By on May 12, 2015

Tesla Showroom In California Circa August 2014

In its battles for the right to sell its wares directly to consumers, Tesla has found a valuable ally in the Federal Trade Commission.

Though the FTC has supported Tesla in the past, the agency recently reemphasized its pro-direct sales stance via a post regarding a new proposal working through the Michigan Legislature allowing so-called “autocycles” – i.e., Elio Motors’ wares – to be directly sold to the public, TechCrunch reports.

The autocycle bill – SB 268 – comes just months after Michigan passed legislation to clarify its position on automakers directly selling to the public, which the state has said was always verboten. The clarification, however, left the door open for further conversation on the matter of direct sales, such as the one proposed by SB 268.

The FTC said the final decision involving the business model would remain in the domain of each individual state’s regulators, though it would prefer policymakers to leave said decisions on such business models to both automakers and their consumers “absent some legitimate public purpose” in prohibiting certain selling methods.

[Photo credit: Ming-yen Hsu/Flickr/CC BY-ND 2.0]

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88 Comments on “Tesla Gains Renewed Support From FTC For Direct Sales Model...”


  • avatar
    healthy skeptic

    Good. In fact, the FTC goes even further than this article suggests. They want direct sales open across the board, not just for Tesla and trike makers.

  • avatar
    energetik9

    All I know is that I am rooting for Tesla.

  • avatar
    tfraine30

    The argument is always “yes, but who is going to service tbose

    • 0 avatar
      redav

      I don’t know why anyone would ask that. Here in Houston, Tesla can’t technically sell directly to the public, but they still have a service center, which is identical to a dealer’s service department. If they can do this just fine already and without any dealerships, how will having direct sales & their own dealerships make it less feasible?

  • avatar

    Before everyone gets their panties in a wad, there is something everyone should understand. It isn’t regulation that prevents the legacy auto OEMs from selling direct. It is common sense and the Sales and Service Agreements in place between them and their partner dealers.

    State regulations are designed to fill potential loopholes in those S&S agreements, and to keep the consumer protected from fly by nighters selling cars out of their garage, etc.

    So where did dealers come from in the first place? Auto OEMs needed their capital and local expertise. And that hasn’t changed.

    • 0 avatar
      OneAlpha

      In theory, maybe.

      In practice, the virtual monopoly dealers get to sell new cars makes them crooked.

    • 0 avatar
      redav

      If it’s common sense and not the law that keeps the automakers from selling directly to the public, then why are dealerships so scared of losing the protectionist legislation set up just for them? (For the record, I don’t think it’s wise for the major automakers to sell direct, but I also think many are lacking common sense.)

      Fact: no one cares about the consumer except the consumer, not the govt and certainly not businesses. Those that seem to–particularly those that sell cars–only do so as far as it is to ensure that the consumer keeps giving money to them. Consumers didn’t push franchise laws through legislatures. I know for a fact that politicians don’t believe their own drivel about whom they claim to help. What I can’t figure out is why individual people believe it.

      • 0 avatar
        Pch101

        The laws were intended to protect dealers from the automakers. The dealers don’t want the OEMs to cherry pick their best territories or to seize their franchises.

    • 0 avatar
      healthy skeptic

      @Ruggles

      >> It isn’t regulation that prevents the legacy auto OEMs from selling direct. It is common sense and the Sales and Service Agreements in place between them and their partner dealers.

      Plus a generous dose of protectionist regulations mixed in. Don’t forget those.

      >> So where did dealers come from in the first place?

      From the decades of yore, mostly. Changes are afoot now.

      • 0 avatar
        Pch101

        Most companies either don’t retail their own goods at all or else rely heavily upon third parties to retail most of what they sell. The reasons that they do this are rather straightforward.

        Why it’s supposed to be so astonishing that the car business would be any different, I don’t know. The public hatred of car dealers is not a compelling reason for manufacturers to, er, shift gears when it comes to retailing.

  • avatar
    tfraine30

    Oops….service those cars and do warranty work”….I think Elio motors model, having pep boys or some other provider do the work is the way around that. I’m all for it!

  • avatar

    Personally, I am in favor of Tesla being able to sell direct. After all, they wouldn’t be welching on any deals previously signed. The market, and Tesla’s own finances, should be able to determine if their model is sustainable. I suspect it won’t be, but I’m happy to see it all play out. It costs a lot of money to be a mainstream auto OEM as well as owning your own retail network IF you intend on becoming a mainstream volume auto company, not just a niche manufacturer.

  • avatar
    Robbie

    Great… perhaps soon we’ll be able to cut out the middlemen and buy cars direct from the manufacturer, at 4% or so discounts.

    • 0 avatar
      Pch101

      It’s the opposite. Prices are higher when retailers don’t compete against each other.

      • 0 avatar
        Robbie

        Then we should have a law saying dealerships cannot sell to the public, but only to sub dealerships who are allowed to sell to the public! That will lower car prices!

        • 0 avatar
          OneAlpha

          And give us the opportunity to run the proprietary gauntlet of car salesmen and high-stakes game-playing we get from no other sector of the economy!

          Yay franchise laws!

          • 0 avatar
            runs_on_h8raide

            OneAlpha you make it like this is the 1970s and 1980s. You are making irrelevant arguments. You own a computer and have internet. You can easily…and I mean easily…contact 10, 20, 30, hell 100 dealers all at once with the power of the internet. You can find out the invoice, cash backs, manufacturer cash, interest rates, etc on any car with some quick research, and tell them what you want to pay and send that off into cyberspace. Oh, and get this…you don’t have to see not one damn car salesman. HOORAY!!!

