Tesla defends selling cars directly to the customer at FTC panel

Dealership representatives say they want to protect “intrabrand competition.”

Megan Geuss – Jan 19, 2016 6:26 pm | 405

Collins Oldsmobile, Indianapolis IN, 1971 Credit: Alden Jewell

On Tuesday, the Federal Trade Commission (FTC) assembled a panel of experts in auto manufacturing and marketing to talk about whether or not automakers should be allowed to sell cars directly to customers.

Representatives from Tesla Motors, as well as Elio Motors, a company that has plans to manufacture cheap, three-seater vehicles, argued that new car companies shouldn’t have to comply with a dealership model of car distribution—something that been a contentious issue for Tesla in previous years. Tesla has been barred from selling directly to consumers in numerous states including New Jersey, West Virginia, and Texas. The FTC, however, has sided with Tesla, calling for legislation to revisit regulations on how cars are sold. (FTC officials stressed at today’s panel that the commission was not going to assert its opinion, but instead leave the stage to the speakers it had assembled.)

On the opposing side, auto industry analyst Maryann Keller and dealership attorney Paul Norman argued that the dealership model is good for consumers because it promotes “intrabrand competition”—or the idea that competition doesn’t just happen between, say, Ford and Volkswagen, but between Ford dealers within the same city.

Tesla’s lead lawyer, Todd Maron, argued that the company is relatively new and selling a product with which most customers are unfamiliar. And customers coming to Tesla have questions that can’t be outsourced to third parties, like “how to charge from home [or] away from home, what is range anxiety… what are the incentives, what is the difference between the price of gas and electricity, how does the car work, what is generator breaking, what does dual motor mean.”

“For all these reasons our customers take a long time to study the car,” Maron continued. “It takes hours and hours of a patient education process that only we can afford them and a traditional dealership model cannot.”

Maron also argued that, were Tesla to open dealerships, those dealerships couldn’t make money off the things that dealerships traditionally make money from—servicing, financing, and insurance products. If a car doesn’t use oil, customers won’t come in for regular oil changes, Maron said.

But even more than that, Maron said that customers would never buy from a dealership anyway. “If we hypothetically used a franchise dealer in a certain state, we would still be selling on-line and in neighboring states… Franchise dealers make profits marking up the price of the car sold by the manufacturer. If a franchise dealer marked up the price of our car, no customer would ever buy it from them, they would simply go to us and buy it for less on-line or a neighboring state. No franchise dealer would ever opt into this system for us.”

In her rebuttal, Keller argued that cars aren’t like many other consumer products and Tesla can’t use the same model that Apple uses to sell its phones. “There are simply costs associated with the distribution of objects that weigh 4,000 pounds, occupy 50 square feet of space and are sold to consumers with varying needs including trade ins, credit issues, etcetera,” she said.

Keller added, “What promoters of the direct sales model fail to recognize is that same-brand dealers vigorously compete with each other for the benefit of consumers.”

Norman agreed, adding that dealerships create a beneficial buffer to the manufacturer. “Independent dealers also act as advocates for consumers and provide a local presence which is a convenient place for customers to go to solve their problems. Independent dealers add an extra layer of accountability.”

But Dan Crane, an associate professor at the University of Michigan and the author of six antitrust books, challenged the idea that dealerships are good for consumers. “The claim we’ve heard on this panel is somehow intrabrand price competition is good. That may be true but it doesn’t follow from that that… forcing the manufacturer to distribute through dealers lowers prices to consumers. As a matter of economics, that make absolutely no sense.” Crane explained that manufacturers who command brand loyalty and marketshare will usually charge the most they can for each car, and dealers always have to mark the prices of the car up from there.

Crane added that Keller and Norman could even be right about the dealership model leading to consumer savings, but that it’s hard to know without a test. “Remember, the choice of distribution method is a competitive vector itself. And so we’ll find out whether or not direct distribution leads to consumer savings. That’s what markets are for,” Crane added.