The auto dealers’ racket and their war on the free market

Last week, Tim Steller of the Arizona Daily Star had a piece about Tesla Motors possibly locating its so-called gigafactory (battery plant) in Tucson, along with a projected 6,500 new jobs.

Tesla is cutting-edge electric automobile technology. It won all the major 2012 automobile awards (Motor Trend, Automobile, Yahoo), and got a near-perfect rating (99 out of 100) by Consumer Reports. So it’s perfect for Tucson, right?

There’s just one problem. State law impedes dreams of Tucson Tesla plant, and more:

Arizona is one of many states where auto dealers have been able to enshrine their business model in statute: State law prohibits auto manufacturers from selling cars directly to consumers rather than going through dealers.

Since Tesla’s business model is to sell direct to buyers, either through company-owned dealerships or over the Internet, it cannot sell cars in the state. Tesla has a showroom in Scottsdale where prospective customers can look at its models but can’t drive the cars or even discuss the price. (That’s probably OK for most people, since the cheapest model starts at about $70,000.)

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I asked Robert Lusch, a professor of marketing at the University of Arizona’s Eller College of Management, about the dealership system, and he said it evolved out of the early years of auto sales a century ago, when it took manufacturers a long time to ship their vehicles around the country in response to orders.

Now that transportation problem doesn’t really exist, he noted, but the dealership system that grew out of the problem persists, in part because auto dealers have become such integral figures in their communities. They sponsor teams and activities and make donations to community needs. Their standing and money also translate into political power (not that we have anybody who fits that description in Tucson).

“They lobby to get those laws passed,” he said. “In my opinion, it’s anti-competitive, but the government has the power to pass laws.”

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Diarmuid O’Connell, Tesla’s vice president of business development, said in an interview with Bloomberg News this month regarding the gigafactory and Texas laws that prohibit direct sales.

“The issue of where we do business is in some ways inextricably linked to where we sell our cars,” O’Connell told Bloomberg. “If Texas wants to reconsider its position on Tesla selling directly in Texas, it certainly couldn’t hurt.”

So there’s a challenge for Arizona’s auto dealers. The rest of us would of course welcome the economic boost a Tesla plant would bring to Tucson and Arizona. If you do, too, maybe it’s time for you to re-examine your position on direct sales.

Today in the Los Angeles Times there is an opinion by Michael Shermer, the publisher of Skeptic magazine and a monthly columnist for Scientific American. The car dealers’ racket:

The New Jersey Motor Vehicle Commission last week voted to prohibit Tesla from selling its electric vehicles directly to consumers, a decision endorsed by the New Jersey Coalition of Automotive Retailers and Gov. Chris Christie. New Jersey is the third state, after Texas and Arizona, to block Tesla from direct sales, all under the guise of protecting consumers. Some free market.

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[T]here’s nothing wrong with a manufacturer offering to sell its products only through designated retailers. This is common practice in many industries so that manufacturers don’t compete against themselves and undercut their retailers.

But there’s also nothing wrong with a manufacturer offering to sell its products directly to consumers. This too is common practice, as evidenced by the billions of dollars that are exchanged online between manufacturers and consumers. Some bricks-and-mortar businesses have suffered as a result. But as conservatives like to say, that’s the free market at work.

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This move against Tesla is nothing more than naked economic protectionism of the type that Adam Smith railed against in 1776 in his book “An Inquiry into the Nature and Causes of the Wealth of Nations.” This work, which conservatives treat with almost biblical reverence, is one long argument against the mercantilist system of protectionism and special privilege. Smith demonstrated that practices similar to what is being done to Tesla may benefit other producers in the short run by protecting them from competition, but in the long run they harm consumers and thereby decrease the wealth of a nation: “In the mercantile system,” he wrote, “the interest of the consumer is almost always constantly sacrificed to that of the producer.” Whereas in a capitalist system, Smith explained, “Consumption is the sole end and purpose of all production.”

In the old mercantilist system — what we today call “crony capitalism” — instead of consumers telling producers what they want, government agents and politicians tell consumers what and how much they can buy, and at what price. This is done through tax subsidies for corporations (estimates vary, but Fortune 500 companies combined receive about $100 billion annually), regulations (to control prices, distribution and sales), licensing (to control wages, protect jobs, exclude newcomers) and other deals between industries and politicians.

New Jersey is not only stopping Tesla from selling cars to consumers. They are, in essence, saying that we the government will tell you where you will be allowed to buy your cars.

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Elon Musk has been compared favorably to Steve Jobs. Imagine where we’d be if, in the 1980s, typewriter manufacturers lobbied to block Apple from selling its computers directly to consumers. The very idea is absurd. Consumers should be free to buy any product they want from any manufacturer without the consent of the government. And if anyone should understand this simple principle, it should be conservatives.

Dealership trade groups have sued Tesla in several states like Massachusetts and New York.

In North Carolina, the state Senate just passed such a bill unanimously, which would effectively bar North Carolina residents from buying Tesla vehicles.

This is crony capitalism protectionism for automobile dealers and their antiquated dealership system. The New Car Dealers Association is typically among the most fervent of conservatives spouting “free market capitalism” and “fewer government regulations” and “small government” — just not for their business — for which they demand the government protect them from emerging new technologies through anti-competitive protectionist trade regulations. They are phony “free market” conservatives.

It’s time that Arizona put consumers and consumer choice — and good jobs first. Then maybe Tucson can bring this much needed manufacturing employer to town.