            Out of the 100 dealers you can email, I am sure at least 10 will give you the exact car and price you want…all by email or phone, unless you are that averse to human contact. All you have to do is sign the obligatory paperwork and boom…new/used car is yours. OMG! OMG! So simple a cave man can do it.

          • 0 avatar
            healthy skeptic

            @runs_on_h8raide

            What an inefficient pain in the butt your process is. I’d just rather bypass all that, walk into the manufacturer’s outlet, and order exactly what I want directly from them, with no middleman markup. Or I could even do it from the manufacturer’s own site. I like that a lot better than emailing 30 dealers and playing a lot of games.

          • 0 avatar
            healthy skeptic

            @runs_on_h8raide

            In a couple of minutes, I could have a Tesla on the table if I really wanted. Right from Tesla. No screwing around.

            You’re right, competition is great: Tesla vs. BMW vs. Mercedes vs. Lexus et al. It keeps prices down.

            An extra layer foisted on the consumer by law? Not so great.

            If every manufacturer sold direct…I’d probably be paying about the same or slightly less for my car, with a much better buying experience. If not, direct sales wouldn’t stick around long. Fine by me if it didn’t work out, as long as it failed on genuine lack of merit.

            And finally, as with most people, the majority of stuff I buy is from middlemen, of course, but they won my business (and the OEM’s business) by being worth it. I can buy produce directly from a farmer at the farmer’s market, or I can by indirectly from him through Safeway. Most of the time I buy from Safeway. Funny thing, though, somehow Safeway wins my business without having to pass a bunch of state laws outlawing farmer’s markets and forcing me to buy only from a supermarket.

            Do you enjoy being robbed of choice?

          • 0 avatar

            RE: “And give us the opportunity to run the proprietary gauntlet of car salesmen and high-stakes game-playing we get from no other sector of the economy!”

            Ain’t it wonderful? Try buying a piece of real estate without running their gauntlet. Not try changing it. Good luck with that.

            Consumers have the advantage of being able to shop. Sorry if you have to actually put out effort to do this. Its an advantage to you whether you realize it or not. If you don’t like it, tough shit. Buy a used car from a private party. There won’t be any haggling there, right?

            You can buy a gadget directly. But a vehicle is a lot more than a gadget. Trade ins with negative equity have to be dealt with, along with a complex credit system. With a gadget, you just put it on your card. If your gadget breaks, you put it in a box and send it in.

            With a gadget, there aren’t complicated state sales tax laws that have to be filed and paid. There aren’t license, title, and inspection fees imposed by municipalities, counties, and states. There are a lot of moving parts in a car deal. There is also a mountain of government mandated paperwork to be dealt with. Not so with gadgets.

        • 0 avatar
          Pch101

          When you try and fail to buy a new Tesla for less than MSRP, remember this thread.

          • 0 avatar
            redav

            MSRP is irrelevant. Ford has already made their profit by the time their cars have landed on the dealer lots. Ford doesn’t really care much about what the dealers sell the cars for so long as it doesn’t harm the overall brand.

            Dealers make around 2% profit on new car sales. (Their main profit comes from service/parts & used cars.) So, in theory, if you bought your car directly from Ford, and Ford was willing to make the same margin on those sales as they do to dealerships, yes, you could save some money regardless of MSRP.

            The competition that matters is not between dealerships, but with competing car companies. If Tesla had franchised dealerships, you wouldn’t be paying less for their cars, but if there was another high-end EV brand, then they would have to lower real-world prices (whether through lower MSRPs or deals).

          • 0 avatar
            Pch101

            “MSRP is irrelevant.”

            Tell that to your Tesla store when you try to buy one of their cars for less than what they’re asking. It is possible to pit car dealers against each other in order to negotiate lower prices; that won’t work with Tesla.

            “if you bought your car directly from Ford, and Ford was willing to make the same margin on those sales as they do to dealerships, yes, you could save some money regardless of MSRP.”

            Automakers earn higher rates of pre-tax return than dealerships. They would have to charge more in order to make retailing worth their while, which is one reason why Daimler is getting rid of many factory-operated stores in Germany — those reduced levels of profit hurt the value of the stock.

          • 0 avatar
            OneAlpha

            Considering what a Tesla costs, the few thousand bucks I might save by haggling wouldn’t be worth the effort.

            If I’m already psychologically prepared to spend most of a hundred grand, I’m not really gonna care about a few thousand either side of MSRP.

            When I go to buy a car, getting the car is what I care about – not getting the car AND a deal.

            Cars cost what they cost, and if I can’t afford them, I don’t buy them. Might not be the cheapest way to go, but the ease and simplicity are worth it.

          • 0 avatar
            CJinSD

            OneAlpha,

            For every laydown like you, there are a few people that are buying six figure cars because they don’t let themselves get taken advantage of.

          • 0 avatar
            Pch101

            Some alpha male you are. Terrified of gay people and incapable of negotiation.

          • 0 avatar
            runs_on_h8raide

            Would be great if we could get his Tesla negotiations on hidden cam so we can laugh at him.

            BTW, OneBeta, I’ve seen quite a few 7 figure people grind the hell out of GSMs for every penny they could possibly get….on a base model CRV LX in fwd. Now that is some alpha shyte right there. True story.

          • 0 avatar
            ect

            According to NADA, the average dealership makes a return on equity of 34%. Published numbers indicate OEMs are making in the range of 8-26% – much less.

            In mature industries generally, ROE is typically in the 15-20% range.

            So, dealerships are significantly more profitable than OEMs and businesses in other mature markets. This profitability is paid for by consumers, and results from the legally privileged status that dealerships get from state legislatures, where they regularly spread money around.

