By on October 24, 2014

tesla-store-opening-in-westfield-mall-london-oct-2013_100444200_l

Bloomberg’s op-ed “Detroit Fights Innovation — Again” is not about the Detroit Three of GM, Ford and Fiat Chrysler [merger consummated Oct 12th] or even manufacturers, but about Michigan and (indirectly) automotive dealers. It makes the very tenuous claim that a ruling blocking Tesla from running company stores (which is in fact in line with existing state law) is tacit protectionism that represents a step backward. Indeed, the article implies that the restriction is ultimately aimed at preventing a Chinese invasion. In fact the policy is misguided because history shows that there’s no need to fear factory stores, at least as long as they’re not set up by a car company so as to undermine their own existing dealers.

First, there’s the red herring: China. The editors – there’s no by-line, though David Shipley is listed at the bottom – ignore that GM and VW are the biggest players in China, and that purely domestic firms are in a tailspin (Warren Buffett has thrown away a pile of money on BYD [比亚迪汽车]). The camel’s nose is well inside the tent: all of China’s major players are multinationals who already have dealerships spread across all 50 states. Indeed, two firms, Honda and Volvo, are already exporting from China. And the policy is to protect the Detroit Three? Don’t the editors realize that last month they held but 46% of the US market?

Second, the important point: multiple automotive firms in multiple countries across multiple decades have tried and failed with factory stores. If you read carefully, you’ll even find Elon Musk talking about defects with Tesla’s distribution model. A modern dealership is comprised of six interlinked businesses: new vehicle sales, used vehicle sales, used car wholesaling (trade-ins), finance & insurance [including warranties], repair services, and parts sales, both retail and wholesale. (Some add a seventh to the mix, body shops, which in practice are a very different business from service & repairs.) So a manager must handle trade-ins, push used car sales and otherwise place a priority on things other than selling new cars in order to make a profit. On top of that, dealers are in a constant battle over what sort of physical “store” is needed, how much and what kind of advertising is necessary, and many other decisions important from a financial or strategic perspective. All this requires an ability to say “no” to the factory. No company has ever granted the manager of a factory store that level of discretion.Note 1

More important for potential new entrants, independent dealers provide billions in financing to a car company, because they hold inventory. The real estate is theirs as well, again not a trivial investment. Any potential new entrant that needs a large distribution footprint — that is, any company outside of the supercar niche — can’t afford to ignore that. If Elon Musk wasn’t so good at bilkingmilking investors, he would need that money, too.

So the Bloomberg editors are accurate that Michigan — which is far from being in the vanguard on this issue — should not concern itself with Tesla’s retail strategy. They are however accurate for the wrong reasons: factory stores have been a bloodbath for all who have tried, and will remain so. In practice, independent dealers are critical to a car company’s long-run financial viability. Contrary to the editorial, it’s not incumbent car companies that should be concerned, or existing dealers. It’s Tesla shareholders and bondholders who should worry.Note 2


  1. The factory rep who has actually sold a car to a real customer is the rarest of creatures. To my knowledge there are none with the experience of running an independent dealership. Then there are incentives. A factory rep is not offered compensation commensurate with what the principal of a (successful) independent dealership can earn. Instead they work for a salary, and their career depends on saying yes to their boss. So both corporate incentives and practical knowledge stand in the way.
  2. In the past week Toyota sold some of its 2.4% stake while Daimler sold all of its 3.9% stake.
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124 Comments on “On Tesla, Michigan And Factory Stores...”


  • avatar
    Pch101

    The point of the Bloomberg op-ed is to object to the fact that GM is once again using the legislature and political system to keep out a competitor (in this case, Tesla in the state of Michigan), instead of beating back the rivals by making better cars.

    Detroit tried to use legislation to hold back the Japanese and the Germans, and ended up having their backsides handed to them. They would have been better off if they had just focused on pleasing the customer, but they spend money on lobbyists that could have presumably gone to R&D.

    • 0 avatar
      stuki

      It’s the American Way in the age of progressivism: All outcomes shall be decided by policy/politicians and law/lawyers.

      • 0 avatar
        VoGo

        Um, Bloomberg is an entrepreneur and business person first. Ever here of the firm he founded? It’s called…Bloomberg.

      • 0 avatar
        Pch101

        The law was supported by car dealers. Most of their campaign money goes to Republicans.

        Until the bailouts, most of GM’s political money went to Republicans. Rick Wagoner gave his 2008 contributions to Mitt Romney.

        I know that you aren’t fond of “progressives,” but you really ought to get your facts straight.

  • avatar
    Pch101

    The point of the Bloomberg piece is to object to GM’s use of the political system to keep out a rival (in this case, Tesla.)

    Detroit tried to use legislation to hold back the Japanese and the Germans, and failed miserably. They would have been better off if they had just focused on pleasing the customer, but they spend money on lobbyists that could have presumably gone to R&D.

    • 0 avatar
      Big Al from Oz

      @Pch101,
      I agree with your assessment of how the Big 3 operate.

      They influence and lobby the government, along with other interested parties, ie, UAW, energy, etc to maintain a stranglehold.

      This does take away from “free enterprise” which I’m an ardent supporter of.

      Maybe one day DOT, chicken tax, emissions fuel standards and vehicle design in the US will match what the majority of the world is doing as well.

      Once this occurs the consumer can feel confident they are getting the best possible deal. A strong consumer is a strong economy. It makes you wonder why thousands of dollars are thrown in the “cash on the hood” deals. The US taxpayer isn’t asking why are we protecting and subsidising this industry if they can throw money around like that?

      Now we can add to this the retail of vehicles in the US.

      I do think the US vehicle consumer could be on a better wicket.

    • 0 avatar
      Big Al from Oz

      Pch,
      I agree with your assessment of how the Big 3 operate.

      They influence and lobby the government, along with other interested parties, ie, UAW, energy, etc to maintain a stranglehold.

      This does take away from “free enterprise” which I’m an ardent supporter of.

      Maybe one day DOT, chicken tax, emissions fuel standards and vehicle design in the US will match what the majority of the world is doing as well.

      Once this occurs the consumer can feel confident they are getting the best possible deal. A strong consumer is a strong economy. It makes you wonder why thousands of dollars are thrown in the “cash on the hood” deals. The US taxpayer isn’t asking why are we protecting and subsidising this industry if they can throw money around like that?

      Now we can add to this the retail of vehicles in the US.

      I do think the US vehicle consumer could be on a better wicket.

    • 0 avatar
      Big Al from Oz

      Pch,
      I agree with your assessment of how the Big 3 operate.

      They influence and lobby the government, along with other interested parties, ie, UAW, energy, etc to maintain a stranglehold.

      This does take away from “free enterprise” which I’m an ardent supporter of.

      Maybe one day DOT, poultry tax, emissions fuel standards and vehicle design in the US will match what the majority of the world is doing as well.

      Once this occurs the consumer can feel confident they are getting the best possible deal. A strong consumer is a strong economy. It makes you wonder why thousands of dollars are thrown in the “cash on the hood” deals. The US taxpayer isn’t asking why are we protecting and subsidising this industry if they can throw money around like that?

      Now we can add to this the retail of vehicles in the US.

      I do think the US vehicle consumer could be on a better wicket.

  • avatar
    bimmermax

    You are absolutely right about factory reps!
    I know of only one who ran a successful dealership before going to work for a manufacturer.
    The ones who have gone from the corporate to the dealership level haven’t been good.
    Sooner or later Tesla will have franchised dealers.

    • 0 avatar
      FreedMike

      “Sooner or later Tesla will have franchised dealers.”

      And if they choose to do so, then great. Companies have to decide for themselves how best to serve their customers.

      But for now, their business plan is to sell directly to consumers, which companies have been doing for over a century now. They should have the right to operate the way they see best fit, unless there’s something inherently objectionable about their methodology…in which case I would suggest Michigan’s next target should be IKEA, or Brooks Brothers, or Sears, or Harry and David, or the hundreds of other companies that make products to be sold exclusively through their company-owned retail network, and have been doing so for a long, long time (almost 130 years, in Sears’ case).

  • avatar
    dal20402

    So if the independent dealer is the naturally correct model for car sales, why do independent dealers need extremely aggressive and anti-competitive franchise laws?

