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Want A Tesla? You Can’t Buy One Here.

· June 27, 2013

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The U.S. economy has seen its share of disruptive technologies derailed (at least in time-to-market) by archaic legal regimes. We looked most recently at Uber’s taxi-hailing service and Airbnb’s apartment rental innovations as examples. Most times it’s a case of old assumptions about consumer protection and competition having lost validity with changed circumstances. Other times it’s simple protectionism by legacy incumbents, as in the legal assault on Aereo’s IPTV streaming service for alleged copyright infringement. In the case of electric auto developer Telsa Motors, however, it’s something a little different.

Tesla logoThe problem for Tesla’s well-reviewed vehicles — Consumer Reports gave the new Tesla S its highest car rating ever — is not technical, as the California start-up boasts impressive lithium battery innovations and is aggressively building its own chain of recharging stations. Instead the constraint is a plethora of state laws (48 in all) that prohibit or limit automobile manufacturers from selling direct to consumers or owning auto dealerships. These statutes, which date to the 1950s, are matched by a federal law known as the “Automobile Dealers’ Day In Court Act.” That legislation is an anomaly which allows dealers (franchisees) to sue in their home federal district court and recover legal fees if a manufacturer fails to “act in good faith in performing or complying with any of the terms or provisions of the franchise, or in terminating, canceling or not renewing the franchise with said dealer.”  (These sorts of lawsuits would otherwise require a minimum of $75,000 at stake, would be governed by state law and would not have the threat of fee-shifting.)

As the Washington Post explained:

It hasn’t been a smooth ride for Tesla Motors in Virginia. Nearly two months ago, the electric vehicle manufacturer known for its six-figure price tags opened a gallery at Tysons Corner. Potential customers can check out the Model S, chat with employees and pick up a Tesla T-shirt or baseball cap. But they can’t buy a car.

Virginia law prohibits car manufacturers from operating their own dealerships, partly to encourage competition and protect consumers. So the California-based company is using the Tysons Corner location as a showroom where employees are forbidden from discussing purchases.

This is a glaring example of the kind of crazy public policy that would be extremely hard to get off the ground nowadays, but once entrenched is difficult to dislodge. There are auto dealerships all over the country, in part because of these obsolete statutes. That means most state legislators and all members of Congress represent a guy who owns a car dealership. Auto manufacturers, meanwhile, are headquartered in Michigan or Germany or Japan and, even though they’re much bigger than dealers, the dispersed and widespread nature of the dealer industry gives them extra lobbying ooomph. So much so that even a sophisticated state like New York considered and nearly enacted a dealer-sales requirement precisely in order to strangle Tesla in its infancy.

There used to be a societal preference in America for small-scale companies and “mom and pop” shops. Yet demographics, population growth, suburbanization and costs led over several decades to the demise of many of those in favor of big box retailers, national discount chains and the like. As a consequence, consumers in the United States are offered some of the lowest real prices in the world and an array of products that would put even Richard Nixon’s “kitchen debate” from the Eisenhower Administration to shame. Like it or not, an era of local pharmacies and grocery stores has given way to one of CVS/Caremark, Safeway and Wal*Mart.

From a purely economic standpoint, there’s nothing at all bad about that trend. From a social standpoint, one can differ, of course. But the problem is one of values, not scale, and choice, not prohibitions. We do not have a “druggist day in court act” or a “restaurant day in court act.”  Nor should we. Everyone cried at You’ve Got Mail, but not because Meg Ryan’s little family bookshop was closed after a Borders-type megastore opened around the corner. Where local, small, organic, chic and other contrasting values are promoted by smaller retailers and companies, the farmers’ market and local diner can compete well, on a level playing field, against supermarket and fast food chains. In the meantime, Amazon and Internet sales have disintermediated Borders and may be doing the same to Barnes & Noble now. And no one cried when Circuit City bit the dust, another victim of technological change and margin compression in the Internet age.

Conversely, auto dealers may be politically powerful, but their business model is just as poor as their reputations. Witness the success of CarMax and AutoTrader in quickly and fundamentally disrupting the used car market. For new vehicles, the patchwork of state constraints represents, as Steve Blank described in VentureBeat, simple “rent seeking.” Auto dealers look to the government and regulators as their first line of defense against innovative competition. They “use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants” and “create nothing of value.” It gets absurd sometimes. In North Carolina, the car dealership lobby literally said “You tell me they’re gonna support the little leagues and the YMCA?

Tesla is “trying to buck the system,” complains the president of the Arizona Automobile Dealers Association. Damn straight it is. The Justice Department concluded that the absence of direct and online sales adds as much as 9% to the cost of automobiles in America. The system is broke and should be sent to the scrapheap along with the fin-winged, white-walled, massively over-powered and polluting cars it was invented to protect. Consumers today need choice, price competition and customer service. What they do not need, even if they eventually prefer the hybrid Toyota Prius or Chevy Volt to Elon Musk’s fancy and very expensive electric vehicles, is state governments siding with incumbents whose mission is only to protect their own insulated markets from new competitors. And they certainly do not need special federal protection on top of a state-law system designed to reward politicians and shelter one of the most consumer-unfriendly sales industries in the U.S. from real competition and innovative change.

Tesla has just launched a White House petition drive asking for a national rule allowing direct-to-consumer automobile sales everywhere. But if Tip O’Neill was right that “all politics is local,” Tesla is nonetheless still going to have to slog through a long and extremely expensive 50-state battle to implement its business model. Wish them luck. In Tesla’s case, time really is money, lots and lots of it.

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.

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.