That is ridiculous. A car is a product like any other product that can be sold. Apple sells phones and MacBooks directly to the public. Outlet malls have clothing manufacturers selling directly to the public. The car dealerships is an outdated model and this is a sign that they are desperate. They are just suing because once the Tesla stores prove to be more efficient other car manufacturers will follow suit.
America has anti-trust laws. Companies are not supposed to be allowed to wield undue market power (e.g. be able to set the price of their type of product). Now this is obviously complex. But basically a lot of anti-trust battles led to the de-verticalization of numerous businesses: from film studios which owned theaters, to Standard Oil which owed oil, railroads, refineries, distribution centers, etc.
The idea is to make sure there is market efficiency, e.g. competition, in price throughout, so the consumer doesn't get screwed.
Now the idea of a franchise law like this one is done in a similar vain: it appears to ensure better competition for big car makers to bring their goods to consumers.
The problem is this law is written from a perspective of a couple major car companies that dominate the market.
There has always been an argument that a small player cannot be considered to wield market power, and that thus they should be allowed to be vertical. Apple for a long time avoided any anti-trust issues (while Microsoft didn't) even though it was very much vertical, by being small! Tesla presumably will use the same argument.
Bottom line there are two sides to laws like these: on the one hand, in Tesla's case, they seem anti-competitive. On the other hand they are made to bring about a kind of competition. Clearly the courts will need to resolve this...
Apple is anything but small... they passed Exxon earlier in the year as the world's most valuable company. They ship more computers than nearly any other company (save maybe HP).
So when do they start being big enough to be affected by this law?
I also find it interesting that you also compared them to Microsoft, since Microsoft is now opening retail stores.
A monopoly is usually a company which has price making power (on the whole industry) and has established barriers to entry that prevent competitors from entering the market.
The key reason Apple isn't considered a monopoly is that even though they are huge, they don't' have a monopolistic position in their products. For smartphones they have a market share of ~20% worldwide and in the PC market the hold ~5%. Even on the country level, the numbers never get to a level where people would usually scream monopoly.
You could argue that they probably have monopolistic market share on the tablet market but most wouldn't consider that an industry in itself (yet) and they haven't exhibited the characteristics of a monopoly: price setting for the industry and an inability for new players to enter the market. It's actually possible to not be considered a monopoly even with a huge market share if you can prove you don't control the industry.
Apple's normal business model allows them to thrive without being a high volume business; their per device profit margin greatly exceed any competitor, so they can still be hugely profitable with low market share.
I can recommend reading this paper[0] It discusses the history of the relationship between the auto manufacturers and their dealers and the reason why franchise laws now exist in every state.
Concludes that state regulation is necessary to the extent it neutralizes the disparity in bargaining power between the automakers and the dealers, but that current legislation no longer achieves this and only benefits the auto dealers.
Wait till you see the laws surrounding the sale of liquor and cigarettes. There are many protected industries, some protected for business reasons and some for tax purposes.
Tesla is not only upsetting the apple cart when it comes to sales but service; I do not agree with their service side changes because it takes choice out of the hands of the consumer. (disclaimer : I work for a parts distributor who happens to own repair shops too).
Dealers are rightly upset because the current system requires them to put up a lot of money in facilities that must be built to specific guidelines. Throw in having to meet manufacturer set requirements for sales and service they do have a large investment. Contrary to belief, the majority of new car dealerships are very good people who do go out of their way to help people.
Every now and then we see old laws being used by dying industries take a plunge at stopping innovation. Uber & Air B'n'B are two others that come to mind.
The bigger problem for the dying industries is that they're taking on companies that at their core solve problems and disrupt. As opposed to being pathetic and continuing to prolonge the inevitable, they should focus their efforts on product development/sales channels. Or maybe even become a little innovative themselves.
Its easy to say that at the macro scale, but what are you suggesting car dealerships do on the micro scale? Learn how to build their own cars and sell them in defiance of the current laws on the contingency that the judge rules in Tesla's favor?
I would like to see emerge a car-buying agent. The agent would deal with all manufacturers and used car lots (still a need for this) and help the buyer get exactly what they want at the best price.
However, there will always be some new car retailers because some people like to buy new cars in person and drive them immediately. I think the standards for sales staff will continue to change away from the old commissioned, "pal" model to the new non-commissioned, quant/car nerd model. It is a change that seems to be defining this generation of workers.
