Car dealers aren’t sleeping very well lately because of the prospect of direct-to-consumer (DTC) auto sales. In March 2022, Ford Motor Company announced that it was forming an independent unit for its electric vehicle business and that it would be revamping how it sells electric cars. Ford proposed to sell its electric vehicles at a fixed price and that dealers would no longer hold inventory but would instead serve as delivery points.
Ford currently has two popular electric vehicles, the Mustang Mach-E electric crossover, and the Ford F-150 Lightning. The Lightning is the most powerful F-150 ever made, it has a range of 320 miles, and you can even use it to power tools or your entire house if need be.
Ford isn’t the only car maker to consider the DTC model. In May 2022, Volkswagen announced that it was reinventing its Scout brand as a line of all-electric pickup trucks and SUVs. VW already sells its popular electric ID.4 SUV. In a carefully worded statement to Automotive News, the CEO of VW Group America said that Scout “[…] [won’t operate] through the Volkswagen brand. In fact, it [will be operated] through [the] Volkswagen Group of America. It will be operated independently.” The significance of the word “independently” will become apparent soon.
Also, in May 2022, Mercedes fired a shot over dealers’ bows with its announcement. The Brand plans to cut between 15 to 20 percent of its dealerships in Germany and 10 percent of its global dealerships and move toward the DTC model. BMW is considering the same move.
Buying a car from your smartphone
DTC sales is the method adopted by Tesla, Inc. when its first car, the Roadster, debuted in 2009. Today, you can buy a Tesla directly over the internet and customize it exactly how you want. With Tesla, there are no dealership middlemen, and their staff is salaried rather than working on a commission, eliminating any possible conflicts of interest.
Besides purchasing online, you can also buy a Tesla at one of its showrooms. As of May 2022, Tesla had 823 showrooms, Service Plus centers (a combination of sales and service), and service-only facilities worldwide. However, in some states, Tesla can only operate “galleries” where you can view its cars, but you can’t buy them. This is due to prohibitions on DTC auto sales.
Below is a list of states that prohibit DTC auto sales and/or service as of this writing:
- Alabama (also bans service centers)
- New Mexico (also bans service centers)
- South Carolina (also bans service centers)
- West Virginia
If your state isn’t included in this list, don’t feel too smug because the following states limit the number of Tesla dealerships allowed within their state:
- Georgia – 5-store limit
- Maryland – 4-store limit
- New Jersey – 4-store limit
- New York – 5-store limit
- North Carolina – 6-store limit
- Ohio – 3-store limit
- Pennsylvania – 5-store limit
- Virginia – 2 stores, approval for 3 additional
To understand why states prohibit DTC auto sales, we have to look far into the past.
A look back
During the 1930s, when car ownership was increasing across the United States, all 48 states passed what are known as “dealer franchise laws.” These laws restricted car makers from selling directly to consumers to protect the dealers from the prospect of manufacturers opening their own dealerships and undercutting them. In general, the dealer franchise laws state that no car company that has franchises in a state can sell directly to consumers. Things get murky when a manufacturer, such as Tesla, doesn’t have franchises within a particular state.
Car dealers vs. the DTC model
Tesla has responded to state prohibitions of DTC auto sales by filing lawsuits and lobbying state legislatures. However, auto dealers and auto dealers’ associations hold an inordinate amount of sway in most states. Consider how large ground auto dealers occupy and the amount of real estate taxes they pay. Moreover, the DTC model threatens car dealers’ very existence. If you can order a car through your smartphone and have it delivered right to your house, why do you need them?
Perhaps a greater fear for dealers is electric vehicles themselves. According to a 2015 New York Times article, the profit generated by auto service is three times greater than that generated from new car sales. Electric vehicles don’t require much service because they don’t have combustion engines, transmissions, fuel filters, spark plugs, or fan and timing belts. Electric cars never require a tune-up or need to have their oil changed.
Indeed, Tesla’s recommendations for service primarily include changing out the high-efficiency particulate air (HEPA) filter every three years, changing the cabin’s air filter every two years, and flushing out the brake system every two years.
Auto dealers and dealers’ associations are fighting the DTC model by funding candidates who support dealer franchise laws. For example, In the 2014 election for governor in Arizona, one of Governor Doug Ducey’s most significant campaign contributors was a Tucson auto dealer. However, by 2017, a judge forced Arizona to provide Tesla with a dealer’s license because it didn’t have an existing network of dealers within the state.
In January 2020, following a six-year legal fight, the state of Michigan, which is home to the “Big 3” automakers Ford, GM, and Chrysler, agreed to allow Teslas to be sold directly to consumers and serviced within the state.
The next fight will likely come down to over-the-air updates, which we’ll write about more in the future. When new software and firmware versions are available, Tesla updates its vehicles. Tesla also offers upgrades such as its Autopilot, Full Self Driving mode, an acceleration boost for Model 3’s (as if they weren’t already accelerating fast enough at zero to 60 in 5.8 seconds), and rear-heated seats for the Model 3.
Tesla also uses over-the-air for remote diagnosis and repair. If a problem can’t be fixed with software, a Tesla mobile technician might be dispatched to your house, or you’ll be directed to take your car to a local Tesla service center. Contrary to the traditional auto dealership model, Tesla has stated that it does not want to make a profit on vehicle servicing.
In February 2022, West Virginia attempted to ban over-the-air updates with HB 4560, which stated that “a manufacturer or distributor may not […] cause warranty and recall repair work to be performed by any entity other than a new motor vehicle dealer, including post-sale software and hardware upgrades or changes to vehicle function and features […].” However, by March 2022, that language had been struck.
Passing a tipping point
In July 2022, a critical milestone was achieved in the U.S. Five percent of new car sales were electric vehicles. The U.S. thus became the 19th country to achieve this milestone, with the others being:
- New Zealand
- South Korea
- United Kingdom
Unless archaic dealer franchise laws are changed, the U.S. will likely lag behind the rest of the world in electric vehicle adoption. This will deleteriously affect not only our pocketbooks but our climate. The outcome may come down to who has more clout with state legislatures, the auto dealers, or the voters.