Podcast: The Future of Buying Cars, With Daniel Crane

April 18, 2022

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One of the benefits of electric vehicles is they cost less to maintain. But that also means there’s less profit to be had in servicing their warranties, which gives car dealers less incentive to sell them. That’s why EV makers like Tesla and Rivian depend on direct-to-consumer sales and distribution. Unfortunately, there are decades-old dealer-distribution laws standing in the way. Rob and Jackie sat down with Daniel Crane, the Frederick Paul Firth Senior Professor of Law at the University of Michigan, to discuss how these laws harm consumers and undermine technological innovation.

 

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Rob Atkinson: Welcome to the Innovation Files. I’m Rob Atkinson, President and Founder of the Information Technology and Innovation Foundation. We’re a DC based think tank that works on technology policy.

Jackie Whisman: And I’m Jackie Whisman. I head development at ITIF, which I’m proud to say is the world’s top ranked think tank for science and technology policy.

Rob Atkinson: This podcast is about the kinds of issues we cover at ITIF from the broad economics of innovations to specific policy and regulatory questions about new technologies. And today we’re actually going to talk about something that affects pretty much every listener and that’s when you want to buy a car and why in most places, you cannot buy that car directly from the producer, that states want to limit your choice. And we see this now with Tesla. And this is really bad for consumers. It’s really bad for technological innovation. That’s what we’re going to talk about today.

Jackie Whisman: Our guest is Daniel Crane, the Frederick Paul Firth Senior Professor of Law at University of Michigan School of Law. His specialty areas are contracts, antitrust, intellectual property, and legislation and regulation. Over the last several years, he has taken a leading public role in advocating for the freedom of an automobile manufacturer to open up its showrooms and service centers and deal directly with consumers.

Thanks for being here, Dan.

Daniel Crane: It’s my pleasure, Jackie. And hello, Rob.

Jackie Whisman: You’ve written extensively on efforts to block direct distribution by new car companies, like Tesla and now the newer players, like Rivian. Who’s leading the bans and on what grounds are they basing their logic?

Daniel Crane: So, if you go back to the middle of the 20th century, what you find is that almost every state passed some kind of dealer protection law that was designed to protect dealers, car dealers, from competition from their franchising manufacturers.

And the world was a really different place then. For one, you had only three large car manufacturers, the big three. And you also had dealers that were organized basically as mom and pops. They were very small, family-owned businesses.

And so, among the package of protections in place in these state laws almost across the country was some kind of prohibition on the manufacturer opening its own retail stores and competing directly with its dealers.

Now, those laws took different forms in different states, but they have been on the books for a long time. With Tesla’s arrival in around 2013 and ‘14 and Elon Musk’s decision that in order to sell this new technology, electric vehicle technology, he needed to go directly to the consumer to sell and service the cars. The question arose as to whether these, 60, 70 year old dealer distribution laws applied to a company like Tesla that wanted to sell directly to consumers and not use franchise dealers at all.

And in broad brush terms since about 2014, these political battles, on a state-by-state basis, have been between the car dealers who want to use these mid 20th century laws to protect themselves against competition from direct sales by electric vehicle companies like Tesla and Rivian, and Tesla in the early days, almost by itself. And now really a coalition of not only companies like Tesla and Rivian, Lucid, Aptera, Lordstown, Bollinger, start of electric vehicle companies, but also a coalition of environmental groups that see direct sales as really important to the market penetration of electric vehicles. Free market groups and pro-consumer groups all advocating in favor of direct sales.

Jackie Whisman: And why are these bans so bad for consumer welfare? And as Rob said, technological innovation overall?

Daniel Crane: So, the problem is that the current model of dealer distribution simply does not work well for selling electric vehicles. If you think about the traditional model of buying a car from a dealer, the dealers made very little money, very small margins on the sale of the car. They made 30% or higher margins on servicing the car.

And so, their whole game was to get you to buy the car primarily so they could get you back for warranty service, which was very lucrative to the dealership. That model just does not work for EV sales because EVs have a much smaller service component than traditional cars. There are no oil filters to change. There are far fewer moving parts. Lots of over the air updates.

And so, the economic model just does not work well for the dealers. And in various studies, including a Sierra Club study from 2019, Consumer Reports did a study sending secret shoppers into car dealerships that did carry EVs and found that they had no incentive to sell you the EV. They weren’t charged. Oftentimes the dealers actively discouraged a consumer from buying an EV even though they had an inventory.

And so, the EV startups have concluded that if they’re going to be successful in introducing this new technology to the market, they have to go directly to the consumer.

