It’s not about Tesla, it’s about Michigan’s future

Michigan, United States  (R Street) – Michigan has made great strides in its dramatic rebound from the economic doldrums of the Great Recession, helped by efforts to reduce unnecessary red tape and to create an environment friendly to innovation and opportunity.

But unless state policymakers remain steadfast in challenging entrenched special interests and allowing new business models to flourish, this recovery may soon hit an arbitrary ceiling. Tesla’s struggle to bring their new approach to auto sales to Michigan is emblematic of why the state’s policymakers must embrace the future.

Tesla has popularized a business model of direct sales from the carmaker to consumers without a dealer serving as the go-between. This radical idea that consumers do not need a middleman to control their car-buying decisions faces relentless opposition from the Michigan auto dealer cartel, who enjoy the benefits of government-protected monopoly protecting them competition.

Gov. Rick Snyder signed a bill in 2014 that reinforced the state’s commitment to the dealership model. Tesla’s response has been to take the state to federal court over the prohibition on consumer choice. For its part, in an effort to win the public relations fight against progress, National Automobile Dealer Association Chairman Jeff Carlson has claimed the direct-sales model would lead to higher costs, arguing that the extra costly step of shipping a car from a factory to a dealership, where a paid salesman on commission may offer a reduced deal, is more affordable than anything a retailer could match by selling directly to consumers.

I can only assume that Carlson buys his clothing and groceries, or bought his house or even a used car, through government-protected dealerships, since direct sales are just way too expensive. The argument defies logic. Time and time again, it’s been proven that disintermediation — the process of reducing reliance on middlemen between producers and consumers — has been mutually beneficial. Allowing consumers to shop for a better deal and allowing producers to seek out potential customers and reach new markets is the way capitalism is supposed to work.

A recent study from George Mason’s University’s Mercatus Center explains how agreements to establish dealerships or territorial-based franchises to mediate between producers and consumers might help consumers, but only when such arrangements are purely voluntary. They “virtually always harm consumers” when mandated by state law.

Mercatus found that maintaining the status quo essentially freezes the market, making it difficult “for manufacturers to experiment with new methods of auto sales or to close unprofitable and inefficient dealerships, which ultimately prevents any potential cost savings to consumers.”

This is not to say that dealerships and other intermediaries can’t serve a valuable purpose. For some companies and industries, the established business model might make the most sense. But is it really the government’s job to prohibit opportunities to innovate? Any fan of the Big Ten can tell you that this state relishes competition; if Telsa’s storefronts give people what they want, they will survive alongside the big dealership lots. If they don’t, they’ll fail. There’s no reason to keep consumers from deciding which they prefer.

TeslaBells Brewery, Twisted Mitten food truck, Detroit Bus Company and even Uber are examples of companies currently thriving in Michigan. Each has radically improved the way consumers enjoy their products, all while overcoming barriers to entry first established by their competitors. Why can’t Tesla try, too?

Michigan has always been the center of America’s automotive industry. As emerging technology and innovations continue to revolutionize the industry, it’s illogical that the Motor City would want to lose its place. Drivers are excited to see how Tesla will add to the already spectacular lineup of American-made vehicles. Now is the time to embrace the future and allow Michiganders to drive the latest rides, as their forefathers once did.

 

This report prepared by Nathan Leamer for R Street