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The FTC takes another stand against "harmful" laws forbidding direct-to-consumer auto sales

It looks as though Tesla Motors has some friends in high places. Just last month, three Federal Trade Commission (FTC) directors wrote a blog post in which they blasted states that have implemented laws to forbid Tesla from selling cars directly to the public.
 
“In this case and others, many state and local regulators have eliminated the direct purchasing option for consumers, by taking steps to protect existing middlemen from new competition,” wrote the directors in April. “We believe this is bad policy.”
 
Now the FTC staff has issued a press release that singles out Missouri and New Jersey for their bans on direct-to-consumers auto sales bans. The FTC’s Office of Policy Planning, Bureau of Competition, and Bureau of Economics note that both states “operate as a special protection for [independent motor vehicle dealers] – a protection that is likely harming both competition and consumers.”
 
The FTC singles out the abuse of Tesla in particular, stating:
 
The prohibitions on direct sales in Missouri and New Jersey particularly affect Tesla Motors, a relatively new entrant in the auto market that has been prevented from selling directly to consumers, the staff comment states. But their effects are likely more far-reaching.
 
The FTC goes on to conclude that the legislatures for the states of Missouri and New Jersey should “permit manufacturers and consumers to reengage the normal competitive process that prevails in most other industries.”

 
We have the feeling that National Auto Dealers Association (NADA) won’t take too kindly to the strong wording from the FTC. When the FTC’s pro-Tesla blog was posted last month, the NADA responded by claiming that “the fierce competition between local dealers in a given market drives down prices both in and across brands” and that “buying a car isn’t like buying a pair of shoes online. Cars require licensing to operate, insurance and financing to take home, and contain hazardous materials, so states are fully within their rights to protect consumers by standardizing the way cars are sold.”
 
The NADA, which represents nearly 16,000 auto dealerships and 32,000 franchise locations, will likely also respond to the latest comments from the FTC, and we will provide you with an update once a statement is provided.

Source: Federal Trade Commission



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to the NADA, Thanks but no thanks
By GotThumbs on 5/20/2014 9:27:02 AM , Rating: 5
I find it very hard to believe, in fact I don't believe for one moment that the NADA has my best interests at heart.

Only a fool overlooks the fact that a sales person number one purpose is to sell the consumer a product. If they don't sell something, then they don't support their salary and the company folds. This is nothing that should be new to anyone, but sometimes I think people do overlook this very simple fact.

I've never purchased a vehicle from a car dealer and probably never will. I've heard of too many cases where the dealer mislead the buyer or simply lied. My one experience with a dealer ended with me walking out without the car.

I've traveled over 1,000+ miles out of state for my last 3 vehicle purchases and If I could afford to buy one, I'd have no hesitation in traveling to any state that does allow direct Tesla sales. When you know what you want and find it elsewhere, the distance is nothing




RE: to the NADA, Thanks but no thanks
By Reclaimer77 on 5/20/14, Rating: -1
RE: to the NADA, Thanks but no thanks
By weaponzero on 5/20/2014 11:13:53 AM , Rating: 2
The reason is simple, when dealing with a car dealership your dealing with a middle man. And as always when dealing with a middle man you run into a barrier between yourself an the manufacturer.

On top of that, the car manufacturer can actually fire individual car salesman or replace the entire staff if need be. That process becomes much more complex with franchises.

On top of that, the dealership makes most of their money on servicing and parts. Which interests them in making you do "extra servicing" that you do not even need.

The dealership experience would be much better without franchised dealers. If you have any doubts, try comparing Tesla service vs what other franchise dealers offer.


By Solandri on 5/20/2014 11:56:50 AM , Rating: 5
The point is, the argument between you two can't be settled in a web forum. It's pointless to even be having this argument in text postings because it can't settle the matter.

Just allow dealerships and direct sales to customers. Let people buy from whichever one they decide they like better. That will settle the issue once and for all.

I suspect the direct sales model will be better for consumers because dealerships are seeking to outlaw it. If dealerships were truly better, the NADA wouldn't be trying to prohibit direct sales. They'd be saying, "Pshaw, allow direct sales if you want. It will fail in the market because dealerships are better. Bring it on!"

The only reason dealerships were mandated in the first place was because automakers, by virtue of having a monopoly on their products, could effectively outlaw dealerships without any consumer input. A law meant to prevent one extreme, is now being used to enforce the opposite extreme.