            I’ve worked in companies where we sold both to distributors and direct to end users. It worked well enough. The consumer would benefit from a situation where OEMs are free to sell direct and through dealers. At the very least, it would force the dealers to sharpen their pencils and improve their customer service standards. It might even bring the profitability of dealers down to levels that prevail in competitive markets – which is why dealers spend so heavily to keep it from happening.

            MSRP? Ford sets its MRSPs on the assumption that the actual selling price will be significantly lower, because dealers want to tout the great “saving” that they’re offering. Tesla (as did Saturn, when it was around) sets its MSRP based on what a realistic selling price is expected to be, given the competitive market set each model is up against. The two are very differently calculated, and not directly comparable.

          • 0 avatar
            Pch101

            “Dealership buyers base their decisions on return on investment instead of return on equity. The former is a different calculation that includes the cost of buying the business.”

            http://www.autonews.com/article/20140303/RETAIL/303039973/dealership-profits-keep-soaring

            It should not be surprising that ROE isn’t that important for assessing a dealership. ROE is a function of debt. Dealerships are highly levered as a matter of course.

            Much of the leverage includes inventory financed by the automaker — unlike the independent, an OEM earns no return by borrowing money from itself. There are also high real estate costs, for obvious reasons.

            Meanwhile, anyone who is familiar with a PE ratio should appreciate what a 2% pretax margin does to the income statement of a public company. (Hint: For a business that is supposed to make more than that, it isn’t good.)

          • 0 avatar
            runs_on_h8raide

            healthy skeptic.

            Inefficient? Hardly. In a matter of minutes I could have multiple offers on the table. Competition is great. And you’re totally off point from my reply to OneBeta.

            To counter your point…if every auto manufacturer sold cars directly, you will be paying MORE for your car. That’s inefficient, my friend. Then who’d you complain to?

            I love how people go off the deep-end with car dealers. These people complain about the model, but let me ask you all…do you make all of your purchases directly from manufacturers? I’d like to know. Tell me how you do not buy anything ever from a “middle-man.”

          • 0 avatar
            ect

            Pch, I read the article you cite. The journalist who wrote it clearly has no knowledge of corporate finance, which is to be expected.

            Even so, I get that, in acquisitions and other capital projects, you base investment decisions on ROI. Having led a very large number of such projects, around the world, I quite understand that process.

            But the article also makes the point that auto dealerships are far more profitable than other investments – which is exactly the point. They’re more profitable because of the privileged status they get from state legislators. This economic rent is paid for by consumers, in the form of higher prices. Which is wrong.

            Pch and Ruggles – bleating about selling margins is a red herring. Ongoing businesses are evaluated based on ROE. There are a number of businesses that feature low sales margins (commodity chemicals is one I’m familiar with), but generate quite acceptable returns to their shareholders on the equity they have invested in the business. Which is what really matters, and which is why the market focuses on it.

            In Ontario, Mercedes sells through a combination of corporate stores and franchised dealers. When we bought our current car, we shopped both. As it happens, the dealer we visited wielded a sharper pencil than the corporate store, so he got our business. Which is fine.

            The real issue is that , while we may debate whether and to what extent OEMs would want to sell direct, they should have the same right to make that decision that every other manufacturer has.

            The fact that they don’t is because state politicians have been paid lavishly by dealers to deny them that right, and the cost of this economic rent bestowed on dealerships is paid by Joe and Jane consumer. Which, in a free economy, is just plain wrong.

          • 0 avatar
            Pch101

            As someone who graduated from a top business school and who has worked in i-banking and PE, I have come to put very little stock in what you have to say.

            There are very basic concepts that you don’t grasp, which someone who has the background that you claim to have would understand.

            A dealership is a great business for a small business person who wants to clear a million per year from his store. But that kind of money is chickens**t to a major corporation that has stockholders that expect to earn far more than 2% on pre-tax income.

            This is so easy to understand that anyone who claims to have done all of the wonderful things that you have allegedly done would comprehend it immediately. That you cannot understand such a simple idea after it has been identified several times isn’t helping your story. (Apparently, Dieter Zetsche does understand it, because he is acting accordingly in his trimming of Daimler’s dealership network. Perhaps you should advise him as to why he knows less than you do.)

          • 0 avatar
            ect

            Your habit of resorting to lame personal insult when the facts run contrary to your previously-expressed opinions says much more about you than it does about your imagined victim.

            So, let me stick to the facts. You say “A dealership is a great business for a small business person who wants to clear a million per year from his store. But that kind of money is chickens**t to a major corporation that has stockholders that expect to earn far more than 2% on pre-tax income.”

            Well, we’ve already established that it’s the return on the money invested in the business that matters, not sales margins.

            “small business person”? The industry is in fact consolidating, as large public companies move in. Companies like:

            Group 1 Automotive Inc.
            AutoNation Inc.
            Sonic Automotive Inc.
            Lithia Motors Inc.
            Penske Automotive Group Inc.

            who clearly disagree with your assessment, because as one of people quoted in the article you referenced put it, “where else can investors make such high returns?”.

            The extremely high profitability of car dealerships, as confirmed by NADA, represents economic rent from protective legislation passed by the states. This economic rent is paid by consumers, in the form of higher prices.

            The central point, which you seem desperate to ignore, is not whether OEMs would want to set up direct sale channels, but that they should have the same right to do so that every other manufacturer has.

            And hey, you really need to get a life. Lurking on this site so you can respond instantly to other people’s posts is simply not healthy.

          • 0 avatar
            Pch101

            If you attended business school sometime after the 1960s, then you should have probably learned that vertical integration often sucks.