    Sorry, but the dealer model is broken, as the ridiculously poor customer satisfaction most dealers get (when surveyed fairly) shows. Most dealers don’t do a good enough job of service, in particular, to convince me that a factory option would be worse. And the sales model is terrible, particularly in the US — if I want a reasonable price, I have to pick whatever the dealer ordered, which is usually not what I actually want. I would like nothing more than to be able to order a car straight from the factory in my configuration at a set no-haggle price, and I’d pay a premium to do so.

    The path to get there is relatively straightforward; Apple did it for the electronics industry, and it would be possible to replicate their model almost exactly in cars if it weren’t for the franchise laws.

    • 0 avatar
      Pch101

      (I am going to plagiarize myself below in order to save typing and to provide a comment that can survive the very hungry spam filter. Forgive me.)

      The argument in favor of such laws is that the retail car business involves a relationship between franchisees and the multi-billion dollar franchisors that have more than enough money to crush those franchisees like bugs.

      What the franchisees don’t want is to have the OEM be able to cherry pick the best locations and to compete against or shut down the franchisee whenever the franchisee proves that a particular location is successful. Because a dealership is usually dedicated to one OEM’s products and parts, the franchisee is completely dependent upon that automaker (at least for the new vehicle sales and warranty repairs businesses.) If you invested seven figures into a business that could be destroyed by an eleven-figure company, then you might also be concerned about protecting your investment.

      I doubt that the dealers care much about Tesla per se. What concerns them are the other OEMs. Their concerns may be overblown, but that is what motivates them.

      It’s a franchise issue. If you want to see franchise abuse in action, then learning about the Subway sandwich shop chain can be educational.

      • 0 avatar
        dal20402

        Frankly, most of the franchisees have treated the consumer with such contempt that I have far less sympathy for this argument than I might otherwise.

        • 0 avatar
          Pch101

          That’s the problem with these discussions: Most of the comments here are motivated by the fact that people hate car dealers.

          I don’t care for them myself, but the issue of franchise protection is a different matter. The dealers have a legitimate concern; it isn’t cheap or easy to set up a new car store.

          You guys are upset with the wrong people. Blame your state legislators for their failure to create consumer-friendly laws.

          The contracts should be simple with the numbers clearly spelled out so that people know what they’re getting. What dealers hate most is transparency, but we should make them as transparent as possible.

          • 0 avatar
            dal20402

            The thing is, franchise laws do protect one party, but they do so at the expense of two other parties: the car company that might be able to derive additional profit from selling direct, and the consumer who has no alternative but to put up with the horrible dealership experience. To put the government thumb on the scale like that in favor of one group, there should really be some public or consumer benefit from it. And it’s awfully hard to see public or consumer benefit in the dealership model.

          • 0 avatar
            sirwired

            “I don’t care for them myself, but the issue of franchise protection is a different matter. The dealers have a legitimate concern; it isn’t cheap or easy to set up a new car store.”

            Yes, it’s a legitimate concern alright; one that should be addressed with the manufacturer during the negotiation process when a dealer chooses to purchase a franchise.

            Why is this a matter for state law at all?

          • 0 avatar
            Pch101

            “the car company that might be able to derive additional profit from selling direct”

            As noted in this piece, direct sales are generally a losing business for the OEM. GM supported the Michigan law because it helped to keep out a rival at no cost to GM; GM loses nothing by avoiding direct sales.

            The irony is that Tesla will find itself in the same situation if it ever becomes that large. The direct sales model costs a fortune, plus it limits the company’s growth. But in the short run, it absolutely needs a direct sales model.

            “the consumer who has no alternative but to put up with the horrible dealership experience”

            Again, blame your state legislators for their failure to protect you. A direct sales model provides no assurances whatsoever that they’ll be nicer to you.

          • 0 avatar
            Pch101

            “Why is this a matter for state law at all?”

            Because they lobbied for it. That’s how most laws get passed.

            States have a right to do that. If you don’t live in Michigan, then this isn’t your problem; if you do, then find other likeminded individuals and get the law overturned.

          • 0 avatar
            VoGo

            If direct sales are such a losing proposition, then why is there a Starbucks on every corner?

            Sorry, but I’m not buying it. Smart manufacturers would LOVE the ability to control the buying experience.

            Real estate costs? Not a problem – carmakers are already in the most capital intensive industry out there. They drop $4B just to update a major platform every 5 years. 300 franchises would not cost them even a single billion to set up.

            Sorry, but this is one area where I agree with the libertarians. Kill the franchise laws that only protect millionaire dealers and the politicians on their payrolls!

          • 0 avatar
            Pch101

            I’ve explained this before. The producer’s expertise is in production and development, not retail, and the margins are too low.

            Starbucks is an exception to the rule. Don’t cherrypick the exceptions if you want to understand the rule.

          • 0 avatar
            Dirk Stigler

            I don’t get the legitimacy of that concern. You seem to be focused on the transition period, which–yes–would be painful for existing dealers and their employees.

            But the manufacturer would take just as much risk setting up a new location (which IMO is very little–everyone I know is willing to drive 50 miles or more to get a deal on a car. What difference does location make?) in the direct-sales model. Retail is retail.

            Bloomberg is right. This is protectionism, straight-up. Or as economists call it, rent-seeking. And it’s not a case of WalMart versus mom-and-pop, either. The car dealer industry is dominated by holding companies that own dozens if not hundreds of dealerships. They are Giant Corporations every bit as much as any carmaker.

          • 0 avatar
            sirwired

            “Because they lobbied for it. That’s how most laws get passed.

            States have a right to do that. If you don’t live in Michigan, then this isn’t your problem; if you do, then find other likeminded individuals and get the law overturned.”

            Thank you, Mr. Schoolhouse Rock.

            Note the utter lack of me arguing that the law was somehow unconstitutional, or represented some illegal shortcut in the legislative process.

            I’m instead arguing that this law does not, in fact, well-serve the citizens of the great state of Michigan, and that the sole purpose of these laws is to force auto manufacturers to adhere to one, and only one, sales model, (to the benefit of campaign-contribution-showering dealers) and remove their freedom to even attempt anything else. All the while providing precisely zero benefits to consumers.

          • 0 avatar
            Pch101

            “You seem to be focused on the transition period, which–yes–would be painful for existing dealers and their employees.”

            If that was directed toward me, then I’m failing to see any reference to a transition period to anything.

            There are concerns about cherry picking. A franchisee doesn’t want to build a successful store, only to be punished for his success when the franchisor decides that it wants that location for itself. The franchisee takes the risk, only to have the OEM rob them of it when it has been proven to work.

          • 0 avatar
            Pch101

            I’m sorry that some of you don’t appreciate the joys of federalism, but this patchwork of laws is what happens when you have “states rights.” It is up to the people of Michigan to decide what they want to legislate.

          • 0 avatar
            VoGo

            Starbucks is an exception. Nike is an exception. Apple is an exception. J Crew is an exception. IKEA is an exception. Add them all up, and suddenly you have most of the mall.

            There is no reason that Ford or GM could not develop the expertise to do retail well, just like all the companies mentioned above did.

            Think about it: a decent retail experience and plastic panels were all that kept Saturn alive its last 10 years. And they didn’t even own their stores.

          • 0 avatar
            Pch101

            The mall proves my point. Most products are not directly retailed.

            And companies such as Ikea largely contract out the production. They slap their brand onto products made by others.

            In any case, for automakers, retail is a drag on margins. Go read the Reuters article that I posted on why Daimler wants to dump a lot of its company-owned stores in Germany. They don’t make money and they depress the value of the stock.

            There also isn’t much glory in retail. Companies like Daimler take pride in making design statements, not in dealing with the little guy, his rambunctious kids and his trade-in. Retailing is a different skill set that wasn’t really the life’s ambition of people who studied to be engineers and designers.

          • 0 avatar
            TrailerTrash

            Pch101
            Awesome work.
            It is writing like this that originally brought me to TTAC.
            Good job and wish folks would try to understand what you are saying.

          • 0 avatar
            05lgt

            “They slap their brand onto products made by others.” Would it be inaccurate to apply this to the automotive OEM’s? They assemble, they design, they specify, but most of it is made by someone else at some financial risk. Arguing that a law is good because it’s a law is pretty circular. The right way to fix it is, as you said, to rally like minded people to force a change to the unfair law. Step one: communicate with like minded people. Step 2: get abused by PCH101 for doing what he suggests…

          • 0 avatar
            Pch101

            “Arguing that a law is good because it’s a law is pretty circular.”

