Thursday, March 20, 2014

Unwinding the Auto Dealer

Half a percent. It's not an exceptionally large portion. Yet it's a significant amount of market share for a company as young as Tesla Motors.  It may not seem like much, but it's got traditional auto dealerships worried.

Tesla is reimagining nearly every aspect of the automotive.  Everything from manufacturing to sales has been reconsidered from the ground up.  Up until now Tesla's innovations have been primarily restricted to the reasonably wealthy. However, it's not difficult to imagine many of their innovations propagating to the majority of automotive sales.

To most people Tesla's largest innovation is likely the manufacture of completely electric, long range, luxury cars.  However, the less obvious disruption of their sales philosophy is equally game changing.  Tesla sells their cars direct to consumers, rather than through a franchise like most auto makers.

Critics claim that the direct to consumer model stifles competition as Tesla can charge whatever prices they wish.  It's difficult to view this idea as anything more than ridiculous.  Granted, Tesla monopolizes sales of Tesla automobiles.  However, sales of vehicles in general are highly competitive and substitutable.  Claiming that Tesla's abandonment of the franchise model is uncompetitive is similar to claiming that McDonald's refusal to allow Burger King to sell Big Macs is uncompetitive.  You can't get a Big Mac at Burger King but you can get a near enough analogue that a claim of a monopoly is ludicrous.

Meanwhile Tesla claims that franchise laws are protectionist.  Objectively this does seem to be the case, and with good historical reason.  Auto franchise laws were established in order to prevent manufacturers from driving local dealers out of business with lower prices.  The rationale behind these laws do not seem to currently apply in Tesla's case.  After all, Tesla has no dealers to drive out of business.  However, laws are not enforced based on whether a historical rationale applies or not.  The real question is, do franchise laws provide greater societal utility than Tesla's direct to consumer model?

Realistically the role of the auto dealership is rapidly becoming a relic.  There is no need to hold a large inventory of cars in what amounts to a parking lot.  Consumers would like the ability to test an automobile. However, dealerships serve little useful purpose beyond these test drives.  What benefit does a sprawling dealership with several hundred cars offer over a small show room with a couple dozen test vehicles? Why force consumers to choose between a subset of pre-made cars when one can be built to order nearly as easily? It's hard to find any way in which Tesla's model isn't better and cheaper for buyers. Note that this rationale applies only to new car sales (unless someone discovers a way to make used cars made to order).

Unfortunately simply obliterating all new car dealerships would have vast economic ramifications. While consumers would benefit overall from cheaper, more customized automobiles, thousands of jobs would be lost. Despite what seem to be clear efficiency gains the dealership industry needs to be allowed to unravel slowly and naturally to prevent an economic shock.  However, this won't happen as long as protectionist laws prevent manufacturers from selling directly to buyers.

Inevitably the direct to consumer model will triumph as long as more protectionist laws are not enacted.  Consumers in states with protectionist legislation will simply purchase in other states or online.  However, until then the slow decline of the auto dealer is probably the best way to unwind the industry.

That's all for this week. Until next time stay safe and rationale.

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