            You should have also learned that a 2% pretax profit is not an astounding profit for a manufacturing company.

            That you would not know either of these points makes it difficult to take you seriously.

          • 0 avatar
            ect

            More inane vituperation, no substance.

            For the last time, investment decisions are based on ROI, ongoing businesses are evaluated on ROE, selling margins are not factors in those decisions.

            If you truly worked in PE, you’d get that. Clearly, you don’t (or can’t bear to admit you were wrong).

            Either way, it’s no wonder you’re stuck in your cube.

            Out.

        • 0 avatar

          You really don’t get this, do you. Auto OEMs don’t do business through dealers because of state franchise laws. They do so because they need dealers local expertise and capital and their OWN Sales and Service agreements with those local business people.

          • 0 avatar
            CJinSD

            Well-well look. I already told you: I deal with the god damn customers so the engineers don’t have to. I have people skills; I am good at dealing with people. Can’t you understand that? What the hell is wrong with you people?

          • 0 avatar

            RE: “Much of the leverage includes inventory financed by the automaker.”

            It should be noted that the automakers don’t finance dealer inventory. They might have a captive finance arm that floor plans new vehicles, but the money that is advanced to the dealer for inventory is signed for by that dealer, both personally and severally. The money used by the captive isn’t a result of deposits, like a typical bank. It is borrowed money. It’s the dealer’s liability, not the auto OEM’s. Many dealers prefer to floor plan with a local bank. I rarely financed with an OEM captive.

            What is also true, and not commonly understood, is that if a dealer fails or terminates, the OEM buys back the inventory, less any with damage, alterations, or miles. They do this to make it easier for the dealers to gain floor plan for inventory. The OEM makes its money when the new car rolls off the assembly line, and the OEM drafts the dealer’s account for the vehicle BEFORE it even arrives at the dealership. The dealer is the customer of the OEM, NOT the end user. The end user is the customer of the dealer.

          • 0 avatar

            RE: “According to NADA, the average dealership makes a return on equity of 34%. Published numbers indicate OEMs are making in the range of 8-26% – much less.”

            Return on sales in a dealership is about 3%. Its a high volume, low margin business. But to a dealer, he can buy a piece of real estate, and have the dealership pay the rent on it.

            If you want to see something funny, lay your hands on the results when an OEM attempts to retail new cars. Ford lost hundreds of millions on the Ford Collection experiment.

          • 0 avatar

            RE: “Automakers earn higher rates of pre-tax return than dealerships. They would have to charge more in order to make retailing worth their while, which is one reason why Daimler is getting rid of many factory-operated stores in Germany — those reduced levels of profit hurt the value of the stock.”

            Excellent observation. Toyota and the other domestic automakers also suffer with its factory stores in Japan.

          • 0 avatar
            Erikstrawn

            It’s funny how you mention that OEMs don’t want to sell cars directly, then a few comments later bring up “Ford Auto Collection”, which was an OEM attempting exactly that, which only failed because of the protectionist laws dealerships rely on.

          • 0 avatar
            Pch101

            “It should be noted that the automakers don’t finance dealer inventory. They might have a captive finance arm that floor plans new vehicles”

            When the captive finance arm is owned by the automaker (as it usually is), then it’s ending up on the same income statement.

            A dealer benefits from borrowing money from the captive. The factory-owned store would have no reason to borrow money from what is effectively itself (and if it did, any supposed profit from the arrangement would be illusory.)

            I don’t have any statistics handy, but I’m sure that there is more floor plan lending for US new car inventory that comes from captives than there is from banks or independents. They are carrying the market here.

  • avatar

    There is a small detail left out of this piece. See below.

    Why was mention of this left out? This piece gives the impression that the FTC itself is changing its position. Nothing could be further from the truth. The FTC WANTS competition at the dealer level.

    “The views expressed are their own, and do not necessarily reflect the opinion of the Commission or of any individual Commissioner.”

    • 0 avatar
      healthy skeptic

      I’m pretty sure the general FTC consensus isn’t far behind this posting. I find it hard to believe three high-ranking FTC officials went rogue, snuck into the FTC’s office late at night, and posting this to the FTC website in an act of rebellion.

      • 0 avatar

        I’m pretty sure FTC consensus is FAR behind this posting. Who said they went rogue? Read it again. Then look into the actual actions FTC takes. It might be a revelation to you.

        “The views expressed are their own, and do not necessarily reflect the opinion of the Commission or of any individual Commissioner.”

        Even if the FTC changes its mind after decades of history, what do you think might happen? Do you think auto OEMs are suddenly going to start selling direct to consumers and undersell their own dealers? IS that what you’re hoping for?

  • avatar

    In most states, dealers selling new vehicles are required to have service facilities in the same facilities as new vehicles are sold. Tesla has already sidestepped this in some states. What else should they be allowed to do that other dealers aren’t required to do?

  • avatar
    DeadWeight

    Someone (I won’t say who other than his initials are D.R.) gets REALLY DEFENSIVE whenever the subject of Tesla being able to sell their vehicles to the public comes up!

  • avatar

    RE: “SAomeone (I won’t say who other than his initials are D.R.) gets REALLY DEFENSIVE whenever the subject of Tesla being able to sell their vehicles to the public comes up!”

    You must be illiterate. I am strongly on record as saying Tesla should be able to sell direct as long as they play by all the other rules dealers have to live by. How many times does it have to be said.

    I am defensive when it comes to the facts. There are a host of idiots out there who keep trying to say there are laws that force auto OEMs to sell through dealers. That is just false. It is their own sales and service agreements that bind the system.