            Please don’t misquote me or take my comments out of context.

            What I said was that this is a state matter, so it isn’t the business of most of us who are commenting here. It is up to people who live in those states to decide for themselves what they wish to do, just so long as they don’t violate federal law while they’re doing it.

            I also said that I could understand why the dealers would lobby for such laws.

            I never said that I supported the law, at least for my own jurisdiction. Personally, I don’t. But I could make the case for it if I did.

            Similarly, the absolute naivete about this direct sales model is astounding. It doesn’t lower prices anywhere else — it raises them.

            Why people are expecting the laws of economics to be reversed by a company-owned store, I’m not sure. I understand that people hate car dealers, but be careful what you wish you for.

            “Would it be inaccurate to apply this to the automotive OEM’s? They assemble, they design, they specify, but most of it is made by someone else at some financial risk.”

            As the automakers take on most of the assembly and design work, I would say it’s not the same as just slapping a brand on someone else’s product. But you are right to point out that the suppliers do assume a lot of risk in modern automaking.

            But as I think about it, IKEA actually does produce a lot of the wood/faux-wood furniture, so they may be fair game to present as an example of a vertically integrated direct sales model. (I believe that it’s the other stuff that is made by others.)

          • 0 avatar
            ect

            “Companies like Daimler take pride in making design statements, not in dealing with the little guy, his rambunctious kids and his trade-in.”

            Actually, they do both. In Canada, Daimler (and a number of other companies) operate a mix of corporate stores and independent dealers. And everybody lives.

            The US market is rigged by dealers, who pay state legislators to protect them from oversight by the OEMs they represent.

            At the same time, I’m sure that no OEM wants to replace their dealer network with corporate stores.

            A good analogy might be the hotel industry, another capital-intensive business with which I also have first-hand experience.

            As a rule, hotel brands don’t want to own an operate most of the locations that fly their flag.They tend to own a few strategic locations in key markets that must be in, to protect that presence, and they will generally invest (as a minority player) in other projects they deem to be strategically important. Otherwise, though, they’re happy to leave the heavy lifting of the retail experience to franchisees/licensees.

            This limited retail presence allows the brand greater control over setting and enforcing the quality of the customer experience. Quality franchisees/licensees support this, and encourage the culling of low-quality operators they understand drive customers away and cost them money.

            In the US, state franchise laws, paid for by auto dealers, prevent this from happening in the auto market. The bad dealers are protected, and the system creates an incentive for dealers to gouge both the consumer and and the OEM – at the ultimate expense of the consumer (who can’t/doesn’t bribe legislators).

            In a free market, GM (for example) almost certainly wouldn’t rush to replace its dealer network with corporate stores. They couldn’t afford to, for many reasons. What they might do is open corporate stores in a limited number of showcase locations (as Apple does), to build their brand image and upgrade the expectation of the customer experience that people should expect from the dealers. For consumers, this would be a welcome change.

          • 0 avatar
            koshchei

            All of your points are well and good, but they ignore the basic premise of the article: Instead of letting a factory dealership inevitably fail in a free market because the cards are stacked against them (which is your argument), Michigan’s car dealer association paid the government to stop Tesla from being allowed to even try.

            If the franchise model is so superior to a factory store, let Tesla compete and lose. As a consumer, instead of being able to watch Tesla fail (as you predict), what I see instead is a bunch of slimy, uneducated ex-convict types so afraid of losing their racket that they’ll do anything they can to avoid competition on a level playing field. Ask yourself: Does that make me more or less likely to travel out of state to see what they’re afraid of? Compound that by the likelihood of me driving back in a Tesla that I otherwise may not have bothered with.

    • 0 avatar
      bimmermax

      dal, having dealt with factory types for over 20 yrs, trust me you don’t want them selling you cars. They truly do not care about their customers, only on moving the iron. Why do you think they don’t punish dealers with poor CSI?
      As for what dealers stock, they stock what you the consumer want to buy the most of the fastest. When you have millions of dollars in flooring costs that is the only smart way to manage inventory.
      Most American an European brands will let you custom order a car, no problem.
      1 price is a failure. Everyone says they are for it until its time to pull out the checkbook.

      • 0 avatar
        dal20402

        Good luck getting any dealer of an American brand, or even a Euro brand other than BMW/Mercedes/Audi, to actually let you custom-order a car at a reasonable price. You won’t get any incentives or decent financing offers, and chances are something will go wrong with your order.

        If the factory was in charge of retail sales, they would employ capable retail sales staff. Again, see Apple. No one thought a computer company could manage retail sales in the ’80s and ’90s. They staffed up, they invented a new model, and they got it right — exploding their sales in the process. I can go to an Apple Store and have a commonly configured Mac this afternoon, or I can custom-configure one online and have it at my door once it is manufactured and shipped. Either way I know the price I’m paying, and I don’t have to spend a miserable afternoon haggling with a salesman who won’t give me straight numbers and has to spend 15 minutes with his manager at every step.

        Admit it: the dealership experience makes people miserable.

        • 0 avatar
          bimmermax

          “Good luck getting any dealer of an American brand, or even a Euro brand other than BMW/Mercedes/Audi, to actually let you custom-order a car at a reasonable price. You won’t get any incentives or decent financing offers, and chances are something will go wrong with your order.”

          Generally not true. Some incentives are linked to cars already on the lot. As with anything in life, there is an opportunity cost.

          “If the factory was in charge of retail sales, they would employ capable retail sales staff.”

          Absolutely not true. The capability of a sales staff is directly linked to compensation. Salespeople at mass market brands make peanuts for the most part. Can’t compare an Apple store whose products only cost a few hundred dollars for the most part to cars costing thousands. if an iPad cost $30k the situation would be different.

          “Admit it: the dealership experience makes people miserable.”

          Also generally not true. while there are bad dealers there are also a lot of good ones. They generally charge more, so people are willing to put up with a bad experience to save a few bucks. Until consumers are willing to reward the good dealers with their money the bad ones will continue to prosper.

          • 0 avatar
            dal20402

            “while there are bad dealers there are also a lot of good ones.”

            I’ve had some honest and nice salespeople, but I’ve never had a good dealership experience. And it’s the model, not the people, that is the problem. It takes forever to buy a car at a dealer, the numbers are opaque, and there are always a bunch of unnecessary steps. I want a simple and fast process with clearly spelled out prices. I shouldn’t have to do hours of research just to figure out roughly what I should be paying, and then hours of haggling to actually get to that number.

            “Generally not true.”

            I’d like to live in your world. Unfortunately, I don’t seem to. My experience is that any dealer except a BMW/Merc/Audi dealer treats a special order as radioactive, and does them so seldom that there is a very high risk of error. The sales staff at dealers wants to sell what’s on the lot, and is reluctant to help you if you’re not going to buy what’s on the lot.

        • 0 avatar
          bball40dtw

          Dal-

          Ford will do it, but you are still limited to the build options (you can’t unbundle equipement groups and such). I ordered my C-Max, had it built exactly how I wanted it, received all available incentives, and received sub 2% financing from the dealer (chose extra cash off instead of the 0.9% because my loan is at 1.75%). No problems at all. It’s the only way I’ll buy a new car, unless for some weird reason this generation of SVT Mustangs are showroom poison.

          • 0 avatar
            dal20402

            I know you’re in the Detroit area. Sometimes I get the feeling that car buyers there just have more options than everyone else, maybe because so many of the customers are in the auto industry and there is more incentive for dealers to be accommodating.

          • 0 avatar
            bball40dtw

            Dal-

            Full disclosure:

            I asked five extremely large Ford dealers, in the Detroit area, if they would order me a C-Max without a deposit. This was before the C-Max hit lots, and ordering just opened. I was hoping one would just build one to my specs because they were going to need to order some anyway. Only one dealer said yes right away without giving me a hassle. I’ve purchased three cars from them now.

            I called them about a Mustang last week, and my salesman said that he’d special order anything except for a non-ST Fiesta or Transit Connect Wagon (he ain’t got time for things that don’t sell). I’m waiting for the 2016/17 Mustang SVT specs to come out.

        • 0 avatar
          heavy handle

          “Good luck getting any dealer of (…) a Euro brand other than BMW/Mercedes/Audi, to actually let you custom-order a car at a reasonable price”

          JLR will, and so will Volvo. Porsche is mostly custom-order, as are Rolls and Bentley.