Rob Atkinson: I know a lot about fixing cars. I’m pretty good at it. I don’t want to say the last place I would ever take my car to get it serviced would be the dealer, but it would be near the last because they charge an arm and a leg, especially for things that need warranty work on... Just getting your oil changed or getting a tuneup. It’s unbelievable. So, you’re right. They make a lot of money off of that.

I remember one time, probably about a decade ago, I was speaking at the National Conference of State Legislator’s Annual Meeting down in Dallas, I believe. Or no, San Antonio. And I was on a panel making the case for why we should just get rid of dealer protection laws overall. This was even before EVs. And my counterparty was the head of the Texas Car Dealers Association. And his main argument was, “Hey, we’re car dealers. You can trust us.”

Daniel Crane: So, Rob, here’s the ironic fact. The most complained of business in America to the Better Business Bureau is the car dealer. It’s more than cable networks or cable companies. And I don’t mean to trash all car dealerships. There are good car dealer networks out there. There are still some mom and pops out there, but overall, we’ve all been there. The model of car sales is high pressure tactics to get you to take the inventory that the dealership has on the lot. And the EV manufacturers, it’s all built to order. There’s no bargaining over the price, which I think most consumers prefer. I hate going to the car dealership and being nickled and dimed over the price of the car.

One anecdote, the last time I bought a car from a dealership, I told the dealer, I want everything upfront. I want to know the itemization, every single charge that I’m going to have to pay you at closing, written ahead of time so that I can decide what I want to buy or not buy. I just want to know ahead of time. Yes, yes, yes. Here it is.

I went to the closing and I noticed that there’s a $700 additional fee on my bill. I said, “What’s this?” And he’s like, “Well, you’re pre-buying all the service we give you for two years.” I said, “But, I made it clear. I wanted to know now.” Didn’t even ask me. They just put it on the invoice. And just assuming I’ll just buy it because that’s the model they have.

So, there’s something that I think the American consumer will like about the model of a sale where it’s not that high pressure sales tactic from a commissioned salesperson. It’s a transparent, flat, one size price for everyone. By the way, which is also a lot fairer to women and minorities, which the evidence shows are often disproportionately charged higher prices in this dealer haggling model.

Rob Atkinson: Yeah, no. I don’t know if you ever remember that famous paper that Joe [inaudible 00:07:59] did, I think that’s how he got his Nobel Prize, on lemon laws, which is essentially... It was asymmetric information. So, when you go into the dealership, there’s asymmetric information, but it’s particularly asymmetric if you’re... I don’t want to do gender stereotypes, but here’s one. Men sort of tend to know more about cars historically than women. More educated people have more access to going to buy the Consumer Reports, which costs money and all that.

So, there is asymmetric information there that it ends up hurting, as you said, Dan, ends up hurting certain people more than other people.

The other thing about this I think is interesting, is at least at one point, the last time I looked, there are some countries that allow you to buy direct. And one of them is Brazil. So, in Brazil, you can buy directly from the company. You can actually go online and you can see a picture of your car being built and it gets delivered directly to your house. This is not just about convenience. This is also potentially about lower cost and lower prices for the consumer.

Daniel Crane: That’s right. And here’s the thing though, Rob. We actually don’t know what the best distribution model is. No economist, no law professor, no policy person is in a position to say, “Here’s the right way to do it.” The way we decide what works and what doesn’t work is by allowing companies with skin in the game to test it in the market.

So, Apple, for example, has a dual distribution model. They have their Apple Store. You can buy it online, directly from Apple. Or you can go to Best Buy or AT&T to buy Apple products. Apple has decided that mixed distribution model is what works for them.

For a long time, Dell and Compaq would only sell direct. They wouldn’t sell through stores. Again, they decided that’s what works for them. And so, the model needs to be allowing consumers and manufacturers to prefer their own models to test and see what works. That’s how we’ll know what works.

But, the problem with these dealer distribution laws is they’re trying to lock all sales into the 1950s one size fits all model and that’s going to have a real problem, a real impact on innovation, because particularly with the transition towards electric vehicles, manufacturers and consumers need the flexibility to make a different set of decisions.

And I think in the long run, there may be a place for dealers, but they need to find a way to contribute value in a very different world than the traditional world of buying a well known product from a lot.

Rob Atkinson: To push back maybe a little bit, but I think what some people would say on the other side of that is that dealers do provide one useful service, which is test drives. A lot of people don’t want to drive without a test drive. Now, in the Tesla model, that’s not a problem because Tesla has their own store. They let you test drive.