By 1prophet on 5/21/2014 9:38:01 AM , Rating: 2

quote:
On top of that, the dealership makes most of their money on servicing and parts. Which interests them in making you do "extra servicing" that you do not even need.


They make their money on financing, extended warranty service contract sales, accessories after the sale ,parts if they are a wholesaler and last is service because for most of them it's warranty which is much stricter and pays less than customer pay jobs.


By skildner on 5/20/2014 12:02:48 PM , Rating: 2
Dealers work on commission. Tesla does not. The vehicle pricing is set. There is no pressure.

I'm not sure why the industry is the way it is, but I doubt auto manufacturers like the way their customers are treated at dealers. To me, it's comparable to trying to complete a transaction with a con-artist. They know every trick in the book to squeeze the last dime out of you. It has never been a pleasant experience for me. One person can walk out of dealer paying 10-20% more for the exact same vehicle as someone else. How is this a fair system?

If manufacturers sold their cars at set prices, which is how I believe manufacturers would sell their vehicles if they sold them directly, I think it would create more competition in the end. I think there would be pricing wars for vehicles competing in the same class, much as there are pricing wars in the airline industry.

Personally I think the high pressure sales system of the auto industry does nothing to benefit the consumer and if the industries sales practices were more like Tesla consumers would be happier.


RE: to the NADA, Thanks but no thanks
By Reflex on 5/20/2014 12:12:02 PM , Rating: 3
I highly doubt a direct sales auto manufacturer is going to spend the post-sale trying to convince me that the new car I was just convinced was awesome needs a special undercoat, special regional weatherization, and a special after market warranty and care package. I doubt they would soak me on general service either. In the first case those things are convincing me that the product was poorly conceived or defective, and in the second that is an area of differentiation with competitors, more expensive service factors into the cost of the vehicle.

A friend of mine works for Chrysler, and for years worked in the paint division. He was frustrated at how auto dealers would constantly try to upsell protection packages and pointed out that Chrysler had ever motivation and incentive to use the most advanced paints and paint protections around simply because every good looking Chrysler product on the road was a moving advertisement. He also contested the idea that any third party would have the resources and time investment to have a coating package that competes with what they did from the factory (the amount of R&D he was involved with was crazy). It was all crap, designed to separate gullible customers from their money.

If I'm buying a Chrysler, I want to go to their showroom, test drive a couple models, then build to order right there, and have it delivered to my house in a week as I configured it. That is what a dealer can never offer, and what I think would permit auto manufacturers to showcase their products in the best possible light.


RE: to the NADA, Thanks but no thanks
By Reclaimer77 on 5/20/2014 1:09:32 PM , Rating: 1
quote:
I highly doubt a direct sales auto manufacturer is going to spend the post-sale trying to convince me that the new car I was just convinced was awesome needs a special undercoat, special regional weatherization, and a special after market warranty and care package.


Again I'm just curious, what are you basing this belief on?

Seriously, I highly doubt direct sales means up-selling the consumer won't exist anymore. And optional equipment will be reasonably priced. I mean...based on what evidence?

I'm just asking for someone to back this belief that car manufacturers aren't JUST as motivated to make money as dealerships are. So far I'm not really seeing much concrete.

quote:
If I'm buying a Chrysler


Well lets just hope that's a big IF :)


RE: to the NADA, Thanks but no thanks
By Reflex on 5/20/2014 2:12:23 PM , Rating: 1
I drive a Jeep now, its a diesel 2006 Liberty. Its fantastic. So no, its not a 'big if'. Its been reliable, tows great and gets great fuel economy. Plus its basically impossible to get it stuck anywhere.

As for the rest, the point is that dealers really do not compete with each other, at least not in the same sense. Most dealers carry multiple brands, and in fact most are owned by only a few super chains nowadays that have no motivation to compete based on vehicle brand at all. As a result, the competition is not really between Ford/Dodge/Chrysler/Toyota/etc, its between Automall, Lithia Auto Group, and so on, and they sell all brands.

Permitting direct sales would put Ford in the position of competing on both product and services directly against GM, Chrysler, Toyota and others, with much stricter control of the end to end experience. A crappy experience could not be written off to the 'dealer' but instead would be a black mark against the automaker itself. That's huge.

As I, and many others I know always say, the worst part of buying a car is the dealer.


