Tesla Motors in Christie’s Crosshairs
Because of a new regulation issued on March 11 by the Christie administration, Tesla Motors will no longer sell its electric vehicles in New Jersey, effective April 1. The rationale for this regulation is not public safety—it is protecting a favored special interest
which has contributed to the coffers of New Jersey politicians.
This decision is an economic loss for New Jersey.
Tesla CEO Elon Musk argues in a response to the regulation that, “This is an issue that affects not just Tesla customers, but also New Jersey citizens at large, because Tesla would be unable to create new jobs or participate in New Jersey’s economic revival.”
The Garden State will no longer earn taxes from sales of expensive Teslas and consumers will be inconvenienced by having to travel to neighboring states to purchase new Teslas. But repercussions of this regulation extend far beyond purchasers of the vehicles.
Tesla has two innovative showrooms in the state—in Paramus and Short Hills. Unlike other car manufacturers, Tesla sells its vehicles directly to consumers in its Apple-like retail locations where there are no price negotiations. Without dealerships and outside salespeople, Tesla is free to completely own the branding at the point of sale and ensure customer experiences meet its standards. This bypasses the middleman who is, unfortunately, a powerful political player.
The dealership model, in theory, has benefits—flexible prices based on financing rate changes. However, technological advances are making direct order and delivery of automobiles economically feasible and appealing. But franchise laws and regulations against direct-sale stand in the way of progress.
James Appleton, president of The New Jersey Coalition of Automotive Retailers, which spent $155,000 lobbying New Jersey politicians last year, openly complains that “Tesla’s business model crushes competition.” He argues that dealerships benefit customers. If this is true, why is it necessary to ban other manufacturers from selling directly? If all consumers were truly benefitting, there would be no need to force everyone to shop at dealerships.
Dealerships also offer places for customers to service their vehicles. However, companies which sell directly to the public can also offer maintenance, just as Apple offers maintenance through its Genius Bars. Tesla has a service center in New Jersey, one of more than 60 throughout the country.
The fight against Tesla is not limited to New Jersey. Texas, Arizona, Colorado, and Virginia all limit Tesla’s direct sales to customers. In these states, Tesla offers “galleries” which do not actually sell vehicles. Automobile dealers have powerful lobbies in these states. The Texas Automobile Dealers Association and dealership owners spent at least $2.5 million in Texas’ 2012 elections. This dwarfed Elon Musk’s $7,500 in contributions. More states have tried or are trying to enact similar regulations.
Consumers have very different preferences and reasons for purchasing vehicles, so one-size-fits-all regulations make for poor policy. The market offers a variety of options for purchasing other consumer goods. Customers can choose from shopping directly with the manufacturer, visiting physical retail stores, or browsing online. Imagine if you could buy your next car on Amazon. The convenience and simplicity would appeal to many consumers who dislike the negotiating process and lengthy encounters with car salesmen.
A Department of Justice report found that dealerships raise the cost of new vehicles, and the Department advocates eliminating them. The report estimates that the cost of the current distribution system accounts for 30 percent of vehicle price—and half of this increase is directly from dealerships.
Meeting the needs of diverse consumers requires retailers that are similarly diverse. Eliminating harmless transactions between consenting adults only strips consumers of choice and is detrimental to the interests of all involved—except entrenched competitors. When freedom of entry is limited, consumers lose.
The justification for this regulation is protecting dealerships, not public safety. Dealerships have played a central role in automotive sales and they do not want to lose their favored position. While dealerships do offer some benefits, this is no reason to constrain advances and force all companies and consumers to operate the same way. Tesla’s greatest innovation may be its novel sales model rather than its electric cars.
Jared Meyer is a policy analyst at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here.