    A better question: Why would auto OEMs want to try to back stab their own partners? Any idea what would happen if any of the legacy OEMs started trying to circumvent their own partners by selling direct? Amateurs don’t have the ability to think these things through.

    Tesla doesn’t have any of those agreements in place.

    • 0 avatar
      DeadWeight

      You’re a contradictory windbag.

      Let’s cut to the chase: Should Tesla, and for that matter, any other manufacturers be allowed (thank you, brave legislators for your consideration), should they wish, to sell vehicles directly to consumers in the United States again, either independent of or in addition to a franchise dealership network?

      Yes or no, Ruggles?

      • 0 avatar
        28-Cars-Later

        No, no, no do deal or no deal?

      • 0 avatar

        Windbag? well, at least I’m pontificating about something I know something about. Your question is indicative of your lack of business knowledge and experience. It is NOT a yes or no question. In my opinion:

        1. Tesla should be allowed to sell direct as long as they have to abide by the same set of rules as other dealers. As retailers, they are functioning as dealers, not an OEM, we they are retailing cars. For example, if it is unlawful for a dealer to sell cars off of grass or rocks, Tesla shouldn’t be allowed to either. If new vehicle dealers are prohibited from selling from facilities that lack service departments, so should Tesla.

        2. There are already laws in place that forbid legacy OEMs from selling direct to consumers in contravention of their own Sales and Service agreements. IF a legacy auto OEM wanted to start a separate division, like GM started Saturn, in theory they could eschew the dealer model and sell direct. What they can’t do is to enter into agreements with business people, who then invest millions based on that agreement, then circumvent that agreement by selling direct. They could try it, but the lawyers would love it. It wouldn’t make sense for them to even try it. Why would they? What would they have to gain? What would they have to lose?

        So why won’t we see a legacy OEM establish a separate division and sell direct? Let’s see if anyone has figured this out. PCH certainly has.

        • 0 avatar
          DeadWeight

          Answer the question with a YES OR A NO, MR RUGGLES!

          “Should Tesla, and for that matter, any other manufacturers be allowed, should they wish, to sell vehicles directly to consumers in the United States again, either independent of or in addition to a franchise dealership network?”

          THANK YOU FOR YOUR ANTICIPATED “YES” OR “NO” ANSWER, MR. RUGGLES!

          • 0 avatar
            Pch101

            It’s pretty clear at this point that Ruggles is OK with Tesla selling its own cars, just as long as they don’t get any special privileges in the process. You can drop that one now.

            But his comment about a lack of state laws that bar direct sales is wrong. Not every state does, obviously, but many do. (Tesla’s lawyers seem to have figured this out.)

        • 0 avatar
          bikegoesbaa

          As a consumer, I have no problem buying off of grass or rocks. I expect many other buyers feel the same.

          Instead of arguing whether the new guys have to meet the same absurd rules as the old guys; how about we get rid of those rules entirely and let consumer preferences be the final arbiter of how and off what surface cars are retailed?

      • 0 avatar

        Just because you don’t understand it doesn’t make me contradictory. I’ve been consistent on the issue from the beginning. Tesla should be allowed to pursue its direct sales model as long as it follows the same rules other dealers have to follow.

  • avatar

    RE: “why are dealerships so scared of losing the protectionist legislation set up just for them?”

    Who says they are? What are you calling “protectionist legislation?”

    You are confusing the Tesla issues with franchise law and the sales and service agreements that they enforce.

  • avatar
    grandestmarquis

    So ruggles – if the current sales model is the best for all involved, the market would clearly perpetuate that even without the laws that ensure that the current sales system is the only one legally possible, correct?

    After all, it is the sales and service agreements that force the system into place, not the laws, right? Or is it the other way around…

    • 0 avatar

      When did I ever say the current sales model is best for all involved? EVER? But the idea that the market naturally perpetuates the best solution is just laughable.

      The current system exists because auto OEMs needed access to the capital, expertise, and local relationships of business people. That hasn’t changed.

      I predict Tesla will find out they also need access to the capital, expertise, and local relationships of business people. There isn’t enough capital available for Tesla to become a volume OEM while trying to be their own sales network. Musk has even hinted around that he is beginning to understand this. I’m happy for him to figure it out on his own.

  • avatar
    jmo

    Ruggels,

    If there are no laws stopping OEMs from selling directly to customers – why can’t Tesla sell directly to customers in TX? Tesla seems to think there are Texas state laws preventing it.

    • 0 avatar

      When did I ever say there were NO laws stopping Tesla from selling directly to customers? In most states Tesla is fine as long as they adhere to the other laws in place. I have said I am in favor of Tesla being allowed to sell direct as long as they don’t receive any favored treatment. For example, if it is against the law in a state for a dealer to sell cars from a rented space in a mall, without approved service facilities, it should be the same for Tesla.

      What is so stupid is equating the Tesla situation with legacy OEMs and their partner dealers.

  • avatar

    RE: “So where did dealers come from in the first place? Answer: From the decades of yore, mostly. Changes are afoot now.”

    So you think auto OEMs no longer need the capital, expertise, and local relationships of dealers? Why don’t you begin by calculating the capital invested by a typical dealer. Mutliply that times the number of dealers in the OEM’s sytem.

    Do you think that investment disappears if an OEM decides to sell direct? Do you think an auto OEM would sell direct, undercut its dealers to bankrupt them all, so it could raise prices after they are all gone?

    What do you think the FTC does through all of that?

    There’s a lot of people on this thread that don’t understand basic business, let alone how the auto dealer franchise system works.

  • avatar

    RE: “Plus a generous dose of protectionist regulations mixed in.”

