Are auto-dealership protection laws holding back electric vehicle adoption?

Everyone who’s been following the story of Tesla is well aware of the war between the iconoclastic automaker and the country’s hidebound auto dealerships. After a decade of highly colorful struggle and strife (which I cover in detail in my history of Tesla), the US is a patchwork of policies regarding Tesla’s direct sales model—some states allow Tesla to sell cars directly to consumers, some prohibit it, and some have reached some sort of compromise. (To be clear, one can buy a Tesla in any state by ordering it online—the main issue is whether Tesla can sell vehicles at physical showroom locations.) 

Above: A look at one of Tesla's stores (Source: Tesla)

Now that the mainstream media is beginning to cover the Tesla-vs-dealerships battle, consumers may be surprised to learn that, while they’ve been buying most products and services online directly from their producers for a decade or two, many of them are legally prohibited from buying cars this way. However, while consumer advocates may wax indignant about the situation (few of us have any love for auto dealers), the ponderous political power of the dealerships will probably prevent the legacy automakers from adopting Tesla’s direct-sales model any time soon.

Liam Denning, writing in Bloomberg, and Robinson Meyer, writing in The Atlantic, argue that antiquated dealer-protection laws in the US are distorting the national auto market, and holding back the transition to EVs. They point out that overall EV sales are higher in the states that don’t restrict direct sales. [Mr. Meyer does not mention Mr. Denning’s earlier article, but he makes precisely the same points, and cites several of the same primary sources.]

As it stands at the moment, 17 states prohibit all automakers from selling vehicles directly to customers, while another 11 states have carved out specific exceptions for Tesla (and in some cases, other automakers that sell only EVs, which means Rivian and Lucid).

Messrs. Denning and Meyer point out a number of ironic aspects of the current situation. Consider the puzzling fact that far more EVs are being sold in Florida than in New York. The two states have similar populations, but are poles apart when it comes to EV policy. The bright blue Empire State has implemented a wide range of policies to fight air pollution and carbon emissions, including a plan to phase out ICE vehicles by 2035. New York offers incentives of up to $2,000 for EV buyers, and up to $5,000 for companies that install EV chargers. New York has adopted California’s stringent emissions standards, and has directed substantial investment to public charging and electrification of public transit.

In the Sunshine State, where all branches of state government have been in red hands for two decades, and the governor describes himself as “not a global warming person,” there are no state incentives for EV buyers, and funding for high-speed highway chargers is just beginning to trickle out. (Incidentally, Florida utilities and their representatives in the state legislature are also working to kill rooftop solar in the state by implementing a monthly minimum charge and reducing net metering.)

So how can it be that, for the past three years, (according to research firm IHS Markit), Floridians have bought over 60 percent more EVs than New Yorkers have? Could it have something to do with the fact that Tesla, which currently sells the vast majority of EVs, has opened 17 stores and galleries in Florida, whereas in New York, it has only 5 stores, and is prohibited from opening more? (Tesla recently launched a new campaign to expand the number of permitted stores.)

“In 2020, New York’s nearly 1,000 franchise dealers collectively sold less than two EVs per location,” James Chen, Rivian’s VP of Public Policy, told The Atlantic’s Mr. Meyer. In the same year, Tesla sold nearly 1,890 vehicles at each of its New York stores.

“If you want to see more rapid market penetration of electric vehicles, then prohibitions on direct sales are a major barrier. Whether you’re free market or pro-consumer or pro-environment or pro-competition, there’s something here for everyone,” says Daniel Crane, a law professor at the University of Michigan, adding that in one case, both the Sierra Club and the Koch brothers signed a letter opposing a dealer-protection law.

Above: A look at a Tesla store in Naples, Florida (Source: Waterside Shops)

Dealers, of course, do not agree, and tend to depict themselves as the advocates of consumer choice. “To cater effectively to mass-market buyers—of any drivetrain—you need to capitalize on what has worked for mass-market buyers for generations,” Jared Allen, a VP at the National Automobile Dealers Association, told The Atlantic. “The assumption that future EV buyers want the Tesla direct-sales model is just flat wrong...one of the reasons Tesla’s experiment with selling direct worked was only because the company never gave their customers any other choice.”

