Musk is Right About One Thing

Guest Post by Eric Peters

Why can’t you just a buy a new car?

I mean, without the middleman.

Without having to go through a dealer?

You can buy almost anything else directly – including very big ticket items like a house. It’s not illegal, in any event, to buy most things this way. Buyer and seller. Just the two of you.

But with new cars, it’s different.

There are three of you. The manufacturer of the car, the dealership (a franchise of the manufacturer) and then you.

It is actually illegal in most states to buy a car directly from the company that made it. Laws exist that force you – if you want a new car – to buy it literally third-hand, from a dealer. Who did buy it directly from the manufacturer (the first owner) and who is now re-selling it to you, the prospective third owner, at a marked-up price.

This part – the marked-up price – is not unreasonable. The dealer has every right to make a profit, just like anyone else who sells something he owns. But he doesn’t – shouldn’t – have the legal power (as opposed to the moral right, which he lacks) to force you to do business with him.

And yet, he does.

It’s – incredibly – the law.

In most states, new cars may only be sold through authorized franchises of the manufacturer – i.e., a dealership. You can guess who saw to it that such laws were put into place.

Tesla – Elon Musk’s state-subsidized electric car operation – has been truly innovative in one area (electric cars are not innovative; they’ve been around for 100-plus years and still are beset by the same problems – high cost/not enough range/too-long recharge times – that beset them 100 years ago).

That area being Tesla’s attempt to sell its cars directly, without a dealer network.

Unlike state-subsidized electric cars, this is not objectionable. How could any reasonable person object? If you’re interested in a Tesla – or whatever – and want to buy one, why should you have to go through the dealer rigamarole? The ancient dog-and-pony show?

And pay for it, too?

Why not just go online and order the thing? More precisely, why should you be legally forbidden from being able to do so?

Because it costs the established dealer mafia – and the car companies that collude with them – money.

Your money.

Which, instead of spending on the Dealership Experience, you spend on just the car itself, under the direct sales model. Which because of this thing called the Internet no longer requires the Dealership Experience. You can go online and view the car. It’s brand-new, so there’s no need to physically inspect it (as you would probably want to do with a used car). Use the software to deck it out in the colors – and with the options – you like.

Click “buy,” once you’ve decided.

Then pick it up at (in Tesla’s case) a gallery or sales outlet. Tesla has even talked about having the car delivered – and why not? Unlike his penchant for milking the taxpayer, that would be genuinely cool.

Note also that direct buying doesn’t necessarily mean dictatorial “no haggle” pricing – which some critics of direct buying suggest it would. Many people like to haggle – understandably.

But why would direct buying preclude that?

People already haggle online over the price of used cars. Ebay, for instance. The seller can choose a minimum price subject to negotiation (offers) or “buy it now” at a pre-set price. The same model could work just as well for a new car. At least there’s no structural reason why it couldn’t. Only if it were made illegal – government’s finger in the free market pie again – could it be rendered not an option. Otherwise, market pressure would take care of things. Some car companies might adopt a No Haggle/One Price model but so long as others were not legally forbidden from offering online haggling, the availability of that option would be there and would also apply pressure on the One Price/No Haggle operations to keep things within reason.

Competition, you see.

Tesla has succeeded in getting laws changed in a handful of states to allow it to sell direct to the consumer. But – in typically Teslian crony capitalist fashion – the laws were adjusted to accommodate Tesla only. Because of PC orthodoxies about the necessity of “helping” Tesla’s “clean” electric cars succeed. The laws only permit the direct selling of cars powered by alternative fuels.

Other car companies – in particular, small start-ups like Elio – are out of luck. Because they are not politically correct. Because they sell very low cost internal combustion-engined cars.

Well, they hope to.

But laws forbidding direct sales make that harder. A dealership is no cheap thing. Millions of dollars or at least many hundreds of thousands of dollars are involved. You have to buy the lot and buildings (take out a loan) then fit it out and hire staff. Plus, pay whatever the costs are to become an “official” dealer of whatever the brand of car it is you’re selling. Then you buy the cars from the manufacturer (more loans) and hold the note for inventory carrying costs (plus interest) until you sell the car to someone.

An entire network of dealers is necessary, several in each state at the very least. Realistically, two or three in each major city. Otherwise it’s too much hassle and most people won’t bother.

Many beaks get wet this way.

You and I – the car buyer – providing the “water.”

Service costs are necessarily higher because of this, too. In fact, service mark-up costs are for many dealers the chief profit source. Not the selling of the cars themselves. But regardless, service costs are higher because the dealer has to find a way to offset the fixed costs of the dealership and everything that goes with it.

Direct buy eliminates almost all of this.

It is therefore opposed by dealers – who are heavily in hock, many of them. And those who are not, are making a lot of money being middlemen.

All of this is perfectly understandable.

What’s unconscionable is this business of using the government to enforce what amounts to a cartel operation.

Tesla – and others – are not demanding that traditional dealers be outlawed. They can continue to do business as they have been doing business. What Tesla and the others are arguing for is the right to do business differently. If people prefer the former – or the latter – the market will have spoken.

Which is much to be preferred over the government decreeing – and enforcing – for the profit of private interests.

Now if only Elon would champion the free market when it comes to building his electric cars… .