These agents actually exist. This is how my grandfather has bought cars in the past two decades. He gives the agent a set of parameters and the man shows up with a car my grandfather is willing to purchase.
Well, that is good to hear. I'll be looking for that service in the future. I would definitely expect it to take over some traditional auto sales business.
Such agents are common in the US, they are called "brokers". Brokers are especially good in negotiating with multiple dealers, and getting the exact car you want from the dealer with the lowest price by getting dealers to swap cars. Service can be very good; brokers will pick up the car from the dealer, truck it to you, and take away your old car. Brokers customarily arrange whatever financing the buyer wants. Brokers work around the stupid franchising laws by arranging the actual sale paperwork to be from the chosen dealer to the car buyer, with the broker collecting a commission. The nicest part of buying through an auto broker is that you never have to see or talk to a dealer salesperson.
The auto industry (in the USA at least) has a huge negative reputation for unethical conduct by the dealerships, especially in sales and service (for which they are claiming protection). It's going to be exceedingly difficult to find sympathetic jurors.
I couldn't agree more. I've heard _very_ few flattering stories from coworkers and friends over the decades of their experiences with car dealerships and their service.
When you factor in something unusual, like a Wankel engine, the experience gets exponentially worse. Just browse any RX-7 or RX-8 forum and you'll see nothing but horror stories whenever anyone asks "where should I have my car serviced?".
So much for the dealer's investment in "expensive equipment and training". They don't... they hire the cheapest labor that meets their loose requirements.
Now take that difference even further and eliminate the ICE and replace it with 6k+ Li-Ion cells with their own cooling system, an AC induction motor, high powered inverter and the related heavy cabling, and you're going to have massive confusion and problems in a dealer whose primary sales and training is for conventional vehicles.
Of course, a possible answer could be _exclusive_ dealerships with _extremely_ strict requirements for training and such, but I'm sure there are probably laws against that as well.
It was arguably better to keep them on life support as a means of providing a much more controlled transition from ICEs to EVs.
Ultimately, the ICE car companies still have the innovator's dilemma in front of them. It's not that they don't see the benefits of new technologies, they just don't have a path that allows them to maintain their current size and infrastructure at the same time.
A few of the things Tesla is capitalizing on:
1) Dell's "just in time" manufacturing.
2) Google's use of commodity hardware for scaling. Big iron servers vs linux boxes that can fail individual is like the the li-ion batter pack with several thousand cells vs large nickle-based batteries.
3) Toyota's quality based on open, healthy, workplace relationships that put quality ahead of quantity.
4) Apple's retail store model that seeks to inform without a pressure to buy using a simplified comparison model.
5) The benefit of being the disrupter instead of the disrupted.
6) Engineering focused leadership instead of sales focused leadership; a solid product sells itself.
7) Infrastructure to support interstate EV travel.
In time, the entrenched auto companies will likely fail or shrink to shells of their former selves. Much of what needs to change has been a problem for 30 some years and runs orthogonal to what they're used to.
Yes, we know for a fact it would be better because our ideology tells us that is true. We don't need to actually care about or measure specific outcomes, we can know all things just by applying the simple principle that "the market" is always right.
The alternative is to 'bail them out' -- either through strong and enforced-by-guns legislation in their favor, or the monetary kind to 'create jobs.'
I'm fairly certain we're all sick of private-industry and government colluding together in the name of state-sponsored profit. No industry deserves a guaranteed profit margin.
I agree that no industry deserves a guaranteed profit margin. I just think that if one believes an industry needs to die, then talking of innovation is really just a tease.
>why even say that the dealership industry needs to innovate?
You've misplaced the emphasis. It's the people working in the industry that need to innovate (by finding something else to do). The industry itself seems to be obsolete.
It's not the only choice, just the most likely one.
It's certainly possible for a business dedicated to distribution and sales to provide an experience superior to that of a manufacturer doing sales on the side. It's tougher in this case because cars are a big-ticket item, so manufacturers have an easier time justifying their own distribution and sales network than somebody who makes a trinket you need to sell at Walmart. However, the bigger problem is that car dealerships today are in no way optimized for providing an experience superior to anything.
Maybe manufacturers need to change dealer pricing structure. If they're paying millions for licenses, training and equipment, it sounds like the manufacturer treats that like a profit center. Dealers need to accomplish specific goals, if they're a franchise or company store.
