Tesla Versus The Auto Franchising System, Part 3, Consumer Interests

As a consumer, you are a stakeholder. See also the Introduction, Part One, and Part Two.

A More Worthy Candidate?

Late last September at a Baltimore conference with regulators and stakeholders from various states, a face-off between two high-level speakers for Tesla’s interests, and two representing auto dealer concerns talked turkey, but no one recorded it.

The meeting was organized by the National Association of Motor Vehicle Boards and Commissions. For two hours it became a forum for Tesla to air views on a sub-topic very near to its heart: “Manufacturer Ownership: Is it time to carve-out a limited exception to the franchise laws to accommodate start-up alternative fueled vehicles?”

Attendees said this was the first time they’d seen one of these normally dry meetings so packed.

We learned of it last October from one of the speakers, Texas Auto Dealer Association President, Blll Wolters. Saying he was happy to share the information, he forked over his entire talking points and notes so we could air the point-counterpoint for the court of public opinion. However, we needed Tesla’s side to do this fairly.

We then contacted Chen who passed us to PR. Assurances were made on a phone conversation with Tesla communications director Liz Jarvis-Shean we only wanted to air both sides of the quasi debate to the light of day. If anything was inaccurate, it would be quickly corrected, we said. Assuming Tesla’s points had merit, readers would see that, and this could help its case, went the appeal.

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Jarvis-Shean said she’d reply with an answer. A few days later, an e-mail said Tesla would “take a pass.” Its answer was no comment to the offer to address issues in a more public forum and engage in open debate on significant policy issues.

Now skip ahead to Mar. 11, 2014, when Tesla’s blog post “Defending Innovation and Consumer Choice in New Jersey” accused officials without evidence of serious ethical violations.

“This move comes in spite of discussions with the Governor’s staff as recently as January, when it was agreed that Tesla and NJ CAR would address their issues in a more public forum: the New Jersey Legislature” wrote Tesla. “Instead, rather than engage in an open debate on such a significant policy issue …” [emphasis ours]

That’s right, Tesla tried to shame the governor for something it would not do itself – act with full transparency. This assessment was subsequently agreed upon in interviews with state regulators involved in the Baltimore conference, and several others with no stake against Tesla.

There was no recording so it would appear Tesla could let that sleeping dog lie.

“They’re much happier demonizing the opponent and they don’t want to let them up off the mat by having any sort of a transparent discussion of the issues because that doesn’t help them,” said attorney Mike Charapp, one of the speakers on the dealers’ side last week in an interview. “They’re much better off if they can play the David versus Goliath role and use their PR advantage, allow that to play out and they wouldn’t need to be totally transparent about the issues.”

So What Were The Issues?

The topic – opening a regulatory hole for alternative energy startups – was narrowly framed by a regulator, Bruce Gould, executive director of the Motor Vehicle Dealer Board in Virginia – a state where Tesla is now restricted from sales.

Advocating for Tesla were Duke University law professor, John Weistart, and James Chen, Tesla’s vice president of regulatory affairs. Defending franchise laws were Wolters in from Texas, where Tesla had been restricted four months prior, and Charapp, who’s a partner at Charapp and Weiss, LLP.

Interviews with involved regulators last week and Charapp and Wolters gleaned a few pro-Tesla points. And last week we interviewed Weistart as well.

Perhaps Tesla did not want to share because Wolters shot holes in its core arguments – which we’ll cover later in this series. And, Tesla said other things it might not have wanted publicized.

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“Jim Chen said something at the Baltimore meeting that I had not heard before,” said Weistart who last year wrote an opinion piece in the Huffington Post in favor of giving Tesla a break. “It may be true, but I hadn’t heard it before which would bear on these issues, but Tesla’s ultimate game plan is not to be a major automobile manufacturer, but rather to sell technology to other manufacturers.”

Weistart noted Tesla has already contributed to Mercedes-Benz’s Smart EV and Toyota’s RAV4 EV.

Tesla did not respond to requests to be interviewed for this article too, so whether it’s just trying now to position itself and doesn’t plan to become the mass marketer remains an open question, but Weistert said it’s not an unreasonable guess.

“That makes sense from my perspective, there’s a whole lot of money [to be made as a supplier],” Weistart said. “If that is their ultimate business objective, and it would be worth pinning down, it would be another reason to say, ‘Oh well, then this business of getting their cars sold has a more intermediate objective of publicity and attracting publicity and so on.”

Weistart added this would agree with his theories on carving out limited-basis exceptions for alternative energy start-ups. His plan would potentially be for qualified companies, not exclusively Tesla, and only until a certain volume.

If Tesla’s aim is not to become something “like Borg Warner,” as Weistart put it, to the alternative energy market, others less sympathetic have wondered what is Tesla actually playing at?

Chen also told those present Tesla thinks it will only need to do its factory direct model until it reaches a certain size. Elon Musk said something similar to Automotive News last year, but Tesla’s blog posts don’t say whether it wants permanent rule changes – an option critics suggest it wants to leave open.

“Chen clearly said when we get enough volume we’re going to have to go to traditional dealers and I’m not sure he wanted to be quoted on that because I was never sure why he made that point,” said Charapp, adding he suspected Chen may have been attempting to “mollify” regulators.

Chen’s statement was independently mentioned in an interview with the discussion moderator, Greg Kirkpatrick, executive director of the Arkansas Motor Vehicle Commission.

A Wrench Dropped Into The Cogs?

Charapp is an expert in dealer franchising and licensing statutes and in his address, he explained nuances – there are more than briefly outlined here – on why these are still valid. Contrary to what Weistart, not to mention the Consumer Federation of America advocates, Charapp contends these laws are more important now that Internet selling is here.