    Could you be more specific? What protectionist regulations? The legislation in Texas that prevents Tesla from establishing retail outlets? Or something else? You confuse standard state laws regarding franchise new car dealers with generic dealer laws to protect consumers. You also confuse state laws that strengthen the Sales and Service agreements created by the auto OEMs with what you call “protectionist legislation.” Tesal is operating in most states the way they want to. Consumers in Texas, for example, can still go to a Tesla sales outlet. They exist. I’ve visited some. Texas consumers can buy Teslas. They can license and title them in the state. There are Teslas all over Texas. They just can’t buy them at the Tesla outlet. They order them online anyway, so what’s the big deal?

    I have friends in TX who are independent leasing companies who have delivered dozens of Teslas. If you buy your Model S online, and its delivered to you, what are you complaining about?

  • avatar

    RE: “Answer the question with a YES OR A NO, MR RUGGLES!”

    So who do you think you are? Some kind of dictator? You have your answer.

  • avatar

    RE: “I have no problem buying off of grass or rocks. I expect many other buyers feel the same.”

    Then petition the state if you think that’s something that should be changed. OEMs might get involved. They don’t want their brand tarnished by under capitalized dealers. So see if you can create a groundswell and change the law. Dealers didn’t initiate it. Consumer groups did. I recall a guy selling new Saabs out of his dorm in college. These days there is an interest in maintaining an orderly market. Having to track down a transient dealer over the state’s sales tax he/she collected might be an issue for states, counties, and municipalities. The state would like for a dealer to have a stable business where business docs are maintained and can be inspected by the state authorities. The state is responsible for protecting consumers by ensuring a stable market. Imagine running down a transient for warranty repair complaints.

    Are you sure you’ve thought this out?

  • avatar

    RE: “But his comment about a lack of state laws that bar direct sales is wrong. Not every state does, obviously, but many do. (Tesla’s lawyers seem to have figured this out.)”

    Only a very few do. Every state obstacle Tesla has encountered doesn’t involve a stated direct ban on direct sales. Again, the legacy OEM’s own Sales and service agreements does that.

    AGAIN, if a legacy OEM wants to establish another division, etc. etc. etc.

    Ever wonder why that hasn’t happened?

  • avatar

    RE: “The real issue is that , while we may debate whether and to what extent OEMs would want to sell direct, they should have the same right to make that decision that every other manufacturer has.

    The fact that they don’t is because state politicians have been paid lavishly by dealers to deny them that right, and the cost of this economic rent bestowed on dealerships is paid by Joe and Jane consumer. Which, in a free economy, is just plain wrong.”

    First, there are places where there are factory stores. Europe and Japan to name a couple, and you say Canada. There are reasons for that that you just don’t understand, but the franchise dealers aren’t threatened by it in any way because the factory only owns stores where business people won’t. The most common reason is sky high rent factors. And the factory stores do business at a loss to maintain market representation. In Japan, for example, someone from Nagano can’t buy a car from a factory store in Tokyo, if that’s what you’re getting at. There are other impediments in place that franchised dealers had nothing to do with. What isn’t happening in this particular markets is OEMs selling direct to customers outside of the market their own factory store is reponsible for. And it isn’t going to happen.

    Tesla should have the right to sell direct as they do in most states. As I’ve said repeatedly, there are members of the press who think some of the impediments are caused by dealers when they are actually caused by state watchdogs protecting consumers. But again, Tesla should also have to abide by the same rules as other dealers even if they own their own stores, ALL of their own stores.

    It isn’t state laws preventing legacy OEMs from selling direct. It is common sense. When they owned their own stores they didn’t try to prey on other dealers’ markets. Ask yourself why.

  • avatar

    RE: “When the captive finance arm is owned by the automaker (as it usually is), then it’s ending up on the same income statement.”

    This is true but it is an arm’s length relationship. I don’t know the numbers but dealers tend to avoid floorplanning with a captive and do so as a last resort.

    RE: “A dealer benefits by borrowing money from the captive.”

    A dealer benefits by borrowing from the captive if he has no other options.

    RE: “The factory-owned store has no reason to borrow money from what is effectively itself.”

    Factory stores, MID, Motors Holding, Dealer Development, etc. all borrow money from their captive.

    RE: “I don’t have any statistics handy, but I’m sure that there is more floor plan lending for US new car inventory that comes from captives than there is from banks or independents. They are carrying the market here.”

    A dealer’s captive will always finance a dealer when other lenders won’t, which is why the savvy dealer keeps them in the back pocket as a last resort. They are murderous to work with. Its different for real estate loans. Even capital loans aren’t so bad. I know many dealers who use the captive for real estate, and nothing else. I don’t have the stats either. I’ll see if I can lay my hands on them. I’m curious to know if the advent of the public companies has changed the numbers in the last two decades.

    In my own case, I would ALWAYS floor with the local bank. They’d send me customers. If I needed to, I could manually bounce a draft without being put on finance hold. The draft would represent the next day with no repercussions. Once, Ford built every truck order I had in the system and shipped them. As the drafts came in I told my bank to put me on finance hold so the factory couldn’t load me up. One could never do that with a captive. Bouncing drafts isn’t a good idea. But having an OEM build 3 months of orders in a week, then draft your floorplan for their own cash flow reasons, isn’t good either. My fellow dealers were gagging. I was fat and sassy. Business is full of hard decisions.

    If you floor with the captive, they’ll raise your interest rate if you don’t finance a particular percentage of your payoffs with them. They might refuse to finance any service contracts other than theirs. They’ll often help the OEM load you up when the OEM needs to. And they do most winters. After all, the OEMs all play the stock bounce game and will do awful things to dealers to show a quarter on the “upswing.” The always promise to make it right with “hot merchandise,” but we know that ain’t true.