Do their job better and compete. Nobody in his right mind will object Apple for selling in their own stores. Why should car dealers have such unfair advantage to prohibit manufacturers to sell their goods?
It is basically the same type of law that kept studios from owning movie theaters. Separating producers from local sales was a big thing. We can say it is a crap law but there were some very real worries and reasons that lead to it in many industries. Expect if the law is overturned that all the manufactures will replace local dealers with their own showrooms. This isn't about stopping innovation, it's about accumulated history.
As a modern example: look at luxotica for an example of a monopoly. They own large shares of the manufacturing and retail for eyeglasses, and they charge exorbitant prices.
They own Oakley, Ray-Ban, LensCrafters, Pearle Vision and Sunglass Hut. They also operate Sears Optical and Target Optical.
They also produce eyewear under license for names such as Coach, Anne Klein, Bulgari, Prada, Polo, Versace, Ralph Lauren, and Tiffany.
Below that in the price spectrum, there's Zenni Optical. I bought a $20 pair of glasses from them over a year ago & they've been very good to me. They aren't quite as stylish as Warby Parker, but they are still pretty nice.
Why does having a Walmart raise such ire in small towns? These types of companies expatriate dollars from local economies. I think that's the reason for the original laws.
Imagine that Ford only allows maintenance at company owned stores, because they don't sell replacement parts to dealers, then they charge $500 for a fan belt, etc.
Wait, how is this different from any consumer device that has a warranty?
edit:
e.g. let's say my apple laptop breaks, even if I could fix it or get it fixed by a third party for cheap, I have to take it to the apple store to not risk losing my warranty completely.
Well, many states have laws specifically for that: a car manufacturer's warranty cannot be cancelled just because the owner or someone the owner paid worked on the car.
The manufacturer's warranty can only be voided if the manufacturer can prove that the warranty claim arose directly due to the owner (or someone they paid). So if the owner changes their own oil and the rear bumper falls off? Warranty.
They have have advantages over non-manufacturer dealerships. For instance, parts would be internal and thus they may get them for just material cost which would allow for either lower service costs or higher margins both of which aren't available at non-manufacture dealerships. You could apply the same scenario to fully finished new cars as well.
To expand rapidly (play catchup is the modern term), GM started franchising car sales. No real protections other than the agreements. Then anti-trust laws intruded and it looked like franchising would be illegal (think Standard Oil), but later court cases clarified the difference between the franchise owner and the suppling company. The we go to stopping companies from owning the whole horizontal chain in some industries like theaters and stopping national companies from abusing the local franchisors (like car dealerships).
It is basically the story of stopping evil monopolies combined with need for companies to expand reach quickly in a non-internet world (see Singer sewing machines and GM) dovetailing into more anti-trust laws and then local job protection schemes meshed with laws codifying the 100 year old business model (we are talking stuff that started before automobiles).
Apple doesn't have a problem because they came after. If you think this is screwed up, then don't buy a boat.
"Tesla is choosing to ignore the law and then is choosing to play outside that system."
Is there a statement more indicative of the fear of innovation in archaic industries?
Let's hope that laws like this begin to vanish and clear the way for innovation.
If they don't, I'm sure Mr. Musk will find a workaround. They could essentially setup their retailing operation as a separate legal entity and work around this.
And that's what big auto needs to understand - legal ploys to stop progress will only be met with more legal maneuvers. How about cessation of belly aching and movement toward a change in the product and retail model?
The NPR story doesn't seem correct, at least according to my understanding that Tesla show room locations do not sell cars, only provide information about them. A car dealership is a business/location that sells cars, and Elon's argument is that a Telsa store does not sell cars and is therefore not a dealership. Sounds like defensible logic against the franchise lobby-law to me, but according to the NPR story a Tesla store sold a car. The law is ridiculous, but it is still the law.
According to the story: Mark Seegar claimed, "he walked past Tesla Motors' Bellevue, Wash., showroom. It's one of a handful of Tesla's company-owned stores. Within five minutes, he'd put down a deposit for an electric car that costs more than $50,000."
Tesla's site: "As it is, our Product Specialists could not sell you a car today under any circumstances, as Model S is already sold out several months in advance and there is no inventory on site. All they can do is get you to consider placing a reservation."
http://www.teslamotors.com/blog/tesla-approach-distributing-...