But, maybe in a direct model, what you could end up having is free riding. You would go to do your test drive at the dealer and then you’d go to just buy online. But, it seems to me that’s true in so many other areas and there are ways around that. It seems to me you could charge a de minimus fee for a test drive. Again, I’m inclined to say, let the market work that out, but what are your thoughts to that point?

Daniel Crane: Yeah. So, free riding would be a problem with franchise dealers. And this is why the U.S. Supreme Court on, for example, resale price maintenance, the shift was made when the economics caught up with the law or the law caught up with the economics to realize that when you had multiple dealers in your brand, you had a free riding problem. But, if all the sales are coming from the same manufacturer, then the manufacturer’s indifferent whether you test drive in Dallas and buy in Houston. It doesn’t matter to you where the point of sale is because there’s no separate entity collecting a profit intermediate between you and the consumer.

And so, I think this is actually one of the virtues of the direct sales model. It eliminates double marginalization where that’s a factor and it allows this more direct relationship between the seller of the product who knows the product better and the buyer.

In terms of test driving, the irony is that the dealers who purport to be in favor of protecting the consumer, they’re the ones that are blocking Teslas and Rivians and Lucids, in those states that it’s still prohibited, from being shown directly to the consumer so the consumer has a chance to test drive that car in person.

Right now in every state, the consumer can buy an electric vehicle online and they can pick it up from another state. They can have it delivered to their home. That even the states like, say Texas, that still prohibit direct sales, they don’t prohibit that. They really can’t.

So, it’s not about actually prohibiting the consumer from actually owning the car. It’s about making it really inconvenient for them. That’s for the sales.

And then the service component is a huge aspect of this. So, right now in Louisiana, for example, no one can buy a Tesla from a store because Tesla can’t have a store. But, Tesla does have a service center in New Orleans. And the dealers are trying to shut that down. And the consequence is that a couple of thousand Tesla owners in Louisiana, who already bought a Tesla from somewhere else, won’t have access to local service. And how can that possibly be in the consumer’s interest? So, with a dealer say, “We’re about protecting the consumers.” It’s just the opposite. They’re trying to deny consumers choice and ability to buy and test a car and have it serviced locally.

Rob Atkinson: One of the interesting things about this whole thing, you mentioned Texas, and you think about Texas and now, including its current governor, and it’s a red state and you think, “Well, red state should be for free markets. They should be for consumers.” But, no, this is not a red or blue thing. This is about the power of car dealerships. They go out and they play golf with the local legislators. They donate money. This is really about special interest politics.

I remember a few years ago, ITIF used to put out this annual Ludite of the Year Award.

Daniel Crane: Yes.

Rob Atkinson: One year we issued it to New Jersey for their ban on Tesla sales, with a Ludite activity. That could have been the same year we nominated Elon Musk as a Ludite of the Year because he said that AI was going to kill us. Artificial intelligence would destroy the human race, which was sort of a Ludite [inaudible 00:14:11] view.

So, Musk is anti-Ludite when it comes to this kind of innovation, but when he talks about AI. So, I guess the question is, where are we since then? Do you see more? Is it going in the right direction, Dan? Is it going in the wrong direction?

Daniel Crane: Yeah. It’s trending in the right direction. It’s still very state by state. And part of the difficulty is if you’re trying to create a map of the country and saying which states allow, which states don’t, there are some states like California, which left coast, blue state, is actually, I think the model of what to do. The California law has always protected the dealers from competition by the franchising manufacturer. But, by saying that the franchising manufacturer cannot open its own store within 10 miles of its franchise dealer. And that makes a certain amount of sense, right?

Now, you can’t come in and undermine your own franchise dealer, but of course that has no application at all to a company like Tesla that doesn’t use dealers at all. So, if the goal of these laws, the original goal, was to protect a franchise dealer from competition from its franchising manufacturer, that’s one thing. The dealers are making a much broader play with these laws to stop competition altogether.

As the Massachusetts Supreme Court held in 2014, these laws were meant to protect competition within the brand. And the dealers are trying to use them to protect themselves from competition from different brands entirely, which was never what these laws were supposed to do.

So, it’s state by state. Again, this year, we’ll see legislative battles in a number of states. There’s legislation possibly in Pennsylvania, in Washington, possibly in Texas. A number of other states. And sometimes it moves forward. Sometimes it moves back.

My home state of Michigan is a good example, where in 2014, the legislature moved back to try to ban these things almost entirely. There was a constitutional challenge by Tesla and that resulted in 2020 in a settlement with the state where the state basically stipulated that the Michigan law did not apply to most sales and service activities that a Tesla or Rivian would want to do.