RE: to the NADA, Thanks but no thanks
By Reclaimer77 on 5/20/14, Rating: 0
RE: to the NADA, Thanks but no thanks
By Reflex on 5/20/2014 4:32:49 PM , Rating: 2
I do not know anyone who assumes when they buy a Ford it is from Ford directly. Honestly, who believes that? And how are they not confused as hell when their Ford dealer also sells another major brand alongside Ford like some of the mixed dealers I've seen selling new cars from multiple majors on the same lot?

That assertion really makes no sense at all, sorry. I am pretty certain most people know when they go to a dealer they are buying from the dealer, not the OEM.


RE: to the NADA, Thanks but no thanks
By Reclaimer77 on 5/20/14, Rating: -1
RE: to the NADA, Thanks but no thanks
By Reflex on 5/20/2014 5:58:16 PM , Rating: 5
Huh? I don't know how informed you have to be to read the sign out front that says "Lithia Chrysler-Jeep-Dodge" with the sign right next to it that says "Lithia Nissan".

Seriously, in your world does everyone have an IQ of 80 or is it just you?


By maugrimtr on 5/21/2014 8:50:33 AM , Rating: 2
Why is this even an argument?

In order for dealers to make profits, they need to buy cars at cost, and sell them to consumers with a mark up, i.e. dealerships make cars more expensive. This is basic economics.

Dealerships also homogenize cars. If a dealership is selling >1 brands then, all other things being equal, they have no motivation to promote one over the other.

If you eliminate dealerships, then the market is suddenly open. Manufacturers will have to compete for business, standardised fixed pricing on a national basis will become normal, consumer guesswork will be eliminated, and basically this makes competition far more likely since every consumer can quickly assess the standard fixed prices and compare them across all manufacturers.


By GotThumbs on 5/20/2014 6:16:10 PM , Rating: 3
End price to individual consumer is my point.

The manufacture has a set price and then the middle-man (dealer) tacks on the amount they want/need from you the consumer, in order to cover the dealers costs for building/maintaining the fancy dealership they built and pay their staff.

If you had the option to buy a car (the same make, model and options) directly from the manufacturer @ dealers cost

OR

buy from a dealer with their added cost, which entity would YOU buy from and who do you think would have the lower price?

With every transaction there are risks, but if the car comes from the same source, what are the risks from buying direct?


RE: to the NADA, Thanks but no thanks
By BRB29 on 5/20/2014 11:17:27 AM , Rating: 3
Middleman = higher cost

We have way more than 3 automakers now. We don't need middlemen to drive competition.

Direct sales should increase competition and lower costs. Everyone can have access to every make and model. We're not limited to whatever dealer is available.

NADA's argument make no sense.


RE: to the NADA, Thanks but no thanks
By Solandri on 5/20/14, Rating: -1
RE: to the NADA, Thanks but no thanks
By Spuke on 5/20/2014 1:23:29 PM , Rating: 1
Great points Solandri!


By Reflex on 5/20/2014 2:44:23 PM , Rating: 3
All of those use cases can just as easily be contracted out, they do not require middlemen or dealers to perform, and in fact those services are used by the dealers, they do not do these tasks themselves.

quote:
As I've pointed out before, middlemen can lower costs. If the distribution and marketing process for all the automakers is similar enough, substantial money can be saved by having a middleman consolidate those tasks. Rather than have 3 automakers run 3 of the same marketing surveys (one each), the single middleman can run a single survey.

This is already done. Surveys are contracted out (and are already done by the automakers, not the dealer chains which have an inborn bias). Many studies are done without being contracted by any specific entity and industry players purchase the reports. Middlemen really have no role other than reporting data to those running the studies, and there is no real efficiency to be gained here that has anything to do with whether you have middlemen or not.

quote:
Or rather than each automaker having to set up a trucking system to distribe cars to each major metro area, a single middleman could handle transportation for all the automakers.

Third party trucking companies already handle this, not the dealer chains. That is paid for by the customer in the form of the 'delivery fee'. There is no savings to the automaker or the customer by this.

quote:
Any time a task can be consolidated, that's an opportunity for a middleman to save the end customer money. Otherwise, you can carry the "middlemen are bad" belief to ridiculous extremes. Why should automakers advertise in newspapers and on TV? That's a middleman! They should each set up their own newspapers and TV stations to run their car ads. Why should you shop at a supermaket? That's a middleman! You should be buying each of your groceries directly from individual farmers.

