Direct distribution — a direct result of market needs and innovation or a threat to consumers and the country’s franchised dealers?
That's just what industry experts were debating during the Federal Trade Commission’s Auto Regulation Workshop held last week in Washington D.C., during a panel discussion, titled, “Auto Distribution: Current Issues & Future Trends."
Since the arrival of Tesla Motors to the auto market, the automaker’s method of direct-to-consumer sales and the bypassing of the franchised dealer network has been a matter of controversy. And now, other alternative manufacturers, such as Elio Motors, which also plans to sell its highly fuel efficient low-price vehicles directly to the consumer through retail centers, are joining the discussion.
Many states restrict the ability of automakers to engage in direct-to-consumer sales, but young, innovation-driven companies such as Tesla are looking to overturn these regulations.
Tesla vs. traditional manufacturers
Todd Maron, general counsel at Tesla Motors, participated in the panel and focused on how Tesla differs. from other huge, franchised-dealer driven automakers.
First off, though, Maron encouraged listeners to think about the way new technology catches on and is distributed.
“It makes sense when new technology comes out, consumers don’t come to it, we bring the new technology to the consumer,” Maron said as fodder to support the direct distribution argument. “That’s a standard, well accepted thing … you have to make it convenient for them for them to accept it.”
Another point to keep in mind is the way Tesla is different from, say, General Motors. First, Tesla handles inventory differently than more manufacturers.
“We do not have inventory in the same way — the vehicles don’t get built until they are ordered,” said Moran. In other words, the traditional new-car showroom and lot full of cars is “unworkable,” said Moran, as the automaker builds its units to sell.
Moran went on to explain that Tesla customers also tend to have more questions regarding the new technology in the vehicles, so the fast-paced dealership sales process wouldn’t necessarily work.
And on top of that, a considerable amount of profits from traditional franchised dealers come from service and parts, as well as warranties and add-ons in the F&I office — in fact, more of a profit is made on those items than on a new sale alone. Moran argues Tesla can’t offer that to any franchised dealer, “because we make money off of one thing — new-car sales.”
Lastly, Moran pointed out, “Manufacturers fund dealer advertising. Tesla doesn’t advertise. What franchised dealer is going to accept not being able to advertise?”
Both Moran and fellow panelist, Joel Sheltrown, vice president of government affairs at Elio Motors, agreed consumers are being harmed by states that bar direct distribution by automakers.
Elio Motors, whose cars are still in development, has retail centers that will offer point-of-sale options; customers choose the options they desire; the order goes to one of seven marshaling centers, and the car is delivered to the retail center by 10 a.m. the next day.
A focus on intrabrand dealer competition
Following the notes made by two leaders of companies pushing direct distribution, Maryann Keller, managing partner of Maryann Keller & Associates, made an effort to prove the value of the franchised dealer system for consumers, manufacturers and dealers.
She started out by noting, “Making and selling cars are two different things.” She contends there are two erroneous assumptions that have become dogma in the direct distribution debate.
“First, that direct distribution lowers cost and those savings will be passed on to consumers,” she said. "And second, that there are no benefits to consumers among competition between same name-brand dealers,” she said.
This is a commonly broached topic in this discussion as much of it centers around what dsitribution model best protects consumers and passes down savings to these buyers.
According to Keller, there is no savings to be had for consumers through direct retail sales, noting, "what the proponents of the direct-to-retail model don’t realize is that same-brand franchised dealers compete heavily on price to the benefit of consumers.”
Paul Norman, partner at Boardman & Clark took a similar approach, bringing up the point that in the past, intrabrand competition between franchised dealers has cut down on profit margins, and in turn, retail prices for consumers.
“Manufacturers who choose to vertically integrate their distribution systems to include all retail outlets of their products eliminate intrabrand competition entirely from retailing those products,” he said.
He also outlined how franchised dealers independent from a manufacturer can provide a healthy consumer dynamic. In other words, Keller implied dealers see service and recall issues as opportunities to connect with and please customers, while automakers may just try to minimize the cost.
And when an automaker goes out of business or closes, the franchised dealers remain to help consumers, such as Suzuki, which announced in 2012 it would stop selling cars in the U.S.
“In any case, the decision is for the state to make, said Norman, “These laws maintain manufacturers must have an independent entity to interface with the customer to promote intrabrand competition among various sellers of your products.”
The right to adapt to market needs
Interestingly, one would assume a panelist representing manufacturer interest would come out swinging against direct distribution, but Steven McKelvey, partner at Nelson Mullins, brought up a very interesting point.
“The problem is not the current franchise system. The problem is the overreaching motor vehicle laws that prohibit the original manufacturers from having even the option to respond to consumer demands, market needs or competition in any other way other than the traditional channels,” McKelvey explained.
In other words, the consumer is king, and manufacturers should be able to adapt to market needs and wants, including direct-to-consumer sales.
McKelvey explained manufacturers and franchised dealers share important business relationships, but these relationships are very highly regulated, and in some instances, perhaps too much.
“Manufacturers that have that network have to be able to adapt over time when and to the extent consumer and market demand require. There should not be undue restrictions on the ability to meet those demands now or in the future,” he said.
McKelvey contends that even though franchised dealers have a place in the system, if manufacturers were free to respond to consumer demand for additional sales and service options it would serve not only the interest of the consumers, but also the brand and dealers.
“There are and will be times that market and consumer needs warrant at least having the option to engage in sales and service activity through channels outside of the existing network,” he concluded.
‘Is this really about protecting consumers?’
The initial panel wrapped up with an impassioned speech from University of Michigan Dan Crane, who questioned whether the arguments that cite consumer protection as a reason for barring direct distribution are valid.
Emerging technologies do sometimes need to be distributed in innovative ways, and Crane contends “current rules are motivated by dealer protection, not consumer protection."
To back up this assertion Crane pointed out no consumer oriented groups or economists are joining the fight against direct distribution. Instead, the fight is led by mostly manufacturers, dealers and dealer associations.
Crane stated that consumers might actually be better off when manufacturers are free to choose their own distribution method that works best for them in their particular market circumstance.
“The choice of distribution methods is itself is an important dimension of competition,” Crane said. “Economic literature shows that new market entrants with new technologies often need new distribution methods to get to market.
“Let’s let the market settle this — we will find out if direct distribution leads to savings for consumers,” Crane said. “That’s what the market's for.”