Contact Us


Disruptive Competition Project

655 15th St., NW

Suite 410


Washington, D.C. 20005

Phone: (202) 783-0070
Fax: (202) 783-0534

Contact Us

Please fill out this form and we will get in touch with you shortly.
Close

Tesla, the Auto Dealers and New Jersey: Playing the Consumer Protection Card

· March 11, 2014

Categories

If you are a reader of DisCo, you undoubtedly know about the fight between Tesla and independent auto dealers.  To sum it up, independent auto dealers have successfully lobbied for laws in nearly every state that prevent manufacturers from operating their own dealerships (i.e. auto manufacturers must use an “independent” dealer to sell cars to consumers) – thus protecting the dealer’s privileged economic position as the middleman in the auto distribution chain.

Therefore, today’s news that the New Jersey Motor Vehicle Commission, with the backing of Governor Christie, reversed its previous course and voted to ban the direct sales of automobiles in New Jersey should not come as a surprise to anyone.  Unfortunately for New Jersey consumers, this puts Tesla’s future expansion in the Garden State in serious doubt and casts a shadow of uncertainty over the two stores it currently operates in New Jersey.  As the company describes the situation in its blog:

Since 2013, Tesla Motors has been working constructively with the New Jersey Motor Vehicle Commission (NJMVC) and members of Governor Christie’s administration to defend against the New Jersey Coalition of Automotive Retailers’ (NJ CAR) attacks on Tesla’s business model and the rights of New Jersey consumers. Until yesterday, we were under the impression that all parties were working in good faith.

Unfortunately, Monday we received news that Governor Christie’s administration has gone back on its word to delay a proposed anti-Tesla regulation so that the matter could be handled through a fair process in the Legislature. The Administration has decided to go outside the legislative process by expediting a rule proposal that would completely change the law in New Jersey. This new rule, if adopted, would curtail Tesla’s sales operations and jeopardize our existing retail licenses in the state.

The larger problem for Tesla is that the independent auto dealer model that has been statutorily enshrined in the majority of states thanks to the political influence of the car dealer lobby does not work well for the company.  As a company that, at least right now, only sells a little more than 20,000 vehicles a year (compared to 15.6 million cars sold annually in the United States), they don’t have the scale to support a nationwide network of dealers.  Furthermore, as Tesla’s CEO has previously referenced, Teslas are competing directly against nearly all the other gasoline powered inventory on the dealers’ lots.  Would independent dealers really be fully vested in disparaging the majority of their inventory in order to sell a few Teslas?  Probably not.

Although the dealers’ motivations for using political muscle to preserve their slice of the pie are pretty clear, they have publicly sheathed their arguments in the guise of consumer protection, as Jim Appleton, the head of New Jersey Coalition of Automotive Retailers, did today:

‘Tesla is a wonderful product but unfortunately the company has chosen an unwise and in New Jersey unlawful distribution method,’ he said.  Appleton explained that dealers protect consumers because ‘an auto manufacturer is congenitally incapable of fully and faithfully honoring warranty and safety recall obligations.’

This is straight out of the dealers’ anti-innovation playbook and, as you will see later, it is not original.  Bob Glaser, head of the North Carolina Dealers Association, made a similar argument in discussing his association’s push for even more restrictive legislation that would ban all Internet car sales from the manufacturer to North Carolina residents: “It’s a consumer protection [issue]…and why we say that a dealer who has invested a significant amount of capital in a community is more committed to taking care of that area’s customers.”   David Hyatt, VP of Public Affairs for the National Automobile Dealers Association, echoed a similar talking point when he said, “the franchise dealer network promotes public safety and instills confidence in the consumer that there will be a place to go when help is needed.”  See a pattern?

Another similar strain of this argument is that preserving the independent auto dealer promotes competition, which protects the consumer.  Bill Wolters, president of the Texas Auto Dealers Association, makes this argument in a recent interview:

‘Now to me fewer dealers drives the price up. Fewer dealers drives the service down. Fewer dealers make people less safe on the highways because I don’t have a dealer in West [Texas] to take recalls,’ said Wolters. ‘The price doesn’t go down when they have fewer outlets. And when they talk about the manufacturer being able to save more selling direct, there’s nothing that says they pass that along to the customer.’

The irony embedded in these arguments is thick, but at the core of this disjointed logic is that the American consumer needs to be protected against herself.  So, in the rhetoric of the car dealers, consumers should not be afforded the choice of whether to buy from an independent dealer or straight from the manufacturer.  I would further pick apart the economics of these facially ridiculous arguments, but Dan Crane, Associate Dean at the University of Michigan’s law school and one of the nation’s best antitrust/competition scholars, has already done that over at Truth on the Market.

Also, bear in mind, that the Consumer Federation of America argued against these very laws, along with a host of other laws lobbied for by car dealers, as being anti-consumer, which — as of 2001 — they calculated as costing consumers $20 billion a year; and the $140+ million dollars that auto dealers have spent on political contributions since 2003 is, in the end, coming out of the consumer’s pocket.

However, these “no really it’s about consumer protection” arguments are some of the oldest tropes deployed in the rhetorical fight against socially beneficial, disruptive innovation — innovation that just happens to threaten the pocketbooks of the incumbents.  Rarely are incumbents so brazen as to cite their true motives, at least publicly.

Recently, as we have discussed on DisCo, we have seen the mantle of “consumer protection” used to justify onerous and arbitrary restrictions on new internet-enabled business models as diverse as Uber, Airbnb, food trucks (also, see here), and hair-braiding!  However, these tactics go back even further than that.

Using “consumer protection” as a guise to lobby against technological progress and business model evolution is nearly as old as capitalism itself.  Early anti-rail interests pushed back against railroads, arguing that they were unsafe because — among other reasons — it was unsafe for human beings to travel so fast.  And in the 1920s, the Horse Association of America (HAA) was created to lobby against the automobile and give “reliable information on the use of horses.”  As one newspaper article from 1921, reading from the HAA’s talking points, stated:

If the extended displacement of horses and mules by motors resulted in economic gain to the nation as a whole, the campaign of the Horse Association of America to increase the production and use of horses and mules would not be warranted.  The Association states that ample evidence has already been secured to prove that in many instances, such displacement is economically unsound, resulting in less reliable, less efficient service at greater cost. Consumers, grain dealers and grain producers alike suffer from such substitution, which, according to a leading traffic manager in New York City, is due chiefly to ignorance on the part of business men regarding the actual cost of operating horse drawn and motorized equipment.

Of course, these are just a few examples of many, but they should remind consumers, regulators and politicians to be weary of such arguments.  As the authors of a journal article examining the lobbying efforts of the HAA put it:

This was a gigantic Schumpeterian confrontation as the defenders of entrenched methods appealed to popular sentiments and tried to capture legal and political institutions to forestall the process of creative destruction.

Sound eerily familiar to anyone?

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.