          That leaves VW and Fiat. I’m sure you could custom-order a (Mexican built) Fiat, just like you can custom-order a Ram pickup. Don’t know about VW.

          • 0 avatar
            dal20402

            I live in Seattle. Half the people here drive Volvo XC90s. From what I’ve heard of our dealers I can’t imagine that they are helpful with custom orders.

            Forgot about Porsche — should have included it. Same with Mini.

            VW is on the Honda model, with so few build combinations that a special order rarely makes sense.

        • 0 avatar
          Syke

          Ah, the rub there is “reasonable price”. Who’s definition of reasonable?

          I can guarantee you, right now, that you can go to any automaker’s web site, design your car according to that site, print it out, take that printout to any of that manufacturer’s franchised dealers, and they’ll be more than happy to order that exact car for you.

          At the price that the manufacturer’s web site lists. All you need to do now is negotiate the value of your trade, put down your deposit, and wait the x-amount of weeks needed to have the car delivered. At which time you show up, give them your trade, pay the difference and drive off.

          Oh, that right. Under no conditions do you want to pay the manufacturer’s listed price. Your version of “reasonable price” is anything LESS than what the manufacturer is asking.

          The direct sales model is never going to happen as long as one customer is worried that someone, somewhere got the same car for less money than he did.

          Yes, the dealer experience is miserable. And we’re half the reason it’s so lousy. The other half is the dealer.

          • 0 avatar
            VoGo

            Try that with Hellcat.

          • 0 avatar
            dal20402

            “Reasonable” to me means “roughly the average of what people are paying for this car.” That is only MSRP for a few cars. Generally it’s anywhere from $1000 to $8000 less depending on the car. I would rather see a model where that average real-world price is the advertised price and is what you pay, just like most stores. Again like most stores, there might be sales under clearly understandable conditions like when existing near-obsolete inventory is getting cleared out.

            For instance, MSRP on a Chevy SS equipped the way I want is about $46600. Average transaction prices are around $44000, and if I could pay that for my special-ordered SS I’d be happy. I’d even be OK with a surcharge for certain configurations, specified by the manufacturer, that are known to be hard to resell. But paying $2600 extra for a special order shouldn’t be necessary.

      • 0 avatar
        FreedMike

        Then if this business model stinks, consumers will buy elsewhere. That’s how it works.

        And as far as automakers “crushing dealers like a bug” is concerned, dealers are the same group that has obviously bought and sold the executive and legislative branches of the State of Michigan for their own benefit. They’re helpless in all this? Hardly.

        Laws can be made to protect their interests, which are legitimate even if this episode is shameful. Protections can be built in so that Ford can’t just drop a factory owned store right next to Joe’s Franchised Ford. If I’m not mistaken, similar laws are in places for other franchisees.

        • 0 avatar
          Pch101

          If your local dealer got into a knockdown-drag out battle with the automaker, then he’s probably going to lose. Legal battles are ultimately about money; the guy with the most money wins because he can afford to keep paying the lawyer.

          It’s a David-Goliath issue, except that David is a bit of a jerk. OK, so he’s a big jerk.

          • 0 avatar
            TrailerTrash

            and this is why they have dealer organizations. If they band and lobby together, they have the strength to fight.

      • 0 avatar
        koshchei

        Bimmer: I think that’s the problem: I don’t trust you. At all.

  • avatar
    FreedMike

    For me, this issue boils down to one simple fact: the state of Michigan is telling an American company that its’ products can’t be sold directly to consumers, when there are HUNDREDS of companies who’ve already been doing this, some for literally a century or more, like Sears, or JC Penney. Have Snyder and the legislature never been to IKEA? Have they never been to a shopping mall, which is chock full of stores whose parent companies design and manufacture their own products and sell them through company stores, just as Tesla does?

    There’s some discussion here about whether this model will be good for Tesla, or for consumers, but that misses the point. For better or worse, Tesla has chosen this business plan, and they’ll sink or swim with it, just as thousands of other companies do. If consumers don’t like it, then they’ll buy cars from other companies. And this is how it should be, unless there’s something objectionable about it; if there is, then the legislature should be looking at ALL companies who sell directly to consumers through their retail outlets, not just Tesla.

    But we know that’s not what this is all about. In the end, this is about a state government being blatantly bought and sold, and an American company making products here in America, with American parts and labor, being shut out of an entire state. Tesla and its workers are being screwed for no particular reason. That’s disgusting for any state to do, but for this to happen in Michigan – which has probably suffered more than any other state because workers can’t find jobs – is incredible.

    • 0 avatar
      Pch101

      As I pointed out to you, for the dealers, it’s a franchise protection issue.

      If you had spent a million bucks or more on a store, would you want a vastly more powerful OEM to have the ability to destroy the value of your investment?

      • 0 avatar
        FreedMike

        Then pass some laws to protect these dealers from THEIR OWN MANUFACTURERS engaging in anti-competitive practices like opening a company store a block down the street and selling at cut rate prices. I’d get behind that. And clearly these dealers have enough political clout to make that happen.

        But don’t tell Tesla – or any other manufacturer without an established dealer base – that they can’t use the same business model with its customers that Sears, Freaking Roebuck and Co. has been using for almost 130 years now. That’s utter horsecrap.

        Let Tesla and its direct retail sale business model compete against the established manufacturers and their franchised dealer business model…and may the best company win. If consumers like Tesla’s way of doing business, it’ll succeed. If they don’t, then it’ll fail. But either way, the company will have had the economic freedom to come up with a business idea, implement it, and sink or swim. Isn’t that the way it’s supposed to be?

        • 0 avatar
          Pch101

          “Then pass some laws to protect these dealers from THEIR OWN MANUFACTURERS”

          That’s what they just did. It’s a slippery slope argument; they don’t want Tesla setting precedents for anyone else.

          • 0 avatar
            FreedMike

            “That’s what they just did. It’s a slippery slope argument; they don’t want Tesla setting precedents for anyone else.”

            Of course they don’t. And I have a two word reply: tough sh*t.

            Companies get to compete in this country, last I checked. If they’re scared of Tesla, then they should spend their time and money improving their own game, versus buying off elected officials to prevent Tesla from playing at all.

            And that should be true no matter how much money these guys spend to buy government officials.

          • 0 avatar
            Pch101

            This is a state matter. Unless you live in Michigan, then it’s not really your problem.

            If you do live in Michigan, then find others who agree with you, form a grassroots organization, and fight it. (No, I’m not kidding. Give it a go. Perhaps Tesla would help you to bankroll it.)

      • 0 avatar
        sirwired

        “As I pointed out to you, for the dealers, it’s a franchise protection issue.

        If you had spent a million bucks or more on a store, would you want a vastly more powerful OEM to have the ability to destroy the value of your investment?”

        Really? Do you mean to say that dealers, as a group, are so utterly boneheaded as to not negotiate sales territory agreements into their franchise contract when they purchase the franchise? (That’s a pretty common part of franchise agreements.) If that’s the case, then they are simply horrible negotiators. That’s not the job of the law to fix.

        I’m pretty sure this has nothing to do with protecting dealers against the current manufacturers and everything to do with the dealers, as a group, wanting Tesla to sell through franchises so they can get a hold of the retail profits instead of Tesla.

        • 0 avatar
          bimmermax

          “Really? Do you mean to say that dealers, as a group, are so utterly boneheaded as to not negotiate sales territory agreements into their franchise contract when they purchase the franchise? (That’s a pretty common part of franchise agreements.) If that’s the case, then they are simply horrible negotiators. That’s not the job of the law to fix.”

          A few years ago Chrysler had to close 2 factory stores in CA that violated the franchise agreements. They were found to be in violation of the state law.
          Without the legal protection, those stores would still be there.

          • 0 avatar
            sirwired

            “A few years ago Chrysler had to close 2 factory stores in CA that violated the franchise agreements. They were found to be in violation of the state law.
            Without the legal protection, those stores would still be there.”

            If the factory stores were in violation of the franchise agreements, no special law (barring manufacturers with NO franchises) is necessary; plain ‘ol contract law will suffice.

        • 0 avatar
          Pch101

          “That’s not the job of the law to fix.”

          Unless it violates Michigan’s state constitution or some other Michigan state law, it is up to those who are in Michigan to decide what the state’s laws are supposed to fix.

