Direct-to-consumer auto sales: It’s not just about Tesla

A fundamental principle of competition is that consumers – not regulation – should determine what they buy and how they buy it. Consumers may benefit from the ability to buy cars directly from manufacturers – whether they are shopping for luxury cars or economy vehicles. The same competition principles should apply in either case.

For several years now, there have been reports of the challenges faced by Tesla Motors in selling its luxury electric cars directly to consumers. In state after state, the company has faced legislative and litigation resistance to its business plan to sell its products without using a network of third-party dealers like other auto manufacturers. Over the past year, FTC staff have urged in a blog post and comment letters to legislators that state prohibitions against direct consumer auto sales by manufacturers should be eased. Our point: States should allow consumers to choose not only the cars they buy, but also how they buy them.

Some states that closed the door to direct manufacturer sales, like New Jersey, have recently opened the door by a crack. Legislative changes there (and in several other states) now permit Tesla to operate a handful of direct sales outlets in the state. But the opening in the law is a tiny one—only a few outlets, and only for Tesla Motors.

Some other states, like Michigan, have gone the other way. In October 2014, the Michigan legislature passed and the governor signed legislation that made wording changes to strengthen the statutory prohibitions on manufacturer direct sales in that state. At that time, however, the governor said “[a] healthy, open discussion can and should be had over whether the current business model in Michigan should be changed” and encouraged the legislature to engage in such debate.

A recently-introduced bill in the Michigan legislature, SB 268, provides the opportunity for this kind of debate. The bill would ease the prohibitions for a product category known as “autocycles,” and would open the door for direct consumer sales by another potential new entrant in auto manufacturing.

Elio Motors has announced plans to manufacture an innovative low-cost, high-mileage, enclosed three-wheeled vehicle. According to announcements by the company, it plans to offer its products for a base price of $6800—less than a tenth the price of the cheapest Tesla Model S. The firm plans to manufacture the vehicles at a facility in Shreveport, Louisiana, beginning in 2016. As of March 29, 2015, it had accepted more than 41,000 reservations for the vehicles. Like Tesla, Elio Motors does not intend to establish an independent dealer network, but rather plans to pursue a direct customer sales plan to keep down the price of its products.

In a letter commenting on the Michigan proposal, FTC staff supports the movement to allow for direct sales to consumers—not only Tesla or Elio, but for any company that decides to use that business model to distribute its products. Blanket prohibitions on direct manufacturer sales to consumers are an anomaly within the larger economy. Most manufacturers and suppliers in other industries make decisions about how to design their distribution systems based on their own business considerations, responding to consumer demand. Many manufacturers choose some combination of direct sales and sales through independent retailers. Typically, no government intervention is needed to augment or alter these competitive dynamics—the market polices inefficient, unresponsive, or otherwise inadequate distribution practices on its own. If the government does intervene, it should adopt restrictions that are clearly linked to specific policy objectives that the legislature believes warrant deviation from the beneficial pressures of competition, and should be no broader than necessary to achieve those objectives.

Opening the door by a crack is a step in the right direction, and we urge policymakers in Michigan to take this small step. But beyond company-specific fixes lies a much larger issue: who should decide how consumers shop for products they want to buy? Protecting dealers from abuses by manufacturers does not justify a blanket prohibition like that in the current Michigan law, which extends to all vehicle manufacturers, even those like Tesla and Elio who have no interest in entering into a franchise agreement with any dealer.

Absent some legitimate public purpose, consumers would be better served if the choice of distribution method were left to motor vehicle manufacturers and the consumers to whom they sell their products.

*Marina is the Director of the Office of Policy Planning, Debbie is the Director of the Bureau of Competition, and Francine is the Director of the Bureau of Economics. The views expressed are their own, and do not necessarily reflect the opinion of the Commission or of any individual Commissioner.

Comments

Thanks for the letter to my representatives in Lansing and for this blog post explaining it. And nice to see a Tom Leary quote to show how old this issue is.

It's not just about sales --- you need to realize that it's usually about service too.

If a state bans direct manufacturer sales, they often also ban SERVICE of such vehicles. For example, I live in New Mexico. I own a Tesla. And I cannot get service for my car anywhere within the state. Should my car ever need service, a Tesla service rep needs to drive 6-7 hours from Denver or Phoenix to take care of my car. Which might mean transport it all the way back to Phoenix or Denver, repair it, then transport it all the way back to me.

Why is this remotely fair? Why should I, a consumer who bought an American-made car, have to endure such hassles and expenses and delays? Why does the New Mexico Automobile Dealers Association get away with this protectionist nonsense? How long must we wait until the courts and Congress steps in and stops this nonsense once and for all?

It isn't a part of Tesla's model to include a service facility at each showroom, which runs them afoul of may state laws. They prefer to rent space for their showrooms, which doesn't really indicate any real level of commitment. Auto dealers aren't allowed to do that in most states, and that has NOTHING to do with any dealer lobbying.

Why would the FTC allow its site to be used by employees who want to vent on a particular issue at cross purposes with FTC policy? This creates the perception that the FTC has positions it doesn't have. The headlines written on this are all wrong. The FTC dos NOT take this position.

In the promotion literature regarding the Elio it is clearly stated that Pep Boys will be the service contractor. Time to order an Elio?

They need to do what Elio is doing. Elio is teaming up with Pep Boys to service the Elio. I'm sure Tesla could do the same with some business.

