Liam Denning: Car dealership laws not fit for electric age | Columns

NEW YORK — Car dealerships are, in essence, giant lots staffed with people trained in the art of clearing those lots as quickly as possible and repeating the process over and over again.

But 2021 has been a strange year for all of us, dealers included. Their batches emptied…then sat quite often empty as the supply chain slowed down auto factories. Figures released last week indicate that sales were a little better than in 2020 – also ravaged by COVID-19 – but around a million units less than before.

On the other hand, even in the midst of a pandemic, Americans love buying cars and trucks. So while fewer vehicles were sold, they came with peak prices. Volume may have been down 7% from 2019, but the gross margin on each vehicle was roughly double.

Despite squeezing lemonade from last year’s lemon, dealerships face an increasing challenge to their place in the automotive industry.

In November, Rivian Automotive made its stock market debut, quickly reaching a valuation of over $100 billion despite having no revenue. He joined a growing list of highly regarded electric vehicle newcomers who together, including Tesla, now rival the market capitalization of the entire incumbent auto manufacturing industry. Something more than batteries unites the EV crowd: they don’t use independent dealerships, preferring to sell directly to customers.

With any other consumer product, it would barely deserve a mention. But dealerships are protected to varying degrees in most states by laws passed decades ago to combat predatory behavior by the Big Three automakers. These laws effectively require sales and service of vehicles to go through independent franchises.

However, today’s market is a little different than it was in the 1950s. The big three aren’t so big anymore. This week’s explosive news that Toyota overtook General Motors in U.S. sales last year may reflect the idiosyncrasies of the pandemic. But the market was already competitive.

And dealerships, while still fragmented, have moved away from the family model of yesteryear. The top 10 companies together generate more than $100 billion in annual revenue.

Perhaps most importantly, back when Ike was president, no one had an electric vehicle stuffed with chips and taking software updates over the air. Nor a smartphone connected to a million e-commerce sites.

The traditional dealership model prioritizes moving vehicles from inventory – clearing that lot – and generating higher margins through after-sale servicing. First-time EV buyers, meanwhile, typically need to get their hands dirty on things like range, charging options and single-pedal driving. This requires customer education, perhaps over multiple interactions, rather than immediate hard selling. And electric vehicles have fewer moving parts, which limits their service potential.

As first Tesla and now other EV makers have sought to sell directly, incumbents have engaged in a legal land war. To date, about two-thirds of states cap or ban direct sales by automakers.

Michigan – where else? — presents an interesting case study. In 2014, after a Massachusetts court determined that state’s dealership laws did not apply to Tesla because it had never had its own dealerships, Michigan amended its own law to s ensure that Tesla could not rely on such a loophole.

Tesla filed a constitutional challenge, and in 2020 Michigan’s attorney general agreed to effectively allow the company to conduct direct sales and service via a narrow interpretation of the law. But as it became clear that other electric vehicle companies would follow Tesla’s lead, Michigan lawmakers proposed a new law that would have effectively barred any automaker from conducting direct sales or service in the state – except for Tesla, via a cleverly worded exclusion. The final twist: This exclusion was omitted when the bill passed the House.

The Michigan Senate never took up the legislation, but the saga at this point has already said it all. When lawmakers have to resort to such contortions to protect the old system, the template is lifted.

Daniel Crane, antitrust specialist at the University of Michigan Law School, notes that the dealer lobby has worked to overhaul these laws – explicitly passed to protect dealers – by protecting consumers by lowering prices through the competition between dealers. Yet, as he writes, vertical integration is only anticompetitive if it somehow prevents rivals from gaining access to a vital raw material or sales channel.

“There is no indication that Tesla or any other company is hindering inter-brand competition by creating its own critical automotive distribution points.” The point here is not that concessions should be gutted, only that they should not be given a protected status that embarrasses new entrants.

There is evidence that maintaining outdated state laws is hampering electric vehicles that have been developed largely by startups. States that do not restrict direct sales show much higher EV penetration than those that do.

Correlation is not necessarily causation, of course. But consider two large states, Florida and New York. The latter has much more ambitious decarbonisation targets, including a ban on gas guzzler sales from 2035 and generous state subsidies for electric vehicles.

Yet, in terms of EV adoption, it lags behind Florida, which offers no state subsidies. One difference is that New York caps direct sales — with another one of those weird Tesla exclusions — while Florida doesn’t.

Just because a law is hard to defend doesn’t mean it’s doomed to failure. On the one hand, car dealerships are found in virtually every electoral district and they give generously to politicians, far more than the manufacturers.

Yet even incumbent automakers are now making big investments in electric and vehicle autonomy — and exploring a variety of new ways to sell their products. Last July, Jim Farley, chief executive of Ford Motor Co., touted the company’s expanding backlog.

Of course, these vehicles are always delivered (and later serviced) through a dealership. But the fact that customers select their options and prices online pushes the dealership to become more of a distribution center.

Dealership laws have helped traditional automakers by curbing EV startups. But as these startups outperform incumbents in valuation anyway and begin to change the way cars are sold and serviced, the laws begin to look less like a defensive moat and more like a limiting wall.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. © 2022 Bloomberg Opinion.

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