    Imagine your OEM telling you they are withholding two truckloads of hot merchandise because you turned down a $2K brochure rack they wanted to sell you. Imagine your OEM shipping you truckloads of Jasmine Yellow Cordobas because they didn’t have any more room to store them. If we’d been floored with a captive, they would have been on our floor plan and there wouldn’t have been anything we could have done outside of a courtroom. We didn’t order them. The OEM knew we were solid and had space on our floor line. They threatened us with COD because we bounced their drafts. They were screwed because they could produce no orders. ANd we weren’t floored with the captive.

    And consumers wonder why there are laws protecting dealers from their own partner/supplier.

  • avatar

    RE: “Group 1 Automotive Inc., AutoNation Inc.,Sonic Automotive Inc.,Lithia Motors Inc.,Penske Automotive Group Inc.,who clearly disagree with your assessment, because as one of people quoted in the article you referenced put it, “where else can investors make such high returns?”

    The jury is still out on the large public dealer groups. Some of those mentioned here do not get great results even during boom times the industry is experiencing these days. A lot of the perceived success has to do with the fact that they were able to raise large amounts of capital due to investor frenzy. This has meant they haven’t had to depend on floor plan and capital loans as much as smaller family owned concerns. They HAVE realized some economies of scale

    When rating auto dealer profitability one should consider more than just the fat years. A ten year window gives a better glimpse of actually yearly results. Frankly, if I were to do it again, I’d do an independent pre-owned operation focused on leasing. If someone gave me a new car franchise tomorrow, I’d have it sold by the end of next week.

    RE: “The extremely high profitability of car dealerships, as confirmed by NADA, represents economic rent from protective legislation passed by the states. This economic rent is paid by consumers, in the form of higher prices.”

    See above regarding the so called “high profitability.” You clearly do not understand the auto dealer legislation at the state level. If auto OEMs bought out their dealer network it would result in much higher prices to consumers, not less. We have actual lab experiments to look at. Tulsa, OKC, Indy, SLC, San Diego. FoMoCo. Start there. HAd the losses Ford sustained be passed on to consumers, the price per car would have been thousands higher. The results are in the book.

    The central point, which you seem desperate to ignore, is not whether OEMs would want to set up direct sale channels, but that they should have the same right to do so that every other manufacturer has.

    • 0 avatar
      ect

      If the state laws that prohibit OEMs selling direct all went away tomorrow, I don’t think that the OEMs would rush to buy up their dealership networks, as that would be both prohibitively expensive and disruptive to their business.

      I do think they would move strategically to improve distribution in markets they consider important, but that are at present inadequately served, or that are simply key locations they fell a need to be visible in.

      I’m sure Cadillac, for example, would love to put a showroom in Manhattan. I also recall that Chrysler at one point tried to use corporate resources to bolster its sales network in California. This sort of selective investment would make sense.

      The moist important point, of course, remains the last paragraph of your post, which you quoted directly from mine.

  • avatar

    RE: “The central point, which you seem desperate to ignore, is not whether OEMs would want to set up direct sale channels, but that they should have the same right to do so that every other manufacturer has.”

    It seems when it hit the submit comment button, my response was deleted.

    They should ABSOLUTELY have the “right” had they not VOLUNTARILY given away that right by establishing Sales and Service agreements with thousands of business people. They weren’t persuaded to do so. They were DESPERATE to gain access to the capital, experience, and local relationships of the business people they recruited.

    Now its virtually impossible for them to get it back. They would have to buy out their dealers nationwide. Try doing the math on that. Idiots think all the auto OEMs would have to do is to sell direct, undercut their dealers’ price, and bankrupt them all. Are you one of those?

    Before the Internet took over, they did buy out dealers in select markets, as I pointed out previously. That didn’t work out well. Auto OEMs don’t know how to retail cars. These are corporate people, NOT entrepreneurs.

  • avatar

    You think GM wants representation on Manhattan?

    http://www.potamkinnyc.com/?cs:pro=cgt2&cs:dma=501&cs:loc=en_US&cs:s=gmps-potamkin&cs:e=g&cs:gn=s&cs:cid=22911263056&cs:kw=%2Bpotamkin%20%2Bcadillac&cs:kt=4400201100&mkwid=stcGznQiS&pcrid=22911263056&pkw=%2Bpotamkin%20%2Bcadillac&pmt=b&pdv=c&cs:a=Cadillac_Hyperlocal&gclid=Cj0KEQjwstaqBRCT38DWpZjJotIBEiQAERS6_CjpHr0h7CqTvdFrG3K4NtfebNCZUIlhJ8zbgmt_se8aAuTC8P8HAQ&pageName=HomePage

  • avatar

    RE: “If the state laws that prohibit OEMs selling direct all went away tomorrow, I don’t think that the OEMs would rush to buy up their dealership networks, as that would be both prohibitively expensive and disruptive to their business.”

    There are State and Federal laws against breaking contracts.

    RE: “I do think they would move strategically to improve distribution in markets they consider important, but that are at present inadequately served, or that are simply key locations they fell a need to be visible in.”

    Define “inadequately served.” If you give an OEM the right to arbitrarily declare a market “inadequately served”, you give that OEM the right to apply their own definitions rather than a universal definition. Hence, state laws that prohibit such abuses. There are MANY markets where OEMs have moved to place a dealer to serve a market where there previously was no representation. They do this in a variety of ways. Ford calls it Dealer Development. GM calls it Motors Holding. Chrysler calls it MID (Market Investment Division) These are separately capitalized stores with an investor/operator, who invests, then has the right to buy out the OEM out of profits. MANY dealers began their career that way. Perhaps they borrow the equity out of this house for the initial investment. The OEMs know an entrepreneur with skin in the game runs a dealership better than a corporate hack. They have learned this lesson the hard way.