You are mixing up middlemen and services purchased from third parties. They are not the same thing and they exist the same regardless of who is placing the service orders. If anything it is cheaper for the automaker to do these things as they have larger economies of scale than any individual dealer chain. Buying national advertising spots, for instance, is far cheaper than buying spots in every local market.

quote:
Whether a middleman would increase or decrease costs in this particular case isn't for the government or us on a web forum to decide. Just allow both, and the market will sort out which saves the consumer money and/or delivers better service.

This is exactly what is being asked for. Let the automaker decide if they want a dealer chain or not. Stop using the force of government to keep dealer chains in business. My personal bet is that dealer chains quickly collapse and service improves for everyone.


RE: to the NADA, Thanks but no thanks
By NellyFromMA on 5/20/2014 2:49:02 PM , Rating: 2
Middlemen involvement and task / workflow consolidation are distinct from one another.

Any task that can be consolidated and executed via a middleman can be done in-house as well, with your own resources (human or otherwise) and probably for less than the "contact" of out-side resources.

The only time I can perceive a net-gain of value for a single sale involving a 3rd party / middle man is when costs were shifted from the present deal to another deal, which implies harming another purchaser which is the crux of the issue; it isn't about one deal, its about the experience across the board.

It isn't whether or not "middlemen are bad" as virtually all generalizations are destined for failure.

Rather, it's the insight that when operations are brought in-house that make sense for a business' services / products that there is high likely hood for "synergy" by better utilizing any and all available resources in a way that is simply not possible with a third party.

Instead of two private entities seeking distinct profit margins you have one entity looking for a single profit margin that can be made to be less than the sum of the latter via synergy.

I agree with your main point overall though; let both models exist and see which consumers gravitate to. I just think there's a lot of reason to support the thought that direct sales can and likely would lead to better consumer experience and lower bottom-lines for consumers.


By Reflex on 5/20/2014 4:36:17 PM , Rating: 2
This entire situation played out in the PC market in the 80's and 90's. I owned a small shop at the time and reading the industry press (Computer Reseller News) it was interesting to see the focus on proving that the channel provided more value than just buying direct from Dell. Guess which one won that argument? Nowadays you are almost always better off just ordering direct, avoiding the disingenuous salesmen and getting better service even if its not always local.


By thesaxophonist on 5/20/2014 7:19:38 PM , Rating: 2
Exactly! It's a free market (in principle at least). Let the buyers decide. That's the easiest option, and the best one.


RE: to the NADA, Thanks but no thanks
By Samus on 5/21/2014 12:22:56 AM , Rating: 2
You're very lucky to have never purchased a car from a dealer, because that is hands down the worst part of buying a car.

There is only one dealer sales department that comes to mind that I've ever had a good experience with. The dealership owner was also a military man and made a point to hire veterans over civilians, I liked that. I continued to bring my car back there for years (it was a Ford dealer) for service and being an ex-Ford engineer (something only the parts guys knew) they were completely honest again and again.

It was actually hard not to buy another Ford because of my experience with them. I now drive a Mazda, which will probably be for a very short time, because the dealer network is as shady as it gets. One dealer told me I will void my warranty putting a seasonal winter set of tires and wheels on my CX-5 because it "wasn't made for them" and another dealer has tried to correct my alignment, per a service bulletin, 3 times. The dealer I bought the car from is unfortunately the shadiest of them all (which is why I go to the other two shady dealers) especially after ejecting me from the showroom after presenting a discrepancy in the financing they finally had to own up to after I hired a lawyer. After a BBB complaint and small claims battle, they were forced to credit my Chase loan and pay all legal fees. Unfortunately they may have a decent service department, but I will never set foot back there.

In nearly all circumstances, I think most people would agree dealers make purchasing, owning, and maintaining a vehicle more stressful. All they are good for is recall repairs, something Tesla, so far, hasn't had to bother themselves with since other than the under-armor plate upgrade that can be installed at the request of the owner, and some camber issues with front tire wear, their vehicles have been nearly flawless.


They're not "taking a stand".
By Guspaz on 5/20/2014 12:23:30 PM , Rating: 2
Unless the FTC is actually doing anything about these direct sales ban (like pass regulation preventing the bans), then they're not taking a stand on anything, because saying "Hey guys, you shouldn't do this." isn't going to accomplish anything.