        • 0 avatar
          Pch101

          “I’m pretty sure this has nothing to do with protecting dealers against the current manufacturers and everything to do with the dealers, as a group, wanting Tesla to sell through franchises so they can get a hold of the retail profits instead of Tesla.”

          In the scheme of things, Tesla sells a tiny number of cars. Not enough business to worry about.

          The worry is that some automakers do have an interest in direct sales. (GM and Daimler don’t, but there are others who feel differently.) A dealer doesn’t want to build up a successful location, only to find the OEM putting the squeeze on it because it wants that action for itself.

          This sort of thing does happen to franchisees and it’s costly for them when the producer uses its leverage to take them down. Don’t assume that franchisors are all a bunch of great guys who won’t cherry pick when it suits them.

          • 0 avatar
            28-Cars-Later

            What about existing situations where there are franchisee owned locations and corporate owned ones? (i.e. grocery stores)

    • 0 avatar
      Fred

      Basically I agree with FreedMike, the real issue to me is not if Tesla can sell cars directly, but how legislatures are influenced by lobbies and their money.

  • avatar
    stevelovescars

    I still believe that Michigan law did NOT prohibit factory owned stores in the past and Governor Snyder’s justification letter is just full-on BS. The laws on the books protected franchisees from having to compete with the manufacturers of their products. They should have, and until now, only applied to manufacturers who already had franchises selling their cars.

  • avatar
    Acd

    For all of the people who hate franchise dealers here’s how you can have the same experience that factory stores offer: just pay full retail for the new car, figure out how to dispose of your old car on your own and arrange your own financing. Problem solved.

    • 0 avatar
      dal20402

      But even if you wanted to pay full retail for a new car (which is inflated to give dealers room to screw people over) you still have to waste your time with the dealer.

      There’s no reason that manufacturers selling direct couldn’t arrange their own financing and accept trade-ins.

    • 0 avatar
      sirwired

      Seriously?

      Do you mean to say that carmakers, if they set up their own stores, would utterly ignore the trade-in process, and not offer consumers financing (even though the automakers ALL have large financing arms?)

      And as far as paying “full retail” goes… why would a factory-owned store never run sales of any kind?

      None of what you listed is some sort of insurmountable problem that can only be solved by franchises.

    • 0 avatar
      VoGo

      ACD = Apologist for Car Dealers

    • 0 avatar
      FreedMike

      And if it is about “hating dealers,” consider this for a moment: these folks bought off elected officials to bar an American company that’s selling American-made products in a state where “buy American” is a big deal.

      How, exactly, does this diminish the hate?

    • 0 avatar
      RHD

      Financing: A quick visit to your local credit union. Not a problem!
      “Dispose” of old car: Craigslist. Easy for all but the most tech-ignorant and agoraphobic.
      And even if you had to pay full retail for the car, you just got a better deal on financing than the dealership could offer you, and you didn’t get hosed on the trade-in. You also didn’t have a four hour process of running the gauntlet of sales/add-ons/finance at the dealership.
      What’s to be afraid of?

  • avatar
    VoGo

    If manufacturers could sell direct, the business model would change radically. Dealerships would no longer be warehouses for 2-3 months’ worth of inventory with an attached storefront full of sharks paid on commission. Inventory would be limited to what is needed for test drives. People could order online or at the store, and then 3 weeks later their vehicle would be delivered to their homes on a flatbed.

    A buying experience like walking into an Apple store. No overhead to store vehicles nobody ordered, which then need to be discounted to move the metal. No expensive sales reps, just a few Chevy “geniuses” to give advice.

    Gains to the consumer: fun buying experience; zero haggling -= just pay MSRP minus any incentives. Everyone pays the same price, which would be lower than today’s price, and minorities, the mentally challenged, less well informed and elderly no longer get ripped off.

    Gains to manufacturer: they finally get real data about what consumers want, which they can use to improve their product and optimize production. Equals more profits.

    Why is this so hard?

    • 0 avatar
      bball40dtw

      Upsetting an entreched industry and lobby group can be difficult. Look how long it took for banks to post items as they were presented instead of reordering everything at night.

      • 0 avatar
        VoGo

        You’re right bball.
        No politician at the state level appears to be incented to fight the good fight on behalf of his constituents.

        • 0 avatar
          bball40dtw

          I know the State Senator that slipped the altered language into the bill. His wife is a lobbyist that has automotive dealers as clients. He is up for re-election, but I don’t live in his district anymore.

          This same State Senator opposed Medicaid expansion that Michigan was going to pay for, due to the Afforadable Care Act, even if it didn’t expand Medicare. He called the expansion of Medicaid benefits, that gives poor children dental coverage, “nauseating”. At the same time, he sponsered a bill that let kids younger than 10 carry firearms. No dental, but you can have guns.

          He also voted against all of the bills to fix Michigan’s roads, raised 90% of his campaign funds from PACs, frequently sponsers and votes on bills put forward by his wife’s lobby firm, and says that he hasn’t seen any evidence that unisured people using the ER for colds drives up health care costs.

        • 0 avatar
          koshchei

          “No politician at the state level appears to be incented to fight the good fight on behalf of his constituents.”

          No politician anywhere. They don’t mind invoking the “will of the people” when they’re campaigning, but the rest of the time, they’re actively afraid of their constituents.

    • 0 avatar
      danio3834

      “Why is this so hard?”

      Indeed. It’s already been pointed out several times in this thread and the other recent one why most of that scenario is unlikely to come to fruition and that manufacturers have little to no interest in actually doing it. It’s not as if it hasn’t been tried by mainstream auto OEMs. They did, it sucked, so they stopped.

    • 0 avatar
      bimmermax

      “If manufacturers could sell direct, the business model would change radically. Dealerships would no longer be warehouses for 2-3 months’ worth of inventory with an attached storefront full of sharks paid on commission. Inventory would be limited to what is needed for test drives. People could order online or at the store, and then 3 weeks later their vehicle would be delivered to their homes on a flatbed.”

      What basis in fact do you have for any of this?
      Car companies exist to build as many cars as they can. They aren’t suddenly going to want to build fewer cars. Union contracts often stipulate useage rates at the factories. CAFE requirements mean that you have to build a ton of econo cars that nobody wants in order to sell the profitable trucks and SUV’s. Car selling wouldn’t change. Whether the person is paid on commission or salary, their pay would still be factored into the price you pay.
      The price of cars wouldn’t go down. the car companies would have the expense of building and staffing a sales location. Average cost for a dealership building, land, furnishing, computers, service equipment etc is over $10 million. You would need a minimum of 100 locations across the country for proper coverage. That’s a BILLION dollars.

    • 0 avatar
      Pch101

      The franchise system exists because the OEMs invented it. They aren’t hapless victims of it, they created it.

      The system that you want would be less profitable for them, on a lot of levels. What you want does not match what they want.

      • 0 avatar
        DeadWeight

        I’ve never seen you employ such perverse logic on any issue as you have on this “compulsory independent auto dealer franchisees, to the exclusion of direct manufacturer sales, only are good for the end consumer” jihad that you’ve been on.

        Initially, you attempted to laughably resort to some sort of monopoly model perspective to advance your case, and when confronted with the fact that this isn’t the 1920s, with one, two or three manufacturers, selling maybe a half dozen models, having unchecked pricing power, but 30+ manufacturers producing and selling over 200 hundred plus (maybe 270?) different models of vehicles,meaning that manufacturers would have to compete on price AND service whether independent franchise dealers did or didn’t retail their products, you are now morphing your own original argument in a very convoluted and irrational manner.

        Manufacturers would have to be extraordinarily competitive pricing and servicing/guaranteeing their products selling directly to the public through company owned retail outlets, or risk losing sales to MANY competitors.

        This is a highly competitive, highly fragmented, commoditized consumer product space at this point in time. The biggest share of the market in North America is held by a company that only has approx 17% market share, and most manufacturers possess less than 8% market share of sales.

        The only thing that EXCLUSIVELY MANDATING independent dealer franchisee outlets does is introduce inefficiencies and higher end transaction prices for the consumer.

        Given the fact of such a competitive market, your argument that manufacturers could not or would not sell the same vehicles for the same price OR LESS via their own sales outlets as they do to independent dealer franchisees is nothing short of ridiculous.

        • 0 avatar
          Pch101

          Monopolies generally raise prices. This should not be hard to understand, yet you don’t understand it.