Since then, the dealers have tried to come back and change the law, to actually crack down on direct sales and there’s momentum in the other direction, too.

So, it really is a state by state question. And I think we’ve certainly moved in the right direction overall, but it remains very contested locally.

Jackie Whisman: I was reading one of your recent articles for Automotive News. And in it, you suggest a “grand bargain” and “it’s not exactly a win-win for everyone” you say, “but it would guarantee that no one is a clear loser.” Could you explain a little more about this?

Daniel Crane: Yeah. So, I’ve been trying to find ways. I like compromise. I like principle, but I also believe that the world works on people getting together and come let reason together. So, what I was suggesting was that to the extent that the dealers... The one interest that the dealers I think have that we should take seriously is a reliance interest. The dealers say, “Look, we’ve made investments in a system. We’ve made big investments in a system that worked a certain way for a really long time. And now you’re coming along and kind of pulling out the rug from underneath us.”

Now, that cannot be an excuse to preserve outdated laws that stifle innovation and consumer choice forever. So, what I was suggesting is during the dying days of internal combustion, let’s be real that the internal combustion engine is on its way out, that I don’t see any grave need to change the laws as to internal combustion sales.

So, if you are a Honda or GM dealer, you’re not going to face competition from Honda or GM for sale of internal combustion cars. But, as to EVs for everyone, that’s where I think the law just needs to change. And it needs to change not just for the Teslas and the Rivians of the world. It also needs to change for GM and Ford because they also have the same problem. If they try to sell EVs through their franchise dealer networks, it’s not going to be successful either.

So, they need more flexibility to be able to do more internet based sales and more direct sales and service themselves, perhaps using their dealership network, both more flexibility than these laws allow.

And frankly, I think a worst case scenario for the big three and for the Japanese and German companies, is that all the EV startups get to do direct sales on EVs and Ford and GM and Chrysler can’t do it.

And it’s interesting. There a wonderful, wonderful in it’s ironic sense, letter that the GM wrote to then Ohio Governor John Kasich back in 2014. The dealers and Tesla had basically cut a deal where Teslas would be allowed to have three stores in Ohio and GM is complaining about this bitterly to Kasich. And what’s interesting is they say this is unfair to GM because direct sales is a competitive advantage.

Now, of course, the right thing to have said would be if it’s a competitive advantage, it’s not that you want to deny it to Tesla. It’s let us have it, too. And unfortunately, what GM and Ford did for a long time was try to slow Tesla’s momentum by trying to stand with their dealers and block this competitive advantage of selling directly through insisting that these old laws apply to even Tesla in its new model.

Instead, what they should have done is be saying, look, there’s a whole new world here, a new technological world. We need more flexibility. And if Tesla’s going to do it, we should be able to do it, too. I’m concerned that ship may have left the harbor because now in many states, it’s only the EV startups that don’t have franchise dealers that can sell direct and the legacies are being left behind. And I think this can be a real problem for them as they’re switching more and more of their fleet towards EV sales.

Rob Atkinson: By the way, one little maybe addendum I would add to that is I would put in also hydrogen because we just don’t know what the... Maybe hydrogen works. Maybe it doesn’t, but seems like we should just say alternative or new fuel vehicles.

Your point about that. I’ve talked to a lot of the car companies and one of the things they’ll tell you privately is that they are worried about retailer retaliation.

Daniel Crane: Yes.

Rob Atkinson: And we’ve seen that, for example, in the contact lens industry where optometrists will prescribe certain lenses that are harder to get at Walmart, let’s say. And if you let your lenses go to Walmart, they’ll prescribe your competitor to retaliate, to send you a message.

Daniel Crane: Yep.

Rob Atkinson: And so, it’s one of those weird things where if you’re in traditional industrial organization, economics, how can that be? Because there’s only what? Six major auto companies and there’s 1,000, 10,000 car dealers.

Well, they collude through professional norms, through journals, through all this other thing. And they end up having a lot of power. And I don’t think policy makers really understand that power imbalance.

Daniel Crane: Oh yeah. And one thing to go back to our historical story, Rob is, as I said before, in the 1950s, car dealerships really were mostly mom and pops. They were family-owned businesses. They were the pillars of the community. There’s kind of a lemonade and apple pie story about the car dealer.

Well today, most car dealerships are enormous, multi-state organizations. The top 10 dealer groups in America have collective annual revenue of over $100 billion. That’s with a B. To get outside of a company of over $100 million in revenue you have to be the 300th largest group. These are very large business organizations with a lot of bargaining power. They don’t need protection anymore. If they need a protection in the 50s, they really don’t need protection anymore. And they have a lot of political clout. The saying is, “There’s a dealer in every district.”

