Regulating Tesla Motors: Protecting Consumers or Limiting Free Market?

Regulating Tesla Motors: Protecting Consumers or Limiting Free Market?

Tesla Motors hit a surprising roadblock last month when New Jersey Governor Chris Christie and the New Jersey Motor Vehicle Commission ruled that Tesla would no longer be able to sell directly to customers. Traditional car dealers claim that allowing Tesla Motors to sell vehicles without a middleman would leave defenseless customers at the automaker’s mercy.

Dealers say that forcing manufacturers to go through them encourages price competition. If you can buy the same make and model from several local dealers, the price goes down. If that argument is true, then why are companies like Apple, which sell directly to consumers, so successful? No one worries about the motives behind the employees at Apple stores. Does anyone feel protected when they go to a dealership and deal with a car salesman?

To really understand these laws against vertical integration, one must look back to when these laws were first instituted. Restrictions on direct sales took hold in the 1930s as the automobile industry matured, with the market seeing a combination of company-owned stores and franchise dealers. These laws were enacted to prevent manufacturers from monopolizing the market as well as to protect dealers, because carmakers could strip franchises from established dealers and give them to new ones without grounds.

Tesla Motors CEO Elon Musk took to his blog to explain how he thought the laws should be enforced.

“The intent was simply to prevent a fair and longstanding deal between an existing auto company and its dealers from being broken, not to prevent a new company that has no franchisees from selling directly to consumers. In most states, the laws are reasonable and clear. In a handful of states, the laws were written in an overzealous or ambiguous manner. When all auto companies sold through franchises, this didn’t really matter. However, when Tesla came along as a new company with no existing franchisees, the auto dealers, who possess vastly more resources and influence than Tesla, nonetheless sought to force us to sell through them.”

Arizona is one state that seems to agree with the CEO about these laws. A bill advanced through the Arizona Senate in mid-March that would allow Tesla Motors to sell its car directly to the public, instead of going through dealers. Arizona joins New Mexico, Nevada and Texas as the states that are finalists for the Tesla battery plant, where it and partners plan to invest up to $5 billion and create hundreds of jobs.

In protest of the New Jersey ruling, Musk even took a few jabs at Governor Chris Christie’s recent troubles with bridges — and New Jersey’s history of mob activity.
“The rationale given for the regulation change that requires auto companies to sell through dealers is that it ensures “consumer protection.” If you believe this, Gov. Christie has a bridge closure he wants to sell you! Unless they are referring to the mafia version of “protection”, this is obviously untrue. As anyone who has been through the conventional auto dealer purchase process knows, consumer protection is pretty much the furthest thing from the typical car dealer’s mind.”

Musk also stated that these state’s laws requiring Tesla to sell through independent dealers were a “perversion of democracy.” He recently blogged that car dealers “have a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none.”

In today’s age of almost full Internet access for everyone, people can be much more informed about their purchasing decisions. Every time you walk into a dealership, you have to match wits with a professional who is trained and spends time trying to get the highest possible price. The market is the best judge of what the price should be, not a middleman. These laws are a holdover from the 20th century when market power was in the hands of producers, not consumers as it is today.

Will Tesla be able to overcome the political clout that dealerships have? In the case of New Jersey Governor Christie allowed the dealers to stand in the way of capitalism’s “creative destruction.” Just as book stores had to learn how to innovate with the arrival of Amazon, so should the automotive industry permit consumers to buy the car of 2014 any way they want.