          When GM launched Saturn with its no haggle model, it granted large territories to its dealers. Why? So the Saturn dealers wouldn’t have to compete against other Saturn dealers. Why? Because it’s hard to operate a no-haggle model when there are competitive pressures to haggle.

          Likewise, one motivation for Tesla to own its stores at this point is to maintain pricing power, since there is no haggling over the price of a Tesla. (And I can’t blame them, as they need to avoid commoditization as much as possible.)

          “This is a highly competitive, highly fragmented, commoditized consumer product space at this point in time.”

          Yes, because we have retailers that are ready to claws each other’s eyes out to take sales from each other. A concept that upsets you, apparently.

          • 0 avatar
            DeadWeight

            AGAIN, what specific auto manufacturer is a MONOPOLY?

            If a person can’t afford any particular vehicle or is turned off by the sales outlet experience, they have MANY HUNDREDS of alternatives to choose from in terms of other manufacturers’ model.

          • 0 avatar
            Pch101

            Tesla is a vertically integrated company with no independent retailers. Again, I will make reference to US v. Paramount Pictures that addressed how that was harmful to consumers. Perhaps you should look up the case, and why the court ruled against the film studio’s vertical model.

          • 0 avatar
            DeadWeight

            So, again, you continue to proclaim Tesla is a monopoly exercising monopoly price power, and that it has no competition.

            That’s a really, really specious proposition.

          • 0 avatar
            Pch101

            Unless you are aware of some independent Tesla store that no one else knows about, I have no idea what you’re trying to debate.

            If you want to ignore the historical evidence and defend vertical integration, then give it your best shot. But don’t pretend that Tesla isn’t vertically integrated, as it obviously is. The business model is a matter of fact, not a matter of opinion.

            EDIT: I get it now: You’re under the false impression that retailers don’t compete against each other or that retail competition doesn’t influence pricing.

            And that’s a horribly flawed impression for one to hold. Market pricing isn’t just a function that occurs at the production level, but is also influenced by how retailers interact with each. Hence, why GM tried to keep the Saturn dealers from going after each other in support of its no-haggle MSRP model.

          • 0 avatar
            DeadWeight

            It’s much more basic, which is why it’s absolutely fascinating me that you aren’t grasping it:

            Tesla, whether sold through manufacturer owned or independent franchisee outlets, has NO monopoly NOR monopoly pricing power.

            The prospective customers of Tesla have many, many hundreds of vehicles from competitors to choose from.

            If Tesla vehicles are priced inefficiently and/or develop a reputation for poor reliability or after-sale support and warranty service, this will diminish Tesla’s competitiveness, market share, pricing power and ultimately and inevitably, if left uncorrected, sink Feels.

            Again – TESLA IS NOT A MONOPOLY WHETHER SOLD THROUGH MANUFACTURER OWNED OR INDEPENDENT FRANCHISE DEALERSHIPS.

          • 0 avatar
            Pch101

            I can see that this is futile. It has been explained to death.

            Go Google vertical integration. Perhaps that will help.

          • 0 avatar
            ect

            Deadweight is right, in that Tesla has no monopoly pricing power.

            A friend of mine is a recently retired executive from a very large automotive OEM. He has observed to me that his company’s dealers (who regularly talk to one another) are always reluctant to compete amongst themselves. They are happy to compete against other brands, but in his experience are unwilling to undercut each other, so that the golden goose keeps delivering eggs. They won’t “claw each other’s eyes out”, because it’s easier and more profitable to live and let live.

          • 0 avatar
            Pch101

            This is a lot of drama over what is a factual statement.

            Tesla maintains a retail monopoly over the distribution of its vehicles. That is simply a fact.

            Nobody claimed that Tesla has a monopoly on the entire car industry. But to claim that it doesn’t use its retail monopoly of Tesla products to engage in price setting of Tesla products is at best naive.

            In the real world, retailers compete against each other; that competition pushes down prices. Tesla obviously knows that better than some who post here.

          • 0 avatar
            mcs

            >> But to claim that it doesn’t use its retail monopoly of Tesla products to engage in price setting of Tesla products is at best naive.

            GM has a wholesale monopoly that it uses to set prices. Should multiple distributerships be created to create more pricing competition. Let the dealer’s buy from the distributer with the best price. For even lower prices, add another layer of distributers above the first and.. hmmm this is starting to sound familiar…

          • 0 avatar
            Pch101

            “GM has a wholesale monopoly that it uses to set prices.”

            You’re also missing the point.

            As consumers, we make retail purchases.

            As consumers, we benefit from lower prices when retailers need to compete against each other for our business.

            Consumers don’t have Tesla retailers competing against each other. Therefore, you have the privilege of paying full sticker or not buying at all. The prices are higher than they would be if there were multiple sellers who were competing to get our business.

          • 0 avatar
            Big Al from Oz

            Pch101,
            Telsa has a monopoly at setting it’s prices?? WTF?? Do you think Ford sets Telsa prices?? Internal and exteranal factors influence Telsa’s or any manufacturer’s pricing.

            Telsa sets it’s prices according to demand. If Telsa don’t give the consumer the experience they expect for their cash the consumer will shop elsewhere. Whether it’s vertical or not.

            I’d like to know what institution you represent;)

          • 0 avatar
            koshchei

            How does a showroom filled with puffy, tobacco-chewing sharks protect anybody from a monopoly? If there was only one automobile manufacturer on the planet, wouldn’t these same salesmen still continue to try to take the customer for every dime he was worth?

          • 0 avatar
            Pch101

            I already explained it. Or do you live in a place where car dealers refuse to negotiate?

  • avatar
    healthy skeptic

    This article is full of holes. Where to begin:

    >> It makes the very tenuous claim that a ruling blocking Tesla from running company stores (which is in fact in line with existing state law) is tacit protectionism that represents a step backward.

    But it wasn’t a “ruling”. This had nothing to do with the courts. It was a bill to alter the existing state law, with change snuck in by a certain legislature in a very underhanded manner at the last minute, and signed into law by the governor. This alteration is profound for Tesla in that it now forces *all* manufacturers to sell through franchised dealers, not just manufacturers who already had franchised dealers in place.

    In other words, the existing state law just got altered.

    >> (The entire 3rd paragraph of this store, and Note #1)

    The author seems to still think that factory stores are somehow separate entities from the manufacturer. Let’s be clear here: Tesla stores are *part and parcel* of Tesla itself, just like Apple stores. When you go in there, you’re stepping onto Tesla real estate and interacting with Tesla employees. I’m sure they have a managers there to run the store, but there’s not some “factory rep” deciding how many cars to order, or to fight “battles” with the manufacturer. What…is Tesla gonna battle itself?

    >> Note #2: In the past week Toyota sold some of its 2.4% stake while Daimler sold all of its 3.9% stake.

    Which has absolutely nothing to do with the issue at stake here. Tesla had its direct sales model in place from day one. Toyota and Mercedes both invested in Tesla knowing that full well, and both made out like bandits. (Mercedes scored $780 million!) Who can blame them for cashing in their chips? They had to at some point.

    >> In practice, independent dealers are critical to a car company’s long-run financial viability.

    Every editorial trumpeting the wonders of the current franchise model, and the impending failure of Tesla’s direct route, is an implicit meta-argument for the removal of the dealer protectionist laws. Looks like they’re not needed after all.

    Right?

  • avatar
    Mike Smitka

    Just a quick note, as there are lots of comments touching on the issues below, often reading into my post things I (very carefully) did not say.

    1. Purpose of Franchise Laws:

    In franchising there is a long history of franchisors abusing franchisees, not just in the auto industry.

    A. Franchisors are wont to change the terms of their agreement so as to extract more money, after franchisees have invested in bricks and mortar.

    B. Franchisors are quick to promise services to franchisees that they then fail to deliver. (My local, small, rural United Way — effectively a franchise — is quite vocal in pushing United Way Worldwide to pay more attention to the needs of small United Ways that don’t have a full-time employee, and certainly not a multi-million dollar budget.)

    C. Franchisors are wont to over franchise – they get incremental sales, even if most of a new store’s business comes from stealing share from neighboring, rival franchisees. [In Japan Starbucks is one of such operation, lots of franchise owners suddenly find another Starbucks in business just down the street…] Needless to say existing owners of franchises object to that.

    So all states (with lots of variation from state to state) have over time developed a legal framework governing franchise systems.

