Ask any of Tesla’s customers or fans what makes them so enthused about the California car brand, and the answer will almost always have something to do with the all-electric drive-train strategy or the inevitable replacement of gas cars with electric power. Actually, Tesla’s automotive technology is neither completely unique nor guaranteed to put an end to internal combustion (let alone support the firm’s ludicrous market valuation). What is revolutionary, however, is Elon Musk’s desire to build a retail network free from the franchise-dealer monopoly. And, despite some setbacks this week, he might just succeed.
By attacking the gatekeepers of automotive retail, Tesla is promising not just a unique sales and service experience for its well-off customers, but a more liberalized, competitive market for all car buyers. In this sense, Tesla does indeed hold the promise of a better — if not greener– future.
The dealers themselves, of course, are none too pleased. And they have one of the best-funded and most active political lobbies in the United States, even securing for themselves an inexplicable exemption from Consumer Finance Protection Bureau oversight. Worse, Tesla is facing not just a federal-level battle with this implacable foe, but a state-by-state fight as well, with New Jersey and Texas becoming the latest to ban direct sales.
After all, car dealers have everything at stake. Unlike most developed markets, the U.S. is built on a system that allows new vehicles to be sold only by franchised dealers. This not only bars makers such as Tesla from cutting out the middleman and selling directly to consumers, it prevents new players from entering the market and providing new sources of competition. As Alex Tabarrok points out in a excellent post at Marginal Revolution, the initial benefits of the dealer franchise system have long since given way to rent-seeking, inefficiency and unintended consequences.
Indeed, the excesses of the dealer-franchise monopoly go a long way in explaining the woes of Detroit’s automakers. Locked into franchise agreements that they can break only at extreme cost (see the $1 billion GM paid to buy out Oldsmobile dealers in 2004), U.S. automakers are hampered in adjusting sales and branding to changes in demographics and taste. Moreover, the franchise system encourages automakers to push volume onto their dealers in pursuit of short-term goals, in turn leading to steeper discounts, worse resale values and long-term damage to brand equity. Not coincidentally, Europe and Japan’s more competitive retail markets provide incentive for car manufacturers to more closely match supply with demand, preventing the excesses that lead to massive crashes like the one that forced GM and Chrysler into the arms of the U.S. government in 2008.
So what chance does Elon Musk has realizing his vision of a post-monopoly car market? Actually, momentum might be on his side. Chrysler’s new owner Fiat recently battled California’s car dealers for the right to operate non-franchise “retail laboratories” for its Fiat 500 city cars. TrueCar, an online car shopping site, butted heads with dealers over online price competition. Ebay and Groupon have dipped toes into new-car sales, Costco is nibbling around the edges of the dealer monopoly, and even major automakers show real interest in the potential for online sales. Even in the realm of service, where dealers make up for slim sales margins with huge profits, growing support for “right to repair” legislation — which would force automakers to give the same information and tools to independent repair shops that they provide to dealers — threatens an arguably more important dealer monopoly.
Though Tesla is attacking the franchise system most directly and gaining the headlines as a result, it’s hardly alone in pushing for a change to America’s archaic and inefficient auto retail system. Musk would do well to reach out to these other players as he continues to fight what is, by any macroeconomic analysis, the good fight.
By carrying the standard for retail market liberalization, Tesla shows that it aspires to be more than a green gimmick, but heir to the best traditions of American innovation. And that’s a revolution worth getting excited about.