Chris Collins explains how Tesla challenged U.S. dealer franchise laws that were built to protect small dealers from manufacturers. Tesla argued those protections don't apply to a company with no dealers, and direct sales let them keep margins, avoid dealer incentives, and build to order.
So let's, let's talk about direct to consumer sales. So the situation, and kind of help me explain this to everybody who doesn't understand, is for the longest time in the United States, with the exception of, I believe, one state which was New York.
You could not, if you were a manufacturer of automobiles, you could not sell direct to consumers. You had to have a dealer in between that transaction. And there's different laws in all 50 states, but for the most part, all of the states kind of had their version of that. And then along comes Tesla. And how did Tesla maneuver that they could sell direct to consumer? Were they saying that because they were electric the laws didn't apply to them?
Right. So when Tesla came along in 2014, they, as you said, Chris, started fighting. So this to be allowed to do it. And that's really ongoing still. So about half the states, roughly depending on your count, it makes some provision for direct sales, whether by just EV companies or by everyone. And half the states still have, or roughly half the states restrict that. What Tesla was able to argue in some states was that the original dealer protection laws did not apply at all to a company that wasn't using dealers at all. So here we have to step back historically and realize that when these laws came into effect in the mid 20th century, they were not about protecting consumers. They were protecting dealers from the big three. The idea was that the big three were much more powerful than these kind of mom and pop dealers and took unfair advantage of them, including by opening their own showrooms and sort of undercutting their own franchise dealers. Tesla argued in Massachusetts, for example, before the Massachusetts Supreme Court. Well, that rationale does not apply to us because we're not going to abuse dealers. We're not using dealers at all. And so I think Tesla was successful in some states in getting exemptions for EV sales or exemptions for, for companies that don't use dealers at all. In other states, there were legislative or administrative decisions that didn't apply to Tesla. And still, though in many states there is still a prohibition on the books, like my home state of Michigan in principle, that says you have to sell and service only through dealers.
And if we go back in time, the way that I understand it is Elon Musk, when he thought about jumping into this, and he wasn't actually the founder of Tesla, right? He bought Tesla and then kind of over time became the founder. He says he's the founder, but actually it was founded by a couple other guys. But he, he was given advice by Toyota when he asked Them like if you had this to do over again, what would you do different? And they said we wouldn't have dealers.
Right. And so he, he was kind of, he started off with advice from one of the largest car companies.
In the world saying that if we had to do it over again, we wouldn't have dealers. Right. Have you heard that story?
Yeah, I hadn't heard the Toyota story. I've certainly heard he got advice from people in the car industry that it would not work for EVs in particular. And so, I mean, what Tesla has publicly said is, although it may work, I mean it has worked for a long time for there to be sales through franchise dealers. There are particular reason why EV sales are different. And so for example, at some hearings before the Federal Trade Commission in 2000, was it 16 or 17? Tesla offered a list of reasons why EV sales are different. For example, the dealers tend to work on a model where they make very little margins on new car sales, but they make up to 30% margins on service. Now that works okay when you're selling a car really to get it back into the dealership for service, but when you have EVs where there's a much smaller service component and lots of the services over the year updates, it just doesn't work economically for the dealers to sell EVs in the same way. If you want to see the best evidence of this, 150 Cadillac dealers just quit the GM line as opposed to transitioning to EV sales. And there's quite a bit of evidence that the traditional dealership model, although it may work okay for internal combustion sales, just is not optimized for EV sales.
Yeah. And so this gives Tesla an advantage in the marketplace because they're holding on to their, their margins. Right. So they're not sharing with dealers. So they also don't have unions and they also don't have the same issues of, you know, having inventory sitting on the ground and having to incentivize to move that inventory. Whereas a Ford might have a bunch of a different model just sitting there. Tesla pretty much is making the vehicles as they are ordered. So they're cutting out that other layer.
That's another big point that Tesla emphasized why dealership distribution doesn't work. So as you said, Chris, they're not building inventory and then selling to the dealers to try to push to people who walk into the showroom. They're a custom, basically build to order system. And so if you think about a new technology, a person who goes into a showroom, Tesla's found will almost never buy a Tesla the first or second time they come in. They need to be educated, they need to be taught. What's the battery life like? What's supercharging like? What's the performance in cold weather? All these questions they have about the new technology the dealership model right now is based on. What's the one thing a dealer will always tell you when you're in the showroom? What would it take for you to drive out in the car today? They don't want to let you go because they're working on a commission model. Right. They don't have the structure to sort of educate you over time and be patient for you to come back. Another reason that Tesla thinks it's vital, and now Rivian is saying the same thing, that they will operate not on a dealer commission model, but the company itself will sell you the car, no haggle price, and that their burden is to educate you as a consumer, to persuade you that you want to come to the company.
Thanks so much for watching this clip of Service Driver Revolution. We're uploading new stuff every day, so make sure you subscribe and click the bell icon so you don't miss out. If you have a question you'd like us to answer on the show, call 8333-ASK SDR and we'll answer your question on the show. That's 8333-ASK SDR. For special deals on our books and training, head over to offers.chriscollinsinc.com now that's offers.chriscollinsInc.com I'm Chris Collins and I'll see you in the next video. Sam.