Tesla built a "gallery" in Utah only to have it shut down when it was not granted a license after informal discussions with regulators indicated it would be granted. Now it appears that you can't even get a test drive, making it very difficult for Tesla to sell it's cars here.

I really hope Utah opens the door by a small crack too. Such a great car, great company, and consumers should have the choice.

Awesome i want one!

I think this is great

Great letter to the states. If they don't respond quickly by allowing Tesla or Elio to sell directly, then what steps will you take next to insure consumers rights are protected to buy as they choose? I currently own one of the first Tesla Model S in the state of Michigan and Tesla stock. The illegal law banning the direct sales is hurting Teslas business and the stocks value thus impending progress and fair trade. It's time to put your federal foot down and end this nonsense. Thank you

Exactly how can a law be "illegal?" What laws are you talking about. There is the perception that it is dealer sponsored franchise law that is an impediment to Tesla's business model. That's on a part of the equation.

Surely a Californian producer trying to sell in another state is conducting interstate commerce and subject to federal oversight? If so why is the FTC writing blog posts and letters rather than actually doing something about this issue?

Because this is NOT an official FTC position, that's why. Read the disclaimer at the end of the piece.

if the manufacturer abuses the relationship with the customer, the customer goes elsewhere: it's self-policing. What states like Michigan are doing to its citizens should be illegal. It's anti-competitive and anti-American. Innovate or die. It's how it's done. Build better cars, and treat your customers better. You're being shown how, and have Ben given the patents. Get to work and let your lobbyists take a vacation.

Well put. Laws such as those in Michigan, Texas, et al, that prevent direct sales like Tesla's are the worst kind of crony legislation. The legislators passing such laws should be ashamed.

The Constitution gives the Congress the authority to regulate interstate commerce. In such an obvious restraint of trade situation as this, would it be appropriate for the FTC to propose a legislative fix or does the 10th Amendment get in the way of Congressional involvement?

I feel this is how everyone feels except politicians, lobbyists, and the dealers. Let me buy my products how I want to purchase them.

Well written and concise.

Could not agree more. The millions in added cost to consumers that bring no value is unnecessary and further finances protectionism.

Protect the consumer not the dealer. Regulate product safety, not distribution. Let the manufacturers sell cars. This debate is so elementary that it only serves to higlight the beaurecratic backscratching that controls the automotive industry.

Well, stated - Thank you.

In addition by putting a bubble around a manufacturer's home state essentially, robs the employees and consumers in that area into thinking they are competing on a much lower playing field. Over time, this stunted competition harms the manufacturer and propels it to make less desirable and relevant products. Michigan has thought to have learned some tough lessons with ignoring Asian competition, not it is making the same mistake with another manufacturer down the street and one willing to share patents.

About time we get some pressure to change this protectionist policy. Dealers have been hurting sales and service quality and cost for far too long. It's time to gain some value for the consumer.

Thank you for your insightful comments on automobile manufacturer direct selling to the public.

There is a companion issue that is directly in the purview of Tesla, however. That is Tesla’s absolute refusal to make available its parts lists and service manuals/diagrams to the public and independent shops.

This issue should be equally of concern to the FTC. In fact, FTC’s support for direct-to-public selling should come with the quid pro quo of Tesla making its parts lists and service manuals/diagrams readily available to the owners of its cars.

Tesla will only make available its service manuals when forced to by state law and then only to state residents at a high cost. Apparently Massachusetts is the only state that requires it. See: http://www.teslamotorsclub.com/showthread.php/41396-Service-Manual-Subscriptions.

There are several reasons why automobile manufacturer parts lists and service manuals should be made available to Tesla owners and to independent shops. Tesla service only being available at a manufacturer-owned dealership appears to be somewhat of a restraint of trade. From a safety standpoint, having owners and independent shops working on an automobile “blind” to its part and service documentation puts both the car owner and the general public potentially at risk.

Posts like this on the Tesla Motors Club site are not uncommon http://www.teslamotorsclub.com/showthread.php/46223-Tailgate-Release-Actuator-Issue?p=1007900&viewfull=1#post1007900: "I am having an issue with the tailgate actuator not working. Does anyone have instructions how to remove and replace this part? I have Tesla sending me a replacement actuator but they won't supply instructions."

Tesla has now been selling their cars to the public since 2008. Yet, there are no parts lists nor service manuals available to owners of the cars. Is requiring Tesla to make available the parts lists and service manuals to its automobiles something that can be an FTC issue? Thank you.

I really think this is an interstate commerce issue. I'm not an expert but his does not smell right. Perhaps the states have no right to restrict a sale from CA to Michigan for example. Also, how can the state say that Tesla can not open a store in a state to sell and service a product? Is an automobile a separate class of product over any other product?

I have spent 40 years working for a automobile manufacture Yes we are given discounts but are forced to buy from a dealer close our home Buying a new car should be a fun and exciting experience It has never been for me First when a dealer finds out I get a employee discount I am treated poorly I have been lied to, document changed, my new vehicle damaged by the dealer and refused to repair, charged for recall work, In one instance I asked for a specific finance company because they gave me the best deal the paperwork was switched to another and ended up paying far more The last time I bought a new vehicle was 10 years ago I hate that much going to a dealer I believe the dealership community has become far to corrupt

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