    2. Should states ban company stores?

    A. As far as I know in most industries state laws don’t; automobiles are the exception. I don’t see any particular reason for treating cars any differently from other goods and services, so made no argument in favor of Michigan’s law.

    B. However, states should make it hard for firms with franchise systems in place to open “company stores” that compete directly with existing franchisees.

    • 0 avatar
      Pch101

      As I noted above, you missed that Bloomberg’s gripe in that particular op-ed was with GM for lobbying for a law that it supported because of its effect on a competing automaker.

      I doubt that GM really cares what the dealers think. It just wants as little competition as it can get. GM would prefer that you buy a Volt or something else from the GM lineup, not a Tesla.

    • 0 avatar
      healthy skeptic

      >> In franchising there is a long history of franchisors abusing franchisees, not just in the auto industry.

      Fair enough, but there is now reason to think, in the case of the auto industry, the balance has tipped the other way, and franchises are becoming parasitic in certain aspects, such as new car sales. They add markup, but do not offer added value.

      >> A. Franchisors are wont to change the terms of their agreement so as to extract more money, after franchisees have invested in bricks and mortar.

      There’a problem here, though. What if times change, and the original agreement is only good for the franchisee, but has become parasitic to both the franchisor and end customer? Are we to perpetuate a bad system forever just because the franchisee originally invested money? That’s what happens when you invest money. There’s a danger things won’t pan out or will eventually go south, and you lose. Why are car dealers special in this regard?

      >> B. Franchisors are quick to promise services to franchisees that they then fail to deliver.

      But the issue here is whether the franchisee is needed anymore in the first place, at least with respect to new car sales. As well as whether the franchise system can be forced upon a new market entrant that doesn’t want it.

      >> C. Franchisors are wont to over franchise

      Then put it in the darn contract. “Franchisor will not open another franchisee within a 25 mile radius for the next 20 years…” or whatever. Again, why does franchise law have to get involved. If you want to open a franchise, practice due diligence, and if you don’t like the terms, don’t sign!

      >> A. As far as I know in most industries state laws don’t; automobiles are the exception. I don’t see any particular reason for treating cars any differently from other goods and services, so made no argument in favor of Michigan’s law.

      Fair enough, but if a person doesn’t see any reason for treating cars differently, then shouldn’t they be opposed to the Michigan law, instead of neutral about it?

      >> B. However, states should make it hard for firms with franchise systems in place to open “company stores” that compete directly with existing franchisees.

      Why? I’m a consumer (and a voter). It’s not my job to pay thousands extra to prop up car dealers. If Ford can open a company store and do better than the franchisee (better service, better prices), please tell me why this should be forbidden into perpetuity. Especially if, as you assert so confidently in your article, Ford’s incompetent store is doomed to failure from day one, and the savvy franchisee will kick its butt in the marketplace.

      I’m getting a real bad taste in my mouth for franchise law. I think it’s simply too prone to abuse, especially rent-seeking by middlemen. Worse, it runs a high danger of encoding outdated, inefficient, or parasitic business models, even if the original intentions were good. I think we’re seeing that here with the Tesla debate.

      • 0 avatar
        Pch101

        “They add markup, but do not offer added value.”

        Dealers make less margin than the manufacturers.

        They do add value to the OEM — they do a job that the OEM doesn’t want to do and assume capital risks that the OEM does not want to take, in exchange for profits that would be subpar for the automaker.

        “It’s not my job to pay thousands extra to prop up car dealers.”

        You’re not. There’s no math to justify that comment.

  • avatar
    Tstag

    Stinks of protectionism to me. However to get round it I’d suggest Tesla start a dealer network which they and a couple of new automakers maybe from China jointly own. Tesla dealers could sell another brand such as MG and simply agree to distribute profits based on volume of sales by brand.

    Then GM can compete with the Chinese and Tesla!

  • avatar
    Dirk Stigler

    Again, for Pch’s benefit since he keeps going on about the danger to dealers of company stores stealing their carefully selected locations, location matters less and less in retail in general, and not at all in cars. There aren’t car stores on every corner anyway, and because it’s a big ticket item people drive long ways for a deal. The dealer could be down the hill behind the trailer park and still do a brisk business with the normal kinds of advertising.

    It may be within the legislature’s rights to enshrine franchise dealerships in the law, but it isn’t right. Let the people decide how they prefer to buy cars.

  • avatar
    RHD

    A brainstorm! (Or maybe a brain fart:)
    How about if Tesla leases a corner of each IKEA for their sales locations? There’s already a ton of foot traffic, and at IKEA no one could complain about the futility of direct-to-consumer sales.

  • avatar
    Rday

    All businesses want to eliminate the competition. Only natural. But car dealers are help in particular contempt and should not be protected. If a consumer wants to buy direct without a dealer/service support then that should be his choice. some of us know that service is important and want to have it.
    We should all be able to choose which way we want to go without someone telling us it is the law.

  • avatar
    DC Bruce

    I don’t think anyone has focused on another dimension of this problem: vertical integration. Only the petroleum industry is, more or less, vertically integrated. That is, the same company finds and extracts the crude oil, refines it into products and sells those products to customers. The theoretical problem with vertical integration is that it allows the vertically integrated company to shift profits to its own chosen point in the production stream, possibly for anticompetitive purposes. So, hypothetically, a car manufacturer could shift profits “upstream” (since it controls the prices of the cars it sells at retail and to dealers) and put the dealer in a “price squeeze” (i.e. run it out of business, typically by underselling it).

    Thus far, Tesla is a “by-order” business. Tesla doesn’t maintain an inventory of cars . . . anywhere. Instead it maintains a backlog of customer orders. This is great as long as you can get away with it, but in a competitive market buyers want instant gratification. They don’t want to wait 5 weeks for a built-to-order car. So, one of the things that dealers do for car makers is not just finance an inventory; but provided information back to the dealer — from thousands of sources — as to what vehicles to build. The dealer do that by ordering vehicles for their inventory. So, one of the big — and I would say irreplaceable — functions of a dealer is to provide information to the manufacturer about what it should build. This allows the manufacturer to be more efficient and avoid mistakes like building 10,000 brown, diesel station wagons because its production planner is a TTAC regular.

    Personally, I think dealers’ concerns are overblown. The factor store model was tried and has largely been abandoned in the auto business. Tesla’s volume is a relative flea in the overall car market . . . let them have their fun by doing it their way. It’s not going to take anyone’s rice bowl.

    Right now the market for Tesla-like cars is so small it wouldn’t support a second manufacturer. if that changes, then you’ll start seeing dealers.

    • 0 avatar
      Pch101

      I touched on the ability to use vertical integration to raise prices on another thread. I also referenced US v. Paramount, which addressed the anti-competitive aspects of vertical businesses.

      The oil industry is actually getting out of the company-owned retail fuel business. It’s more lucrative for them to focus on the upstream and to franchise the fuel sales.

      • 0 avatar
        George B

        Pch, in oil industry terms “upstream” is getting hydrocarbons out of the ground and “downstream” is making products out of that hydrocarbon stream. Oil companies have moved away from company owned gas stations, but they most definitely balance upstream and downstream operations. It helps them survive big changes in the price of oil. When oil prices are high, upstream is very profitable while profits are low on the downstream side making gasoline, chemicals, plastics, etc. When oil prices are low, unprofitable upstream operations may be shut down, but the life is good on the downstream side.

  • avatar
    Big Al from Oz

    Pch101,
    I agree with your assessment of how the Big 3 operate.

    They influence and lobby the government, along with other interested parties, ie, UAW, energy, etc to maintain an unfair stranglehold.

    This does take away from “free enterprise” which I’m an ardent supporter of. Maybe one day DOT, poultry tax, emissions fuel standards and vehicle design in the US will match what the majority of the world is doing as well.

    Once this occurs the consumer can feel confident they are getting the best possible deal. A strong consumer is a strong economy. It makes you wonder why thousands of dollars are thrown in the “cash on the hood” deals. The US taxpayer isn’t asking why are we protecting and subsidising this industry if they can throw money around like that?

    Now we can add to this the retail of vehicles in the US. I do think the US vehicle consumer could be on a better wicket.

  • avatar
    Big Al from Oz

    @Derek Kriendler,
    What going on with WordPress?

    Do you have your ‘Spam’ filters set to be vetting comments?

    It might seem so.

    What words are being filtered when certain commenters submit?