> Tesla’s stores are a bit different – essentially showrooms to gain consumer interest and education. For those impressed and wanting to buy, they’re directed to a computer to make their deposit and place their order.
Tesla here is clearly navigating on purpose through a gray area in which the customer is technically not buying anything from the show room.
(c) It shall be deemed a violation of subsection (a) of section 3 for a manufacturer, distributor or franchisor representative:
...
(10) to own or operate, either directly or indirectly through any subsidiary, parent company or firm, a motor vehicle dealership located in the commonwealth of the same line make as any of the vehicles manufactured, assembled or distributed by the manufacturer or distributor.
I can go to McDonalds and order an Apple computer by calling 1-800-MY-APPLE. I can also do so by using McDonald's wireless. If I don't have a computer or phone I can go to the library and use theirs.
Is McDonalds a Apple dealer because I can order an Apple from inside the restaurant? Is the city library an Apple dealer?
If the argument is true that this location, which does not accept money or purchases, and which does not deliver cars, is a car dealership, only because some people are using the internet to place deposits on cars with a company in another state, then the library and McDonalds are Apple dealers.
And furthermore, since I can also access http://carsdirect.com from the library and McDonalds, then under this principle, the library and McDonalds are both car dealers as well.
Look, you can throw up all the theoretical scenarios that don't relate to the specific laws all you want, but it does not change this:
does a car manufacture have a place displaying their car in which the car can be ordered.
Apple is not party to any of the car franchise laws (there are no computer franchise laws) and McDonalds doesn't make cars. We are talking about a case relating to actual laws.
"Let's say consumers really liked buying from a factory store. That would put dealers in a tough spot because they've been saying for years that the franchise system is actually good for customers," [Jeremy Anwyl] says.
I think he hit the nail on the head. I would say the franchise system is only good for the franchise owners, not the customers.
Indeed. I hate having to deal with car dealers. I can safely say it is one of the worst shopping experiences ever given that the purchase being made is one of the costliest things in my life. And I'm not referring to any particular thing going wrong during the purchase, just the whole experience feels like walking through a field of landmines of gotchas.
Has anyone ever had a good experience at a car dealership?
I remember getting my first car when I was 16. I was so excited, I drove the thing home and didn't realize the car mats weren't in it. I called the next day: "Sorry sir, Car mats don't come with used Vehicles. We do sell them though ($350!!!)"
The thought of car dealerships going out of business and being replaced by a better business model feels nearly too good to be true. Here's hoping its not!
Actually when I purchased my MINI I had a great experience. I walked into the show room and the salesman asked me if I wanted to drive a car (they only sold 1 car with 3 options for engine and suspension tuning at the time). I said yes, he took my license and copied it then handed me the keys. Told me to go down the road and where to turn to get to some relatively empty roads. Then said see you later. I took the car out, drove it and knew that day I was going to get the car it was just a matter of figuring out manual or automatic and which of the engine options.
Fast forward a few days I walked in and purchased the car. They have it ready the next day. Problem is they forgot the temporary plates and we didn't notice that. I drove it 40 miles home and then discovered the plates. The salesman drove the plates out to my home address on his way home from work.
The Volkswagen dealership I've dealt with was not too horrible (though this is also in Canada, where car dealerships in general have a marginally less awful repuation). I think it's a you-get-what-you-pay-for kind of situation, in that if you're not buying a used Sunfire or something, the dealer is less likely to have to screw you over to make a buck.
A coworker had problems with his Mercedes SUV, opposite end of the spectrum from a used Sunfire. He had it checked out and came back to the office in a very sour mood. I asked to look at the quote - they planned to replace the plugs, wires, and coils (V8) for $3,600! I looked at it closer and saw a very common game being played. They used the numbers "from the book" for the hours required for each replaced component as if you would replace each component individually and added them all up. In reality, if you're replacing the plugs, you're already pulling the wires, so it adds no time to the work at all (maybe a few seconds per wire). There's not much to add for the coils if you're replacing the wires either.
After much prodding, I managed to get him to get a quote at a non-dealer shop and when he showed the guy his quote, he pointed out the exact same cons that I did. End result, he saved 2/3 of the dealer's quote.
