It looks like auto dealers and their powerful lobbying arm, the National Automobile Dealers Association has won another battle for Main Street (insert loud laugh here). After two years (two years) of fighting in Congress, the Wall Street Reform and Consumer Protection Act passed last week. One of its main provisions is the creation of a consumer protection agency that will try to stop the kind of lending malpractices that where at the root of the financial crisis. Despite outstanding auto loans accounting for almost a trillion dollars (as large as credit car debt), our friendly local dealers managed to carve an exception and will not be overseen by the new agency.

Auto dealers already enjoy one of the most outrageous exceptions in the land of the free enterprise. For decades, state franchise laws have prohibited direct sale of automobiles by manufactures (this document explains it quite well).

Did you ever wonder why you can not buy a car at, say, Amazon.com? Or maybe why, even if you know exactly what Mini Cooper you want (personal experience here), and yes you are willing to wait nine months to get it, and for god's-shake you already ordered it from Mini's website, you still have to visit a local dealer and endure their pathetic pleas to get one of the units they have in their lots instead? Now you know why.

Is this relevant to the EV world, and to XXI century mobility as a whole? Yes it is. Distribution is one of the most significant stumbling blocks for any auto startup, and it came to many entrepreneur as a surprise. Since it is only logical for EV startups to consider themselves technology companies (as opposed to manufacturing), the use of the web for marketing, sales and distribution comes as second nature. Some entrepreneurs didn't know when they launched their ventures that direct sales are prohibited, and only later discovered to their dismay how distribution cost became a gigantic line item in their financial projections. Unlike safety regulations, this is money wasted since it does nothing for the product or the final customer. itMoves' decision to sidestep the retail market and to offer only a pay-as-you-go service was a direct response to this issue.

How are the two main startups dealing with distribution then? Fisker, being a conventional car company at heart (only smaller), announced last year that they will use conventional dealers. It is the conservative option, but probably smart for their high-end market. Tesla on the other hand, with a stronger maverick spirit, are hoping their small scale doesn't bother the big guys too much, so they can get away doing their own thing. We will see. But their SEC filling warns of the legal uncertainty of that option:

We sell our vehicles from our Tesla stores as well as over the internet. We may not be able to sell our vehicles through this sales model in each state in the United States as many states have laws that may be interpreted to prohibit internet sales by manufacturers to residents of the state or to impose other limitations on this sales model, including laws that prohibit manufacturers from selling vehicles directly to consumers without the use of an independent dealership or without a physical presence in the state.

As a result of the fact specific and untested nature of these issues, and the fact that applying these laws intended for the traditional automobile distribution model to our sales model allows for some interpretation and discretion by the regulators, the manner in which the applicable authorities will apply their state laws to our distribution model is unknown.

The truth is that car salesmen are nothing but anachronistic figures that increase the final price to consumers and make the buying experience unpleasant (Gallup poll). Sure, some people still like to buy books at Barnes & Noble and cameras at Best Buy, but that does not stop Amazon from doing the same job more effectively. This exception in the financial reform bill, like the direct sales prohibition, is unfair to consumers, stifles competition and will do nothing to take the auto industry into the XXI century.

 

Posted
AuthorJOSE PARIS