    If this is the case, so much for the truth about cars.

    • 0 avatar
      DenverMike

      @BAFO – If it happens to you a lot, the spam filter is set on “chicken tax”, “protectionism”, “regulatory barriers”, “exceptionalism”, etc.

  • avatar
    05lgt

    Thanks Prof Smitka. I thoroughly enjoyed your insights on the subject. I’m strongly of the opinion that manufacturer / franchised dealer guarantees and relations should be controlled within their contracts, and not in state law. Trying to hold other manufacturers to methods and agreements they didn’t make seems anti-competitive rather than keeping a level playing field. There should be some room for a better method (not claiming this is better than dealerships, you’ve convinced me on that front)but if another method of doing business can’t be tried that will stop positive improvement. All that said, I’m open to finding out I’m wrong.

  • avatar
    George B

    My objection to dealer franchise laws is they lock in one model of how cars get sold and prevent a new entrant from coming up with a different model of how to sell cars. I see the Tesla model as only suitable to a low-volume luxury brand, but why not let them try direct sales? State dealer franchise laws do help protect existing dealers from being crushed by manufacturers. However, each dealer-protection law is one of the many laws and regulations that prevent different automotive business models from being tried.

    Almost all the new cars I looked at this summer had dealer installed options and a supplemental sticker with outrageous prices. It was one additional layer of crap I had to dig through before I could get the out-the-door price for the car. Spent almost an hour turning down Scotchguard and pre-paid oil changes after I thought we settled on a price. In a sane world the tint would be built into the glass itself and wheel locks, trunk tray, etc. would accessories you buy or don’t buy from the parts department. The presence of line items like $200 nitrogen on the supplemental sticker indicate too much power in the hands of the dealer. Let them burn.
    http://www.edmunds.com/car-buying/blinded-by-chrome-high-priced-dealer-add-ons.html

  • avatar
    FJ60LandCruiser

    Car dealership franchises have aggressively lobbied to keep their business model to the point that they have forced web sites that let people know what cars REALLY cost no longer to reveal that information.

    The ugly truth is that they continue to prey on the uninformed, and they’re one of the few legitimate business models who do so (they’re in the same league as pawn shops and predatory lenders).

    Their best counter argument is that if they can’t continue to con the public, then who will provide warranty work? They also con the customer with their service by adding on unnecessary charges that are above and beyond what the factory recommends.

    There is no single benefit to the dealership franchise model except to the dealerships themselves.

    • 0 avatar
      Pch101

      I think that this distills the essence of the problem with these discussions.

      You are under the impression that car dealers are unpleasant because they are franchises.

      But car dealers are unpleasant because the transaction has a lot of moving parts, which provides opportunities to confuse buyers in ways that are profitable to the seller, which provides an incentive to the seller to exploit that confusion because it can add handsomely to the bottom line.

      Changing the ownership of the store isn’t the answer. (A company-owned store can be just as dodgy as a franchise.) Transparency is.

      To have that transparency would require legislation that (a) communicates information more clearly to buyers, (b) eliminates complicated paperwork and (c) provides cooling-off periods that allow the dazzled consumer to discover that a negotiated deal is a bad one. Consumers who care should be lobbying for those changes, irrespective of who owns the dealership.

      • 0 avatar
        bimmermax

        “To have that transparency would require legislation that (a) communicates information more clearly to buyers, (b) eliminates complicated paperwork and (c) provides cooling-off periods that allow the dazzled consumer to discover that a negotiated deal is a bad one. Consumers who care should be lobbying for those changes, irrespective of who owns the dealership.”

        Virtually all the paperwork we do is mandated by the state or the finance institution. The legal system never gets simpler so that is out.
        There is PLENTY of transparency in the car business. More than in any other that I can think of. A car is they only big ticket item you can buy where you have a good idea what the seller paid for it.
        You have CarMax to put a real number on a trade in. Do your research, make the best deal you can and understand that the other guy needs to make money too.

        • 0 avatar
          Pch101

          “There is PLENTY of transparency in the car business. More than in any other that I can think of.”

          You can’t make statements like that and then expect anyone to take you seriously.

          • 0 avatar
            thx_zetec

            Bimmermax is not saying that current system is perfect, but that it has many regulations already, and that in practice hard to improve.

            Example in your post you say there should be requirement for “cooling off period”. In my state (AZ) they already have this, an acquaintance of mine used this to return a car from a dealership; the dealers initially said no but had to back down.

            Most people that complain agree to the terms and either don’t think about them or read them clearly. You should never buy a car on first visit – you are always free to walk out.

            Writing laws to protect buyers sounds easy but in practice is very very hard. You always run the risk for making more paperwork and confusing the process; as it is it takes about 45 minutes to wade through signatures now.

            At any rate that is why another imperfect system (company store) would be good idea.

          • 0 avatar
            Pch101

            “that in practice hard to improve”

            The car business is built on opaqueness. This would be easy to fix, but there is no will to fix it.

          • 0 avatar
            bimmermax

            “You can’t make statements like that and then expect anyone to take you seriously”

            Judging from the ignorance of the car business displayed here, seriousness is not a quality that is aspired to here.
            Having said that, what other big ticket item can you buy where you have a very good idea of the unit’s cost?
            There are websites where you can see incentive programs, buy rates for loan and lease factors. You can buy a subscription to Manheim and see what your car is really worth. It is up to you the consumer to DO YOUR HOMEWORK. Understand this is a business. the seller wants the maximum profit he can get, the buyer wants the lowest price he can get. The customer has the ultimate power. You can simply walk away if you don’t like the deal. No one can hold a gun to your head.

          • 0 avatar
            Pch101

            Dealers attempt to confuse customers so that they don’t know what they’re paying, let alone how much it cost.

            One reason for the use of the four square is to shift the focus away from the price and toward the monthly payment. It’s far easier to snow a customer who fixates on the payment; the smart customer understands that one achieves the lowest payment by paying the lowest price and then financing it with the best terms possible.

    • 0 avatar

      There are lots of advantages for car makers. Some one to market their cars some one to handle state paperwork. Some one to own the real estate. Some one to hold an inventory buffer.

  • avatar
    thx_zetec

    note to TTAC

    I can post tests posts, but main post rejected. Spam filter run amok.

  • avatar
    thx_zetec

    I think a conspiracy of auto-dealers have hacked TTAC. Just kidding.

  • avatar
    Dr. Kenneth Noisewater

    I don’t buy it.

    If franchise middlemen are the clear winner in the marketplace, then let them prove it by outcompeting factory stores rather than running to mommy government to exclude factory stores.

    If franchise middlemen fear OEMs messing with the value of their franchises (which is legitimate, as OEMs have done so in the past), then let franchise-protection laws only protect actual franchise agreements.

    Tesla has no franchises, so they should not be subject to franchise agreement protection laws. It’s not the place of the State to dictate how an industry does business, only that those doing business abide by contract law and consumer protection. There’s enough competition among carmakers that any anti-monopoly consumer protections have long since become obviated by the marketplace.

    Tesla should be able to sell direct if they haven’t sold any franchises. Let the marketplace then show whether or not middlemen provide more value to the auto buyer. Anything else is just corporate crony socialism, and rent-seeking dealers pleading for special treatment are just fucking commies.

    • 0 avatar
      bimmermax

      “If franchise middlemen are the clear winner in the marketplace, then let them prove it by outcompeting factory stores rather than running to mommy government to exclude factory stores.”

      Already proven. Factory run stores don’t provide any inherent advantage to the consumer over a franchise dealer.

      “If franchise middlemen fear OEMs messing with the value of their franchises (which is legitimate, as OEMs have done so in the past), then let franchise-protection laws only protect actual franchise agreements.”

      Problem is that legal precedents can undermine franchise agreements and laws. that is what the dealers fear.

      “It’s not the place of the State to dictate how an industry does business”
      Actually, the State would disagree.

      Right now, Tesla is a boutique car maker that loses money on every car it sells. Eventually, if they survive to be a full line car co, they WILL have to embrace the franchise system. the cost of selling cars is just too high not to.

  • avatar
    DeadWeight

    I think WordPress is now eating entire articles as well as comments, since there are hardly any new articles, reviews or essays Brunton posted on TTAC for the last week or so.

    Jack! Jack!

    Reinforcements needed, Jack!

    Where’s Steve Lang, Murilee, etc.?

    JACK!!!!

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