Car dealership laws aren’t fit for electric age

Car dealerships are, in essence, giant lots staffed by folks trained in the art of emptying those lots as quickly as possible and repeating the process ad infinitum. But 2021 was a strange year for all of us, dealers included. Their lots emptied … and then quite often stayed empty as supply-chain snafus idled auto factories. Figures indicate sales were a bit better than in 2020 — also ravaged by Covid-19 — but roughly a million units fewer than in the beforetimes.
On the other hand, even amid a pandemic, Americans love buying cars and trucks. So while fewer vehicles were sold, they came with surge pricing. Volume was down perhaps 7% compared with 2019, but the gross margin on each vehicle was roughly double.
Even though they squeezed lemonade from last year’s lemon, though, dealerships face a growing challenge to their place in the auto industry.
In November, Rivian Automotive Inc. debuted on the stock market, quickly reaching a $100 billion-plus valuation despite reporting no revenue. It joined a growing list of highly valued electric-vehicle upstarts that together, including Tesla Inc, now rival the market cap of the entire incumbent autos manufacturing sector.
With any other consumer product, this would barely merit a mention. But dealerships are protected to varying degrees in most states by laws that were passed decades ago to address predatory behavior by the big three automakers. These laws effectively force vehicle sales and servicing to go through independent franchises. Today’s market is a bit different from the 1950s, however. The big three aren’t so big anymore. This week’s bombshell news that Toyota Motor Corp overtook General Motors Co in US sales last year may reflect pandemic peculiarities. But the market was already competitive. And dealerships, though still fragmented, have moved far from the mom-and-pop model of yesteryear. The top 10
companies together generate more than $100 billion in annual revenue.
Perhaps most important, back when Ike was president, no one had an electric vehicle stuffed with chips and taking software updates over the air. Nor a smartphone connected to a gazillion e-commerce sites.
The traditional dealership model prioritises shifting vehicles from inventory — clearing that lot — and generating higher margins from servicing after the sale. First-time EV buyers, meanwhile, usually require some hand-holding about things like range, charging options and one-pedal driving. That requires customer education, perhaps over several interactions, rather than the immediate hard sell. And EVs have fewer moving parts, which limits their service potential.
As first Tesla and now other EV makers have sought to sell directly, the incumbents have dug in for a legal ground war. As of today, about two-thirds of the states cap or prohibit direct sales by auto manufacturers.
There’s some evidence that maintaining the outdated state laws hinders EVs that have been developed largely by startups. Just because a law is hard to defend doesn’t mean it’s doomed. For one thing, auto dealerships can be found in virtually every electoral district and they donate to politicians generously, far more than the manufacturers do.
Dealership laws have helped traditional automakers by acting as a brake on EV startups. But as those startups surpass incumbents in valuation anyway and start changing the way cars are sold and serviced, the laws begin to look less like a defensive moat and more like a restrictive wall.
—Bloomberg