Tesla, the maker of the car you see above, is in a bit of a pickle with the state of New Jersey.  The automaker is an industry innovator; not just for the fact that it makes beautiful electric cars, but because they also want to sell those cars directly to their customers.  In the United States this idea is not only rare, it’s largely illegal.  For the past few years Tesla has been battling with lawmakers and trade-groups state by state for the right to sell cars directly to their customers.  The opponents in this case are the car dealers, who want to force Tesla use dealer networks to distribute and sell their cars.

Car dealers say that this decades long tradition of having local and independent dealers sell and service cars helps protect consumers and connects communities.  Yes, they said that.  As such, today just about every state has laws or regulations creating a middle-man between the automakers and the customer.  And of course the dealers need to make money too so that can inflate the final price of the car you buy.  Tesla has been fighting these laws.  In economics speak, Tesla would be called a disruptor.

They aren’t just disrupting the auto industry by making good electric cars.  But this direct to consumer sales disrupts the dealer industry too.  Tesla is still a low volume manufacturer so the dealers aren’t worried about losing business by not being able to sell the cars.  The issue is the precedent Tesla would set.  What if GM or Toyota decided to sell directly to consumers as well?  That would tear up the industry.  In a few years we’ll start seeing Chinese cars on the road here in the US, and the dealers want a cut of those sales too.  This amounts to government sanctioned monopolies.

In business speak we’d say that Tesla is vertically integrating.  Tesla could own the entire process of making their car start to finish if they wanted.  But they outsource a lot of parts production and just do final assembly.  This is how most automakers work.  By owning the production of parts they vertically integrate with their supply chain.  Further integration occurs down the road by owning the sales and service of their cars.  This is what the dealers are fighting, but it’s quite common in other industries.  Coca Cola has vertically integrated with their bottlers many times.  At various times in their history Coke has bought and sold their own bottling companies when they saw it advantageous for their bottom line to do so.

As of right now there is consumer appetite for buying directly from manufacturers.  Most of us can see that cutting out the middle-man will save us money.  But for now the dealers have a tight grip on laws protecting their industry.  Most automakers aren’t in a position to set up their own dealers.  They rely on the existing dealers to buy their inventory which funds further production.  But it wouldn’t take long for everyone to adjust.  We just need companies like Tesla to keep disrupting the economics of establishment industries.

Image: Joseph Thornton

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categories: business, cars, government