Even Weistart who urges some measure of breaking from what he considers over-regulation has said some dealer concerns – which we’ll address later – are legitimate.

He also said the media has largely addressed only surface issues, and often one-sided in Tesla’s favor.

When not openly bashing car dealers, Musk and the media have talked about “franchising laws,” but in each state there are two different sets of statutes: 1) franchising statutes, and 2) licensing statutes – and they vary in defining if Tesla can operate or not, or to what degree it can in part.

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It’s often been the licensing laws Tesla has butted up against, and while Musk accuses dealer lobbyists of only selfishly protecting their interests, licensing laws are not something dealers call down upon themselves.

Rather, licensing laws are imposed on dealers as a liability and expense.

“They’re not asking for those regulations,” said Charapp, “but over the years the states have looked at it and said this is the largest non-realty investment consumers will make and we want to make sure dealers have certain characteristics and … licensing to make sure they’re going to be around and have certain financial backing.”

Policymakers have viewed licensing laws as establishing a safer environment where buyers may count upon a heavily invested independent third-party business which has more to lose than a virtual seller on the Internet.

Dealers are required to pay for and maintain substantial infrastructure. Policymakers see this as tying dealers up and it represents a check-and-balance, an extra level of recourse for consumers.

Alternately, buying from someone with less to lose, and who turns out to be a fly by night operation can leave consumers in the lurch, and policymakers have seen that as a chance not worth taking.

Further, a problem with an Internet-purchased book, consumer electronic, or other such item has less potential ill effect for consumers than a malfunctioning car, which at the extreme, could injure or kill people.

Several have pointed to GM’s ongoing ignition switch recall, and Toyota’s $1.2 billion unintended acceleration settlement, along with a history of other incidents where automakers failed to hold themselves sufficiently accountable.

When there’s millions and billions on the line, even honorable companies may be ethically compromised, and in Toyota’s case, it did all it could to protect its self interest.

“Idiots! Someone will go to jail if lies are repeatedly told. I can’t support this,” one Toyota employee said after a meeting with regulators according to a statement of facts filed with the settlement.

Relying on a manufacturer to control the entire network from production to sales and service could be like relying on Big Brother, say those on the regulatory side. All is well until it isn’t.

Wolters observed dealers serve as another check and balance against a manufacturer. A recall is pure expense for the automaker while dealers are paid for these.

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The notion of dealers being advocates for consumers has been a hot-button topic and the Consumer Federation of America’s Jack Gillis ripped it up.

“Yikes, this one really stretches the imagination,” said Gillis. “First of all, dealers traditionally don’t like warranty work as it pays them less than they charge consumers for post warranty repairs. (Which is why most of us leave the dealership after our warranty expires!) Secondly, in my 35 years of consumer advocacy in the automotive area, I’ve never heard of a car dealer being an advocate for the consumer.”

However Charapp, based in McLean, Va., near Washington where Gillis is based, called him out on this.

“Shame on him for saying this,” said Charapp. “He knows personally a great dealer in Rockville, Md. by the name of Jack Fitzgerald who always advocates for consumers and discusses that with Mr. Gillis. He’s ‘never heard of a car dealer being an advocate for the consumer?’ That is shameful.”

Charapp observed that any dealer who wants to remain profitable wants to maintain a good reputation and maximize customer satisfaction.

Generally, said Charapp, while consumer advocates and Tesla are ready to point out customer experiences gone wrong, franchised dealers have plenty to lose if they get a bad rep, and otherwise do provide a service.

“Dealers regularly advocate for consumers. It is their customers,” said Charapp. “They not only work on behalf of consumers individually who have warranty issues, they work generally with the manufacturers by pushing the manufactures to improve warranties and coverage so that consumers are not harmed. A dealer must deal with its customers one-on-one in warranty matters. Manufacturers must consider their overall liability, the overall cost of warranty exceptions and warranty extensions, and the overall cost, frankly, of recalls.”

Even before Tesla’s fire issues prompted a federal investigation that was closed last week, Elon Musk said there will be no recalls.

In response, articles came out reminding the automaker this was not his call to make.

But what happens, ask car dealers, if a major recall is needed and Tesla now has a half million or million or more cars on the road?

At this point, consumers would need to hope the federal government would protect them.

It might, and Weistart’s Huffington article argued other bodies of law besides exist to protect consumers in various instances.

Meanwhile fans beat the drums for Tesla’s cause, while auto dealer critics like the Consumer Federation of America are getting their chance to air views against an old nemesis.

The director of the Center for Automotive Safety, Clarence Ditlow, added his voice to those not so ready to trust dealers.

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“For the dealers to parade as being consumer advocates, they’re nothing more than a wolf in a sheep’s clothing,” he said observing service departments may insist on binding arbitration and at that point be opposed to the consumer.

Ditlow also said he did not think the worst fears of dealers would come to pass, and if factory direct was fully permitted, it would only go so far, but not turn the world back into the wild west.

He further speculated Tesla could not operate at the level of a General Motors, selling a million cars annually and not rely on independent third party dealers.

His and other moderate voices have nonetheless talked about an intermediate scenario, such as Weistart was attempting to share.

Virginia regulator Gould, who set up the meeting, said while maybe some wiggle room needs to be given to small alt-energy startups, licensing laws are still relevant, although ultimately this is up to legislators.

Dealers, while not denying they have something to gain or lose, maintain they wish to prevent what they see as a slippery slope.

We’ll have more on these issues later in the series. See also, Part Four.

This article is based on info and interviews provided by Tesla proponents and opponents and also those with no direct stake. Tesla did not reply to repeated requests for an interview or commentary.