Governor Rick Snyder signed bipartisan legislation on October 21st that clarifies existing state auto sales laws. Tesla has been fighting with numerous states to maintain their preferred, and successful, business model of selling vehicles directly to consumers, as opposed to the traditional method of selling to franchised dealerships that sell to consumers.
The Michigan legislation isn’t unique; forty-eight states have had laws in place for years that ban or limit direct sales of automobiles. In the early years of the auto industry, manufacturers needed a system to distribute cars to consumers – since there was no highway system – and provide regular maintenance, so they made agreements with dealerships. To protect themselves from the car manufacturers, the dealership owners formed associations and subsequently laws were enacted banning direct sales [Journal of Economic Perspectives]. Dealers argue Tesla is violating these same laws. Tesla has been selling to date by claiming the various state laws may not apply, but that issue is now being examined.
Last month the Massachusetts Supreme Judicial Court gave Tesla the green light after throwing out a lawsuit aimed at blocking their direct sales approach [Reuters]. “[The original law] was intended and understood only to prohibit manufacturer-owned dealerships when, unlike Tesla, the manufacturer already had an affiliated dealer or dealers in Massachusetts,” wrote Justice Margot Botsford.
Andy Gavil, Debbie Feinstein, and Marty Gaynor, of the FTC, seem to agree with the Massachusetts ruling: “Many state and local regulators have eliminated the direct purchasing option for consumers, by taking steps to protect existing middlemen from new competition. We believe this is bad policy” [FTC blog post].
Should states allow car manufacturers to sell directly to consumers? What are the costs and benefits of the current laws requiring manufacturers to sell to dealerships?