By Dr. Kenneth Noisewater on 5/20/2014 5:23:50 PM , Rating: 2
Indeed.

PROSECUTIONS OR GTFO


RE: They're not "taking a stand".
By ven1ger on 5/20/2014 6:06:46 PM , Rating: 3
Typically, agencies like the FTC, puts out statements like these because they are hoping that the companies/agencies that are doing this will recognize that if the FTC steps in, they know which way the FTC will rule. If the situation can correct itself then the FTC doesn't have to intervene.


FTC defends Tesla sales model
By RobertFahey on 5/20/2014 10:00:06 AM , Rating: 2
The consumer angle is nonsense. The real reason dealers are afraid of Tesla's business model is the fact that only 15 years ago, Ford and GM tried to muscle in on dealer turf and sell cars themselves. It didn't work out, but that kind of thing leaves lasting jitters!

http://teslamondo.com/2014/04/30/when-ford-gm-trie...




RE: FTC defends Tesla sales model
By Azethoth on 5/20/2014 10:28:24 PM , Rating: 2
Good link. Ok, so the dealer overhead is 24% of the cost of the car. I would like to see Tesla being able to chop that down by running their own dealerships in whatever way they see fit.

Even if they drop it down to 14%, keep 5% and I get 5% that's a win for me and every other Tesla buyer. If they keep it all, I still do not care, it makes them able to survive downturns better than competitors. If it removes the overcharging for repairs incentive, or just making up fake ailments for the car part, I win.

I really do not care about dealerships. I just know too many that commit actual fraud. I mean, I actually know of one that got busted by the FBI because a family member complained about billing irregularities which lead to their insurance fraud ring getting discovered.


Hypocrites
By jmarchel on 5/25/2014 11:48:59 AM , Rating: 2
The FTC and most of the comments are simply hypocritical. It didn't bother anyone for decades that car companies were prohibited from selling direct but suddenly when darling of the left has to obey the same rules it is somehow an outrage. I happen to side with the states. The ban on car direct sales is the law of the land and everyone should obey the same rules. If you don't like it, change the rules for everyone. That is the only fair position. Why would Tesla had unfair advantage when Nissan Leaf, some Ford EVs or Chevy Volt would have to be sold through dealerships ? This would be blatant favoritism of the government handpicking a winner. Not unheard of in the past but still wrong. One can argue then maybe all EV cars should be allowed for direct sales. I disagree. I think EVs are toys for the rich, still useless. Giving them advantage is a hidden tax for the poor who will end up buying gasoline cars. Therefore there is absolutely no reason to favor EV over the gasoline car.




RE: Hypocrites
By mars2k on 5/26/2014 3:27:59 PM , Rating: 2
Wow, Just when you thought you had an issue a conservative could get behind…. Your take on this is just absurd. The outrage is that your brain is running around loose in your head.
First off, this is restraint of trade. Tesla is the first to come along that was a serious threat to the status quo and therefore this is an issue now. Tesla is not the darling of the left I don’t know where you get that?
Second all of the other manufacturers you mention benefit from the old system they do operate under the old rules.
The government isn't picking winners here to not do away with those laws would be picking winners.
Third, everything else you just said is just crazy convoluted lunacy.
You post proves that even a confused rabidly conservative nitwit can type.


By Mint on 5/20/2014 9:19:42 AM , Rating: 2
Assuming Tesla got the basic facts right:
http://www.teslamotors.com/blog/trouble-missouri

quote:
The current statute only bars franchisors from competing against their franchisees (for example, Ford cannot compete against Ford dealerships).

Tesla complies with that statute because we do not compete with any franchise.

So the usual argument about Tesla stores setting a precedent that allows other manufacturers to threaten existing dealerships doesn't apply.

Yet the dealers tried to bar Tesla anyway, and almost got away with it.




Horse and Buggy stables
By Azethoth on 5/20/2014 10:14:30 PM , Rating: 2
I knew someone who lived through the transition from horses to cars. Their view on it was that the stables were run by slimy crooks. When cars came along, the crookery transferred smoothly to car dealerships.

It is the perfect storm of consumer ignorance vs "your flux capacitor needs realignment" resulting in "take my money I guess".

At least with direct sales you could have companies like Mercedes or Tesla etc. compete on total cost of ownership numbers. Or get crushed by someone that has fewer repair costs for their vehicles. Right now there is just no accountability in the system and worse, perverse incentives to inflate the costs.




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