Give Tesla and Missourians a Fair Deal

First appearing in the Springfield Business Journal:

The last time I bought a MacBook I made the purchase from an electronic goods store, but I could have bought it from one of Apple’s retail locations. In fact, millions of Americans purchase products directly from manufacturers rather than through a local storefront under independent ownership. Should Missouri pass a law barring Apple from directly selling computers? Such a prohibition would strike many people as an abridgement of freedom of choice, but that sort of policy is exactly the approach some lawmakers want when it comes to selling cars.

In Missouri, like other states, it is illegal for any car manufacturer with franchises to sell directly to the public. Dealerships fought for that regulation, implemented in the 1980s, under the argument that they needed to be protected from predator car companies.

Tesla, a new electric car company that has no dealerships, is selling cars directly to Missourians. Instead of welcoming a new business model to the state, car dealers and politicians like Mike Kehoe (himself a former dealership owner) want to ban direct-manufacturer car sales entirely.

Supporters of direct sales bans claim dealerships just want a level playing field, and that Tesla is getting special treatment. They claim, as all middlemen have, that their position is necessary, that allowing direct competition from manufacturers could allow car companies to destroy the dealership model. That would be bad for Missourians, they assert, because dealerships protect consumers and provide competitive markets. Having many dealers supposedly creates competition, leading to the lowest possible price for consumers.

In reality, vehicle distribution through dealerships can be costly to the consumer. The 2009 Department of Justice paper “Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers” reported that as much as 30 percent of the cost of a new car is due to auto distribution. Enshrining the car dealership model in law has limited the ability of car manufacturers to both reduce inventory costs and increase customization, practices common in other markets. In Brazil, where GM can engage in direct sales, cost savings from order to delivery averaged 8.6 percent through direct sales.

Car buyers in Missouri, and in America, might prefer directly buying from manufacturers for lower prices, customization, or simply to avoid bargaining at a dealership. A J.D. Power and Associates poll found that half of Americans profess a desire to buy manufacturer-direct, even if the prices are equivalent. If dealerships cannot lure customers the way they operate now, why should Missourians be forced to buy their new cars only from them?

Allowing manufacturer-direct car purchases does not necessarily mean the death of dealerships, as long as they can be of service to both buyers and car companies. From the manufacturer perspective, dealerships allow the company to devolve responsibility for advertising, selling, financing, and maintaining a car, which allows the company to focus on car production.

I bought my MacBook from a store, but I wouldn’t force that choice on others in the market. The next time you purchase a computer, you will have the choice to buy from many types of stores or even directly from a manufacturer—business models that meet the needs of customers in different ways.

That’s a vibrant marketplace, and there is no reason the same type of market cannot exist for cars in Missouri. Indeed, if the playing field between Tesla and other car companies needs to be leveled, we should do so by scrapping the ban on direct car sales. There is no reason manufacturer-direct sales cannot exist side-by-side with competitive dealerships.

Joseph Miller is a policy researcher at the Show-Me Institute.