FTC Stance On Factory-Direct Sales Extends Beyond Tesla And Michigan

The U.S. Federal Trade Commission is urging legislators to remove laws that ban manufacturers from selling directly to consumers, saying it’s better to let consumers decide how and where to buy a new vehicle.

The direct-to-consumer debate was stirred up again last week after the FTC sent a letter to Michigan legislators, who are considering an upcoming bill on the topic. Last year, Governor Rick Snyder signed a law that banned automakers from selling new cars directly to buyers within the state.

But the FTC doesn’t limit its position on consumer-direct vehicle sales to just Michigan, or even just to Tesla Motors, the carmaker most often targeted by these sales bans. When comparing sales of vehicles to sales in other industries, the FTC noted that companies in other industries are typically allowed to choose which sales methods to use.

Elio Motors wants to sell its autocycle using a factory-to-consumers sales method.

Elio Motors wants to sell its autocycle using a factory-to-consumers sales method.

“A blanket prohibition on manufacturer sales to consumers is an anomaly within the larger economy,” said the FTC. “Most manufacturers and suppliers in other industries compete with each other not only on the price, quality, and features of their products and services, but also on the cost, speed, service and efficiency of their sales and distribution systems.

“If a manufacturer concludes that using independent distributors to sell its products will best serve consumers and its own needs, it is free to contract for those services. On the other hand, if it decides that direct sales work better for its products, it can deal with consumers directly.

“Typically, no government intervention is required to augment or alter these competitive dynamics—to the extent a manufacturer faces robust competition from other manufacturers, the market weeds out inefficient, unresponsive, or otherwise inadequate distribution practices on its own.”

Supporters of factory-direct sales bans often say that these laws help lower vehicle prices by stimulating competition between dealers, and argue the laws are necessary to protect consumers after the sales. But the FTC called these arguments “unpersuasive.”

“Perhaps the central concern reflected in the current laws regulating the manufacturer-dealer relationship is that government intervention is required to protect independent dealers from abusive behavior by their suppliers. But a blanket prohibition of direct manufacturer sales is not a narrowly crafted provision to protect franchised dealers from abuse in their franchise relationships,” stated the FTC.

“Advocates for existing dealers also argue that manufacturers that sell directly to consumers will not provide them with adequate service,” the FTC said.

Though Zero Pollution Motors' Airpod is not into production, the company has said earlier that it wants to sell the cars directly from its factories.

Zero Pollution Motors’ Airpod is not yet being produced, but the company has previously said that it wants to sell the cars directly from its factories.

But this goes against normal business practices, the FTC noted, adding that businesses are pressured to show customers that they can maintain and support the vehicle in the future or risk losing buyers to competitors.

“Finally, advocates for a categorical ban on direct sales argue that direct-selling manufacturers would charge higher prices to consumers,” noted the FTC.

Again, this idea is contrary to economic patterns in other industries, explained the FTC. Using gasoline refineries as an example, the FTC pointed out that states with strict limitations for refineries to own retail stations have higher prices than states that let refineries choose between using third-party and company-owned locations.

The FTC doesn’t want the public to confuse its support of consumer-direct sales with endorsement of Tesla or disapproval of traditional auto dealers.

“FTC staff offer no opinion on whether automobile distribution through independent dealerships is superior or inferior to direct distribution by manufacturers,” the FTC said.

“Rather, staff’s principal observation is that consumers are the ones best situated to choose for themselves both the vehicles they want to buy and how they want to buy them.”

SEE ALSO: FTC Urges Michigan To Cease Tesla Sales Ban

Last week, the FTC sent a letter to Michigan Senator Darwin Booher. The department said that it supports his bill to allow manufacturers of autocycles – a small, enclosed vehicle with three wheels – to sell either through dealers or directly to consumers.

But the bill doesn’t go far enough, said the letter’s authors.

“The narrow scope of the bill would largely perpetuate the current law’s protectionism for independent franchised dealers, to the detriment of Michigan car buyers,” stated the FTC.

“FTC staff believe Michigan’s consumers would more fully benefit from a complete repeal of the prohibition on direct sales by all manufacturers, rather than the enactment of any limited, selective set of exceptions.”

In previous years, Legislators in Missouri and New Jersey have received similar comments from the FTC.

Laws banning direct sales are still on the books in Arizona, Texas and West Virginia. A representative with the FTC said that the department will send letters similar to Michigan’s if legislators request it.