Tesla Versus The Auto Franchising System, Part 4, Consumer Interests

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

It has been suggested by both sides of Tesla’s challenge against the automotive franchising system that you, as a consumer, are being manipulated.

But who, some have also asked, is the one doing the manipulation? Is it “crony capitalists,” or “greedy” car dealers, as Tesla supporters have alleged, or could it be Tesla?

Undoubtedly Tesla is the Good Guy in the eyes of many, even journalists who’ve taken positions against ambivalently viewed politicians and cars dealer associations, and sided with the aspiring California corporation with a likable human face.

Maybe this will prove to be the truth, but assertions about alternately keeping the franchise status quo, or amending the system are about the future, so that much is unclear.

Further, it’s been widely said, the framing of any sort of simplistic battle of Good vs. Evil is a false paradigm; a fallacy. That kind of storyline may work in a fantasy or comic book, but reality is a tad more complex.

For Tesla and the media to “dumb down the issues,” as one regulator phrased it who’s otherwise open to change, a simplified narrative has been described as amazingly effective at fostering, at the extreme, a “fervent” mentality in favor of Tesla’s cause.

But as was shown in the last installment, policymakers independently impose their will attempting to protect consumers with a third-party, non-factory direct franchise system. This happens beyond the control of car dealers allegedly foisting their hegemony on hapless consumers, or Elon Musk as “Tony Stark” fighting to liberate them.

Truth is, Tony Stark is a fictional character. The reality of a regulated environment with myriad stakeholders, checks and balances, and all of it codified by thousands of pages of legalese, while maybe not half as exciting, is a complexity of long-standing issues.

Some issues are seen as still valid and not going away, even by those with deep knowledge and otherwise supportive of Tesla.

Major Players In The Background

For now, it’s been observed car dealers are easy to criticize, and no doubt experiences have left some consumers with no great care for them, and others deeply bitter.

It hasn’t been that hard to get people to say let’s just trash the whole system, and anything has to be better than what we have now.

Consumers should however be aware another stakeholder adding costs to car dealers are the ones turning out the products that make the market go around, the major automakers.

Last year 15.5 million vehicles were purchased by American consumers. Of these, Tesla sold an estimated 18,650, and this is only an educated guess because Tesla does not hold itself accountable to the same reporting rules the majors do.

Meanwhile the franchised dealer network is being beaten up as a bad guy, and maybe not without cause in many peoples’ opinion, but again, could some be taking an oversimplified view?

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The regulator we spoke with, who says he is actually open to carving out rules for alternative energy startups, observed automakers may twist the tail of car dealers too.

Stories abound about how much control automakers have over franchised dealers, and this is one reason why car dealers, which Virginia attorney Mike Charapp calls a “splintered group,” have banded together.

As one example, said Charapp, who represents auto sellers, a Volkswagen dealer cannot just rent a storefront and start selling VWs. Volkswagen mandates the white frame building, specifies how it shall be furnished, the number of service stalls, makes dealers buy special tools, specifies minimum personnel, and requires mandatory training.

That’s not to pick on VW. Actually, all manufacturers add costs to dealers with “image programs” mandating how a dealership will look, said Texas Automobile Dealers Association President, Bill Wolters, and this costly requirement may be changed on a whim.

Not uncommon, he said, is when a new executive takes over, the automaker may decide it’s time for a dealership makeover and the dealer must comply as part of its sales agreement with the manufacturer.

So, maybe the order is to “tear up a marble floor, and put in tile,” he said, or maybe the outside of the building needs a new look.

“So the dealers spends a quarter of a million dollars on a new façade, he doesn’t sell one more car,” said Wolters.

According to Bruce Gould, executive director of the Virginia Motor Vehicle Dealer Board, about five years ago, one BMW dealer appealed to its auto dealer association and regulators for help. The issue? BMW told the dealer it must buy special tile from BMW for its service area, and fly in craftsmen from Germany to do the work.

An amendment to the franchise law in that state became work stipulated from the manufacturer could be performed by local tradesmen, assuming qualified applicants could be found.

Myriad other costs from manufacturers are passed onto dealers who must either eat it, or pass it to the customer.

National Automobile Dealers Association (NADA) data showing 3.78 percent average profit earned last year by all U.S. dealers suggests dealers have been swallowing some tile bills, along with other expenses.

Car dealers can make a convenient scapegoat, it’s been said, and critics point to reasons why auto dealers and games they have been known to play have gotten them a sketchy reputation.

Auto dealers acknowledge in instances such reputations have been earned.

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But memories from the bad old days, they say, and more recent unresolved consumer offenses may amplify feelings beyond reality.

Wolters observed one positive thing manufacturers have imposed are consumer satisfaction index (CSI) ratings.

Dealers hoping to qualify for another franchise may see their applications denied by automakers – of their own brand, or another brand – if their CSI score is too low.

NADA studies have shown consumers may have a poor view of car dealers in general, but many really like the one they find they can work with.

Where Tesla does have an argument is that its small-footprint operations could be lean and mean. However, it does have to meet certain minimums under licensing laws, and as a retailer, it is trying to provide the absolute best experience possible, and this costs Tesla more than trying to just get by.

Is Tesla The Best Hero We Have?

Everyone, even car dealer associations fighting Tesla have said they hope it can make it. Tesla is stirring the industry up, and as capitalists, dealers would like to be able to sell Teslas if they can make money on them.

Some close to the legislative issues have predicted it’s only a matter of time until Tesla does decide to use third party franchises as it will face greater management and cost issues that could be shared by trusted third parties.

So far, Tesla has so few customers, one said “Tesla could probably send everyone a birthday card.” But things in the car business get progressively harder with scale.

