FTC comes out in favor of Tesla over car dealer cabals, says direct sales bans are bad policy and outdated

Reuters:

By Diane Bartz

WASHINGTON, April 24 (Reuters) – In an unusual move, three top officials with the U.S. Federal Trade Commission on Thursday came out in opposition to laws that ban automakers like Tesla Motors Inc from selling their automobiles directly to consumers.

Laws that ban car manufacturers from selling their own products are “bad policy” and outdated, the FTC officials said in a blog post. Such laws are currently in place in Arizona, Maryland, New Jersey, Texas and Virginia.

The authors were Andrew Gavil, director of the FTC’s Office of Policy Planning; Deborah Feinstein, director of the Bureau of Competition; and Martin Gaynor, director of the Bureau of Economics.

The views are their own and not those of the commission, the three said in the posting. It is not clear if the FTC is considering other action on the auto sales issue.

Dealers argue that their business model is good for consumers because dealers compete on price and offer long-term service. They see direct sales of any sort as an existential threat.

The clash pits Elon Musk, the billionaire CEO of Tesla, which makes electric cars, against these 17,000 car dealerships, often family-owned, sprawled across the United States.

The FTC officials pointed out that the Internet has changed how people shop for everything from toothpaste to a taxi ride. They urged lawmakers to be skeptical of auto dealers’ arguments that they need protection.

“Change can sometimes be difficult for established competitors that are used to operating in a particular way, but consumers can benefit from change that also challenges longstanding competitors,” the FTC officials wrote.

The franchise system was set up in the first half of the 20th century by automakers who did not want the expense of building up their own sales force. The FTC officials said that regulations were created to protect dealers from abusive practices by automakers.

“In this case and others, many state and local regulators have eliminated the direct purchasing option for consumers, by taking steps to protect existing middlemen from new competition. We believe this is bad policy,” Gavil, Feinstein and Gaynor wrote in their blog post.

“Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated,” they wrote.

Neither Tesla nor the National Auto Dealers Association had any immediate reaction to the blog post.

The conflict between Tesla and dealers came to a head last year after Tesla introduced its Model S, a $60,000-plus sedan that aimed for a wider audience than the two-seat, $101,000 Roadster sports car it introduced in 2009.

Despite the bans, Tesla has found a way to convince customers to look at its cars. In states where sales are prohibited, Tesla employees show off cars in “galleries” and tell customers to complete the sale over the phone or online.

Tesla, which was founded in 2003, had total sales in 2013 of about 22,500 cars.

Musk has said he is not interested in overturning the existing franchise system, but he doesn’t want to participate.

Neither Tesla nor the National Auto Dealers Association had any immediate reaction to the blog post.

Tesla was little changed in late morning U.S. trading, at $208.08 per share.