    RE: “I also recall that Chrysler at one point tried to use corporate resources to bolster its sales network in California. This sort of selective investment would make sense.”

    MID – See above. The factory might own the majority of the stock, but the designated investor operator runs the store.

  • avatar

    The domestic OEMs once believed in vertical integration, although they didn’t call it that back in the day. These days, auto OEMs buy assemblies from suppliers and fasten them together. Ford used to produce their own steel, paint, and glass. No more.

    • 0 avatar
      Pch101

      Automakers are expert at developing, designing and assembling complex machinery.

      It would be more logical for them to get into developing other kinds of machinery and complex products (which would be more closely aligned with their core competencies) than to get into lower margin retailing, the latter of which is only tangentially related to what they do. It’s astonishing that someone on this thread who claims to have an MBA and a technology background would not have figured that out…

      • 0 avatar

        So true.

        There are many experts who are stumped by the car business. Many are convinced it is quite easy. The business has taught humility to many. There are many failures. There is nothing like being wiped out financially to teach life long lessons. The theorists don’t have to deal with that. They stay on the sidelines, probably working as employees for others, while telling entrepreneurs how to run their business. And, like a broken clock, the are occasionally right.

  • avatar

    RE: “selling margins are not factors in those decisions.”

    Really. That’s news to me.

    • 0 avatar
      ect

      When a company is looking at an acquisition or other capital investment, they focus on ROI. Typically, it has to exceed the “hurdle rate”, which is typically what the company defines as its WACC (weighted average cost of capital), and be more attractive than other alternative investments (because capital dollars are always a scarce resource).

      The available selling margin is part of what goes into the financial model, but the determinative issue is the expected ROI – i.e, what return can we expect to earn on the money we invest? If the deal is strategic, and the required ROI is there, we go ahead. If not, we don’t.

      As demonstrated by the article Pch referenced, the public companies investing in auto dealerships are convinced that the ROI on investing in dealerships is positive to their WACC, and so far that seems to have worked for them. 3 of them are now Fortune 500 companies.

      • 0 avatar

        So how many car dealerships have YOU bought?

        The public companies have bought dealerships because their investors demand growth they can’t deliver by growing the dealerships they buy. AND because they have stockholder money to spend, they keep buying to support the stock price. In the beginning they attracted speculators convinced they would do well because of a so called “new” business model. Well, that didn’t turn out but they had all of this speculative investor money to spend. That money couldn’t be left idle and they had to grow. They weren’t going to grow without adding stores.

        • 0 avatar
          ect

          The valuation methodology for acquisitions is pretty consistent across companies and industries.

          I get that you don’t like the public companies’ buying up scads of dealerships. They do however, achieve levels of profitability for their investors that are well above average, and certainly well above the OEMs they represent – see my reply to pch below. Will they ultimately crash and burn, as you hope? I don’t have an opinion on that, one way or another.

      • 0 avatar
        Pch101

        A car dealership that produces a pre-tax return of 3% would be pretty awesome.

        A car manufacturer that produces a pre-tax return of 3% would be a disappointment.

        Different industries have different expectations for performance. This shouldn’t be that tough to figure out.

        (If this concept still confuses some of you, then type “price earnings ratio” into your favorite search engine.)

        • 0 avatar
          ect

          Really? Let’s look at financial statements filed with the SEC.

          In 2014, GM’s net income was 2.5% of sales. Ford’s was 2.2%. Looking at 7 public auto dealers, their net income averaged 2.5% of sales. Penske and Group 1 were at the low end, around 1.6%, Asbury (3.5%) and Carmax (4.2%) at the high end. In the middle were Sonic (1.9%), Autonation (2.2%) and Lithia (2.3%).

          Also for 2014, GM achieved ROE of 11.1%, vs. Ford’s 12.8%. The dealers averaged 22.6% – a lot better than the OEMs. The range was from 9.7 % (Group 1) to 45.4% (Asbury), the rest clustered around the average.

          The average ROE for the S&P 500 is around 14%, so auto dealerships are substantially more profitable than most businesses.

          So, the data tells us that dealerships are as profitable – and really much more profitable – than the major OEMs. No amount of childish invective will change that.

          The enhanced profitability of auto dealerships that results from their legislatively protected status represents economic rent that is paid for by consumers. In a market economy, that shouldn’t happen.

          And you continue to dodge the fundamental issue, which is that OEMs should have the same right to define their sales channels that every other manufacturer has.

  • avatar

    Car car manufacturer making a 3% return wouldn’t be around long unless they were propped up by a government wanting to maintain employment.

    That said, Tesla would love to be showing a consistent 3% return. Perhaps someday they will, and more. I am amazed that people have invested so much in Tesla without solid results. But there are many who invest in the sizzle. If they wait for the steak I guess the presume the big money opportunity will be gone. That’s why they call it speculation.

    Monday I asked an attorney from the FTC why the agency allows staff members to post their opinions on the FTC official website. She didn’t know what I was talking about. Perhaps she did but didn’t want to talk about it. She was either evasive or ignorant about another issue that also involved the CFPB. I don’t mean ignorant in a bad way. She graduated from Harvard Law. The point is that FTC is a huge agency and one hand doesn’t always know what the other is doing. But the media gets hold of an opinion piece and construes it as if the post is agency policy. This isn’t. I’ll be asking the same questions from a recently retired attorney from 30 years at FTC to see if he has more information. This should be interesting.

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