I could tell you other (bait & switch, rudeness, etc.) stories about BMW and Audi dealers, including a coworker's experience trying to buy a brand new one.
Exactly right, if the number of "straight from the factory floor" stores here offer any indication. They're turning into the record companies of car distribution.
This law is sure to go away. The fact is that the future of car sales is the internet.
Here is an excerpt from my blog: "According to a Polk and Autotrader.com study, 70% of new and used car buyers use the internet while shopping for their vehicle, with 58% of all buyers listing the internet as the most influential element in their car buying process. But the online car buying process doesn’t stop there. In fact, eBay Motors has sold 4.62 million passenger vehicles solely online since its inception."
What a dumb law. I wish I had a dollar for everytime the government tried to stop progress to protect big, archaic businesses (über, sidecar, lyft, Airbnb, you're with me on this one). Anyone smell corruption brewing?
Think about it. How can a government own a car company then legislate against other car companies? I know it's federal gov buying and local gov ruling in this example, but it's a slippery slope nonetheless. It would be like mark Cuban becoming the commissioner of the NBA while still the owner of the mavs. Anyone here think that would end well?
That's how I read it. Not that you've insinuated otherwise, but if you take a look at the requirements for starting a dealership, they're typically not 'small' businesses.
As a Swede I'm always amazed to hear about this type of US laws. I know Sweden represents socialism to Americans, but when it comes to this kind of intervention in the market it's much less accepted here than in the US.
In the UK, the Locomotive Acts[1] restricted speed and weight of autos and imposed signaling rules (cars had to be preceded by a walker with a red flag!) and required yielding to horses. Arguably, these laws hindered early automobile development and public acceptance and helped the development of railways and trams.
I'm not sure about the US, but by the early 20th century the American auto industry was on the offensive, setting up shell companies[2] to buy up and dismantle inner-city trolley lines.
--"Let's say consumers really liked buying from a factory store. That would put dealers in a tough spot because they've been saying for years that the franchise system is actually good for customers," he says. --
This is like saying the shit the horses leave behind is good for the road/environment and also smells nice. I think we all know the real answer.
Same reason we need any type of human salespeople -- sometimes people don't want to do all the research & comparisons by themselves and its nice to have someone guide you in the right direction.
Now - that being said - I don't disagree with the sentiment here. The traditional car sales model sucks and I think is ripe for disruption. But don't necessarily throw the baby out with bath water ;)
For example - I bought an espresso machine for a friend the other day. I called one of the better retailers out there and spoke to a super-helpful saleswoman who talked me through the various options, gave me differences between models, what's worth paying for and what's not, and based on my personal preferences, helped me pick the right one. It was a totally pleasant experience.
But what made it particularly excellent was that she wasn't (to my knowledge) pushing one particular brand/model. She had at her disposal about 20 different brands and guided me to the "best fit" based on my needs.
Maybe that's an opportunity for car dealers in the future -- maybe manufacturers sell directly and we get independent "car sales consultants" who don't work for a particular brand....?
After reading this, I think what I really object to is the sales process. The whole act of wheeling and dealing and never really feeling like you got the best deal.
I'm curious to know what other consumer products are sold through dealerships (In the continental US). Why would any law make it mandatory for a manufacturer to sell their items through a dealership. Just curious.
"FREE Butterball Turkey Certificate with every test drive!"
I got this ad in the mail today from a local Jeep dealer. Dealers clearly have no clue. Could you ever imagine Tesla thinking up such a dumb promotion?
The rationale I've heard is that consumers benefit from having a local service location for the brand. Based on that logic, the state limits the franchises to avoid "ruinous competition" (not my phrase) that would threaten that consumer benefit.
The first time I heard the phrase "ruinous competition" used this way, I nearly jumped out of my chair.
But this is why the OP mentions the challenge that Tesla will have in providing local repair service. If it can crack that problem, it may open the door to manufacturer shops of other car models as well.
These laws came into existence to protect dealers from predatory actions taken by manufacturers against the public interest. They have their roots in the Great Depression era when Henry Ford dumped inventory on dealers with "offers they couldn't refuse."
There is a huge imbalance of power in this relationship. Since their creation the statutes have been captured by special interest just like every other regulation.
Well, it creates jobs ... that aren't needed or helpful to others (they're not educating children or providing healthcare services) and inflates costs (profit and money for salaries).