Dealers may argue that they can provide better customer service, but that certainly hasn’t been the case for EV buyers to date. EV advocates consider dealers to be a major bottleneck for EV sales—several secret-shopper campaigns have found that most dealerships keep few or no EVs in stock, and that sales associates tend to discourage buyers from considering EVs. The Atlantic cites a 2019 Sierra Club study, which found that legacy car dealerships were totally unprepared to sell EVs—many didn’t even bother to keep their demo models charged. “There were lots of untrained salespeople who couldn’t answer questions about the technology,” study author Hieu Le told Mr. Meyer. “In the worst case, the volunteer was urged by the salespeople to buy a gasoline vehicle.”

As long as legacy automakers were producing EVs in limited numbers (just enough to satisfy California regulators), this situation probably suited them fine. Now, however, we’re cautiously optimistic that some of them (GM, Ford, VW) hope to start selling EVs in volume, and there are already signs that they’re coming into conflict with their dealers. Among other issues, some dealers have been taking advantage of the ongoing supply crunch to slap huge markups on in-demand EV models such as the Ford F-150 Lightning. To their credit, both Ford and GM have put dealers on notice that they won’t allow this to continue.

Another preview of the upheavals to come: In late 2020, GM decided to buy out dealers who don’t want to electrify. The automaker plans to make Cadillac an electric-only brand, and rather than force its dealers to make substantial investments in chargers and other required equipment and training, GM gave them the option to drop the Cadillac brand and accept a cash buyout. According to the Detroit Free Press, about 20% of Cadillac’s national dealer network took the buyouts.

Savvy dealers realize that fighting electrification is a losing battle, and some are taking steps to make sure they’re still adding value under the new order. Last November, John Voelcker reported in Car and Driver that the National Auto Dealers Association (NADA) will work with startup Chargeway to teach EV sales techniques to its member dealers, and to help them get up to speed on charging, available incentives for EV purchases, and other important topics.

No legacy automaker would ever publicly admit to any dissatisfaction with the current dealership system, but it certainly appears that they (and some of the dealerships themselves) look at Tesla’s direct sales model with more than a touch of envy. During the pandemic-induced lockdowns, many auto dealers started exploring things like online sales and valet-style pickup and delivery services. In Europe, where the dealership model is less rigid, automakers have been flirting with the brave new world of direct sales.

However, even if Big Auto wanted to break it off with Big Auto Dealership, it isn’t going to happen in the US, where auto dealers and their trade associations wield a lot of political power. The top dealership groups in America have collective annual revenue of $10 billion, and they command more market share than any automaker. “These are huge multistate businesses. Lots of them are publicly traded, and they’re politically extremely powerful,” says Professor Crane. Dealers are major donors to local and state campaigns, and more than a few state and federal legislators own auto dealerships themselves.

This local concentration of political power has created another strange situation: state dealership laws don’t correspond to political divisions. “Deep-red Utah allows direct sales, but blue-blooded Connecticut does not,” Mr. Meyer writes. “Tax-and-spend California permits direct sales, but free-market-loving Texas doesn’t.”

Supposedly freedom-loving Texas has been one of the major fronts in the Tesla-vs-dealers conflict (as recounted in a certain book). In 2013, Elon Musk personally testified in favor of a bill that would have carved out an exception to the state’s ban on direct sales. “It is crazy that Texas, which prides itself on individual freedom, has the most restrictive laws in the country protecting the big auto dealer groups from competition,” said he. The pro-Tesla bill failed to move forward in the legislative session. Tesla’s supporters tried and failed again in 2015, 2017, 2019 and 2021 (the Texas legislature meets every other year).

Above: Tesla still has political opposition in Texas (YouTube: KVUE)

Tesla continues to campaign against the law, but for now, it stands. When the Austin Gigafactory starts producing cars, they will apparently have to be shipped across the state line, then back again, before they can be sold to Texas buyers. It’s a puzzling policy for a state that prides itself on its laissez-faire, pro-business atmosphere. It’s even more puzzling that Tesla has embraced a state whose leadership is implacably opposed to the company’s mission of addressing air pollution and climate change, but that’s a subject for another day.

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Written by: Charles Morris; Sources: Bloomberg, The Atlantic