In the last installment of this series, two witnesses cited Tesla’s Legislative Director Jim Chen who told a room full of industry stakeholders Tesla only means to sell factory direct until it reaches an undefined minimum volume threshold. Unknown is whether he really meant it because it was only said behind closed doors, and Tesla doesn’t publicize full details on its long-term plans.

Speaking of which, Tesla’s rhetoric was amped to a new high pitch last month over the affair in New Jersey.

“On Tuesday, under pressure from the New Jersey auto dealer lobby to protect its monopoly, the New Jersey Motor Vehicle Commission, composed of political appointees of the Governor, ended your right to purchase vehicles at a manufacturer store within the state,” said Musk March 14, adding later in, “The rationale given for the regulation change that requires auto companies to sell through dealers is that it ensures ‘consumer protection.’ If you believe this, Gov. Christie has a bridge closure he wants to sell you! Unless they are referring to the mafia version of “protection”, this is obviously untrue.”

To some observers, this was tantamount to libeling Gov. Chris Christie as a liar. Musk could get away with it under First Amendment protections and because one can speak more loosely against public officials, but that does not make what he said justified or true.

As he reads it, said the president of the New Jersey Coalition of Automotive Retailers, Jim Appleton, Tesla’s March 11 post references its own “backroom deal” gone sour trying to change laws already on the books.

“Until yesterday, we were under the impression that all parties were working in good faith,” wrote The Tesla Motors Team. “Unfortunately, Monday we received news that Governor Christie’s administration has gone back on its word to delay a proposed anti-Tesla regulation so that the matter could be handled through a fair process in the Legislature.”

The update to tighten pre-existing laws that restricted its two New Jersey stores from conducting sales activity, was something public record shows was discussed last October, said Appleton, adding Tesla was hoping to stall and put to a vote that which was legally decided. That did not stop it from accusing Gov. Christie, the New Jersey Motor Vehicle Commission and state legislature from “going beyond their authority.”

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On the contrary, said Appleton and Gov. Christie’s office, New Jersey officials were upholding their authority and Tesla was acting like a sore loser.

As Tesla finds its way as the new player in the market, critics say it should avoid putting on carefully staged histrionic fits. Also, it’s been said, Tesla needs to think twice before making accusations that it could be shown to be guilty of in its own right – speaking untruths, going beyond its authority, orchestrating backroom deals, and even not congruently upholding “free market” values.

Charapp said Tesla bandies the “free market” argument, essentially telling consumers they’re being sold down river, but this he said, smacks of hypocrisy.

“Tesla is the ultimate crony capitalist. They exist because of federal government initial financial assistance, ongoing federal and state government support for the cars that are sold, and ongoing tax breaks they are able to sell,” said Charapp.

A Motley Fool article that originally called Musk a “humongous hypocrite,” but that was later edited, estimated Elon Musk’s savvy has been in benefitting from a highly regulated, anything-but free-market reality.

“Add the numbers up: $3 billion,” wrote Alex Planes. “That’s how much money Elon Musk’s three companies have received in direct and indirect government support over the years.”

Tesla Motors itself got a $465 million low interest loan under a federal alternative energy encouraging program which it paid off early last year when its stock skyrocketed beyond earnings. It benefits from offering its buyers a federal tax credit equal to 10-percent off the base price of “100-percent of its products,” said Wolters. Under California Air Resources Board rules, Tesla may have already taken in $90-100 million from “green car credits,” according to one analysis.

What’s more, traditional car makers which Tesla may hope one day to compete against have been forced by California rules to pay Tesla for the credits, or pay stiff penalties.

That’s a sweet deal for Tesla, and even critics note Musk is cagey, and playing a cool hand.

However, it would appear a double standard has not prevented vitriol against those perceived as standing in Tesla’s way. Tesla supporters have been quick to rub conservative opponents’ noses in their purported hypocrisy for upholding franchise laws because they may on another day talk about free markets.

There may be a lot of truth to this, but that knife cuts both ways, say observers, and Tesla’s clamoring for free markets and rule by the people rings hollow, as Tesla Motors is a natural born child of highly government-controlled economies.

It’s been observed the U.S. does not come close to operating according to pure laissez faire. Instead, “free market” is a term that may be selectively invoked when it suits an interest group’s agenda.

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The reality is the U.S. economy is a balance of capitalistic ideals and government control being played out by entities with varying degrees of power. They work toward their self interests, guided by conflicting ideologies and drives, and regulated by laws and policies. The whole macroeconomic arrangement pushes and pulls under a measure of compromise between alternately opposing and harmonious interests.

Proof that the U.S. does not work under pure free market rules has been seen at least since 1934 and the formation of the Securities and Exchange Commission. But “free market” – not to mention “democracy” and the Constitution – may be latched onto when it suits an organization’s purpose, and dropped just as quickly when it does not.

If you want to really pull the curtain back on the “free market” ideal, look at how the federal government may anytime it sees the need, hit pause, rewind, delete, or change the channel on economic fallout. This was seen during the banking and mortgage crises, and GM and Chrysler bailouts, among other instances.

In short, Tesla is no one to cry about free market principles, say critics, and it is the last company that would really want an unregulated market. On the contrary, while in some ways it’s competitive already, in others it needs protections, and wants more.

“That’s the ultimate crony capitalism,” said Charapp of Tesla noting it has masterfully played the system to be where it is today, “but when there are regulations and statutes they don’t like, those must come tumbling down.”

To be sure, as Tesla supporters have argued, the auto industry is hard to crack into, no one has succeeded since Chrysler, and Tesla – and others innovators – may well deserve more breaks.

Some however say if Tesla wants to plausibly wear the mantle of peoples’ hero, it should be fully honest about the issues, quit cherry picking the facts, and stop playing the victim.

See also Part Five.

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.