The Corner

Tesla’s New Jersey Problem: Time to End Auto Dealers’ Plaid-Jacketed Cabal

I am no ally of Elon Musk’s. I have spent a lot of energy criticizing his companies, such as Tesla Motors, for accepting wasteful tax subsidies and government handouts under the guise of “green investment.” But I’m taking his side today, against the New Jersey state government’s incredible anti-competitive actions on behalf of the Garden State’s car dealerships.

If you think you can’t stand car salesmen’s antics now, just wait until you learn about the political shenanigans that these grinning auto peddlers use to squash competition and keep prices high.

This week, the New Jersey Motor Vehicle Commission approved new rules for new-motor-vehicle sales, prohibiting non-franchised, non-state-licensed businesses from selling cars in the state. Lacking any franchises or state licenses, Tesla was an obvious target of this shameless concealed cronyism — it will end all electric car sales in New Jersey next month.

Why did Tesla incur such wrath? Rejecting the outdated dealership model, Tesla instead aimed to sell their cars directly to their customers through their retail stores. But the company’s innovative distribution model proved too competitive for yellow-bellied market incumbents. The Wall Street Journal explains:

Tesla’s problems have their roots in decades of mistrust between independent car dealers and auto makers. Over the years, dealers have fended off efforts by the auto makers to set up company-run stores that could compete with them. The dealers have pushed for—and won—state legislation to protect their franchises.

Dealers fear Tesla’s model could cause directing selling to spread to other manufacturers, ending a century-old system that protects the sales territories and investments of many independent businesspeople.

Dealerships fear that one successful experiment with a non-traditional distribution model will beget another, and another, and another. Today Tesla sells cars directly to their customers; tomorrow Toyota could allow customers to create and buy custom cars online. It can’t be long before Ford and GM get into it too!

Well, actually Ford and GM have tried it. Again, the WSJ reports:

When Ford Motor Co. and General Motors Co. tried to operate some company-owned stores during the e-commerce boom of the late 1990s and early 2000s, dealers rebelled and the auto giants retreated. Auto dealers have so far stymied various efforts to use the internet to cut them out. You can shop online for a vehicle, but only a franchised auto dealer can actually sell you a car.

Another member of the Silicon Valley entrepreneur fraternity, Scott Painter, has learned hard lessons during the past year about the perils of challenging the auto retailing status quo. Mr. Painter’s made a splash in 2011 with a Super Bowl ad and other high-profile marketing of a car-shopping site that promised users they’d get the best local price from dealers in their area. In effect, Truecar’s site made it possible for dealers to compete for a sale by offering ever-lower prices.

As the profit-denting potential of the Truecar model hit home, Truecar encountered ferocious opposition from dealers – including some of the big chains – who said the site’s system encouraged bidding contests that threatened their profits. Dealers in several states charged that Truecar was violating laws regulating auto brokering, price advertising and related issues. Honda Motor Co. told dealers not to use the site. The number of dealers willing to transact through the site plunged to about 3,100 from 5,700, Mr. Painter said during a recent visit to Detroit.

The clash pounded Truecar’s finances, and forced Mr. Painter to spend much of this year overhauling his relations with dealers and the way the website works. You can read more about it at the WSJ’s Driver’s Seat blog and AllthingsD.

Car dealerships in America muscle a surprising amount of political clout. Quietly, under the radar, franchise groups have consistently worked to quash industry competition and keep the prices that you pay too high. Enough is enough. This small cabal of plaid-jacketed franchisees will simply need to learn how to compete – or find a new career path.

Now, it’s one thing for dealers to be upset and fearsome of competition. But when an industry lobbies the government to establish rules that protect incumbents by harming consumers and competitors, that’s called cronyism. And cronyism is bad, mmkay?

New Jersey’s regulatory action is a shameful maneuver that lawmakers, especially those who claim to support a free market, should absolutely oppose and repeal. Those who do participate will be at the mercy of their own ridiculous reasoning. They will claim that their actions will “help small business,” “protect consumers” and “create jobs,” but free-market advocates know better. Cronyism is corruptive and is a bad deal for everyone, especially consumers and growth. Over at the Examiner, Tim Carney drives this point home:

Scott Waldman at Capital New York reports that Dorman,

said the bill was designed to protect consumers because it required companies to create a storefront in the state and was not directed at Tesla because it sold electric vehicles. Some environmentalists have claimed the bill unfairly targets electric car manufacturers.

. . . So when you see a proposed regulation, never buy the credulous consumer-protection explanation. That’s probably part of the motivation of supporters, but you also need to consider how the regulation protects incumbent businesses and empowers government officials. I think Matt Yglesias (through whom I found this story) put it well at Slate:

Precise practices vary from place to place, but the general spirit of the regulations is that instead of a manufacturer selling cars to consumers, they should sell cars to dealers who mark them up and then divide the profits with state legislators.

Again, there are no true heroes here. While I wish that I could unequivocally defend Tesla in this fight, the car company unfortunately has its own spotty track record with free-market principles. Tesla not only continues to accept government subsidies and tax credits from federal and state governments, but also enjoys tax rebates provided to its customers, all of them at the expense of existing and upcoming competitors. Tesla may cloak itself in free-market rhetoric when it’s convenient for this New Jersey fight, but their track record shows the company will only stand for such “principles” when they’re on the wrong side of a barrier to entry.

Update: A. J. Delgado wrote about Tesla over on the homepage yesterday. 


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