The FTC held a conference yesterday titled “Auto Distribution: Current Issues & Future Trends” with a particularly interesting panel about direct distribution. The panel discussed the laws in certain sates which restrict the ability of car manufacturers to sell their vehicles directly to the consumer, and instead force them to go through independent franchised dealers.
Panelists included two automaker representatives, Tesla Motors’ General Counsel Todd Maron and Elio Motors’ Vice President of Government Affairs Joel Sheltrown. Both companies are trying to established their own network of stores and don’t want to use the dealership model.
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For the counter argument, two lawyers representing the dealerships, Maryann Keller and Paul Norman, were also on the panel to advocate for the laws banning automakers to directly sell cars.
Finally, two independent experts, Professor Dan Crane from University of Michigan and Steven McKelvey from Nelson Mullins, were also on the panel to provide their inputs. Both experts argued strongly against the prohibition of direct sales by state interventions.
Tesla General Counsel Todd Maron argued that the automaker wouldn’t thrive under a dealership model because independent dealers make most of their profit from servicing cars while electric cars have little long-term maintenance and fewer moving parts.
Dealership representatives spent the better part of their presentations arguing that intra-brand competition (same brand dealerships competing with each others) is good for customers because it lowers the prices compared to direct sales from manufacturers.
But they couldn’t explain the simple logic of manufacturers extracting margins at the wholesale level instead of at the dealership level being essentially the same thing. A manufacturer will take a profit anyway, it doesn’t matter at which step of the buying process it takes a margin. When a dealership is franchised and independent, it takes an additional mark up on top of the manufacturer’s price. The only variable is how big of a premium.
Maron commented on the idea:
The existence of a middleman, someone else who needs to obtain a profit in the process of selling a car results in lower prices. That is counter intuitive to every economic principle that exists. As Dan cited, 72 economists spoke out on this issue against this notion that the existence of the dealers lower prices.
It’s why the dealers have said in court in our cases that it’s us who are lowering the prices. That’s why we put on an economist to explain how we were the ones that were able to lower the prices and how the franchise model increases prices. They didn’t put on any testimony to dispute that. They didn’t even put on any economists. These questions are not subject to serious dispute.
There’s some interests out there between manufacturers and their affiliated franchise dealers and how they should compete against one another. I don’t know where to draw those lines. I Know we have nothing to do with that question.
Here is Maron’s presentation and you can watch it in full here (Tesla presentation starts at around 5 hour):