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Tesla Squares Off Against Car Dealers

HOST INTRO: On Tuesday, Tesla will stop selling cars from its two showrooms in New Jersey. The state ruled earlier this month that the electric car company was violating a law that says cars can only be sold through dealerships — and not directly from manufacturers. Tesla has been trying to change this model in the face of steep opposition from car dealers. Chris Mossa has more on what’s actually best for the customer. 


Buying a Tesla is quite easy. Head over to the Company’s website and into the online Design Studio. Make some classic choices about color and wheel size. And some new ones about battery power and charging options. A box to the right calculates the price as features are added — starting as low as 65 thousand dollars and climbing to almost double that at the high end. The whole experience is simple. And this is exactly what Tesla wants — full control over the customer experience.

But if you’re the kind of person who needs at least a test drive before shelling out a tuition-sized payment, you may have a problem. Tesla doesn’t sell its car through dealers. The company has its own showrooms, and they’ve been running into a wall of opposition in several states.

Tesla plans to sell 35,000 cars nationwide this year. That’s a lot — until you consider that Americans will buy over 16 million cars in total. And yet the upstart electric car maker has dealers spooked. Michelle Krebs has been covering the automotive industry for three decades.

Krebs: Clearly, there is concern that there will be online car buying. Its not just about Tesla, it’s about setting a precedent and allowing any automaker to do an end run around dealers. (0:13)  

Dealers say they’re just looking out for the customer in the complex world of car buying. Jim Appleton is president of the New Jersey Coalition of Automotive Retailers, or NJCar. He says dealers serve two very important purposes.

Appleton: One, price competition and two, to make sure the consumers get fair treatment when it comes to warranties and safety recall purposes. (0:09)

Let’s start with competition. Economics is very clear on this point: markets functions best when businesses have to compete. The way dealerships work now, when two Ford dealers compete for the same customer, that customer should end up paying less. But if Ford bypassed the dealers and sold directly to consumers, that competition would go away, and there would only be one price for a Ford. But Jack Gillis from the Consumer Federation of America says that argument ignores the fact that different manufacturers would still have to compete with each other.

Gillis: If manufacturers were allowed to sell directly to consumers, what you would see is extraordinary competition between manufacturers of similar vehicles. (0:14)

So, all Fords may not cost the same but the Company would still have to compete with Toyota and Honda. Gillis thinks consumers should have a choice.

Gillis: So any time a state entity or the federal government closes marketplaces, that’s going to hurt consumers and consumer choice. (0:10)

Now let’s get back to the dealers’ second point — safety. According to them, consumers are safer in cars sold through dealers because they make sure manufacturers live up to their warranty commitments.

Appleton: They want to ensure that the fox isn’t placed in charge of the chicken coop when it comes to warranty and safety recall service. (0:08)  

Dealers are paid negotiated rates by each manufacturer to service cars within the warranty period and in the event of a general recall.

Appleton: The manufacturer has every economic interest to sweep these things under the rug because to them it’s an expense. Whereas the dealer has every economic interest in bringing these things to light because to them it’s revenue.  (0:13)

Dealers receive, by some estimates, most of their revenue from servicing cars. To borrow another term from economics — they have what’s called “incentive.” The incentive to keep the current system as it is. And so do the politicians who represent them. Jared Pincin is an economics professor and says it makes sense that state governments are not siding with Tesla.

Pincin: 20% of their sales tax that a state gets — and that varies by state — is from the selling of new automobiles. So it’s a huge source of revenue for states. That gives dealerships a lot of power. (0:12)

But some politicians are standing with Tesla. David Buchwald is a New York State Assemblyman. An avid supporter of electric vehicles, he opposes a bill in the legislature that will ban Tesla from direct sales.

Buchwald: A company like Tesla which is innovating when it comes to the viability of electric cars, which I think are crucial, if we’re ever to move away from being dependent on gasoline, when it comes to transportation. (0:12)

Consumer Reports recently named the Tesla Model S the industry’s best overall car — an impressive milestone for a car that only hit the market in 2012. Even dealer advocates like Jim Appleton are rooting for the Company’s success — as long as they play within the rules. The dealers he represents would be happy to sell as many cars as Tesla can manufacture.

Appleton: I hope it has a bright future, but it has no future without franchisees. (0:05)

But Jack Gillis has faith that consumers will seek out the sellers that serve them best — as long as they have the option.

Gillis: Either direct to consumer sales will work wonderfully in the marketplace and everyone will be happy or it will fall flat on its face. But the bottom line is it should not be outlawed. The free market needs to decide which is the best for consumers to buy cars. (0:18)

New York legislators may vote on the bill as early as this spring. But one thing is clear — the economics of car buying are as divided as the politics.

Chris Mossa, Columbia Radio News.

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