So, in any legislative district in America, you’re going to find a local car dealer that’s got a lot of political clout. They give a lot in elections. They’re very connected. As you say, Rob, they’re very organized. The lobbies are strong.

So, yeah, I think that GM and Ford and I don’t blame them, they looked at the situation when Tesla’s coming along and the choice was either you really tick off your dealers and you go to war against them or you stand with them and be against Tesla. And I understand that calculation. I just think it’s not a sustainable equilibrium. In the long run, because the reality is Tesla is selling direct. Consumers like it. Their market share is growing. Their market cap is bigger than all the legacies combined. The market’s already predicted that Tesla wins and the legacies go bankrupt.

So, something’s got to give and if the story is we’re staying with what we’ve done since 1940 and that’s how we’re going to sell cars, even though it doesn’t work, that’s just accelerating the day of their bankruptcy. They’ve got to turn and start talking about legislative reforms that provide for the dealers, that are fair to the dealer’s reliance interests, but also allow more flexibility in the way that cars are sold.

Because remember, the current generation of buyers is used to Amazon, right? They’re used to be able to go online and put things in a cart and check out. Although of course, cars are a little bit different, they want to see it, they want to test drive it. They don’t buy into the idea that in order to buy something, you have to go to a dealer and experience that high pressure sales tactics that my generation grew up with.

Rob Atkinson: Yeah. And software or tools can help you figure out, do you really need that $400 undercoating?

Daniel Crane: Exactly.

Rob Atkinson: What dealers sell.

I want to ask one last question. Before I do that, one of the key things here also though, we need to remember competitiveness. So, China’s going... They’re putting everything into this. And if we end up with only Tesla, that’s not a competitive position vis a vis China.

And secondly, is antitrust, which is what my question is. Everybody’s saying, we want robust competition, but if we have a unlevel playing field, that means that Tesla becomes dominant. That’s not good for consumers. That’s not good for innovation, either.

Dan, here’s my question. While you are an expert on this really interesting issue of auto franchise and EVs, you’re also an expert on antitrust, generally. And I think you’re going to be on [inaudible 00:24:14] podcast coming up soon about antitrust. So, there’s a lot going on in antitrust. The main thing being the rise of what people call Neo brand [inaudible 00:24:22], the notion that big is bad and that consumer welfare standards not what should be guiding us. What’s your two minute take on all of that?

Daniel Crane: Rob, that’s the big question. I think will [inaudible 00:24:36], will Tim Wu, will Jonathan Canter, the people, head of the agencies who have this [inaudible 00:24:41] perspective, will they be successful? And I think it’s too early to tell whether they will successful in changing the basic idea of antitrust law to be moving away from an efficiency and consumer welfare ideal towards this anti-domination or big as bad idea.

My own prediction is that they will have an effect on the law, but the law will continue as it has in terms of its consumer welfare orientation. Because at the end of the day, I think anti-domination is vacuous. It doesn’t lend itself to objective legal analysis. How do you know when big is too big, unless you moor into some sort of objective idea about the welfare consequences of a company being too big?

So, I am certainly not one who will say that current antitrust law is perfect or needs no revisitation, but the virtue of the economic approach to antitrust law was that it was self-correcting in the sense that you could come in and say, “Well, four years ago we allowed a merger of five to four in the industry and that produced this effect, price increases or diminished innovation.” And so, we should learn from that and have better predictions now about what to allow or not to allow.

And so, what I hope happens in this kind of moment of antitrust reform is that we get better understanding about the economic tools that allow us to figure out what kinds of economic strategies or mergers we should allow or prohibit. But, not that we sort of throw out the baby with the bath water and eliminate what I think is a workable approach to antitrust law based on economic analysis and consumer welfare.

Rob Atkinson: Yeah. But, Dan, that’s because your goal is to drive innovation, efficiency and consumer welfare. Come on. That’s being too reasonable.

Daniel Crane: Look, I think that Lena and Tim and Jonathan, they’ve earned their seat at the table. And look, I’m a believer in democracy. Elections have consequences. This is the president’s policy. And so, we’ll see what happens with it. So, I’m not going to begrudge them their moment. I still have not heard though what the principle is that they want to be the law. And this is law we’re talking about. It can’t just be, we don’t like big bigness, we’re against it.

And for all the maligning of Robert [inaudible 00:27:03] that’s being done today, the one thing I think he was very right about in the antitrust paradox in 1978, was that the problem of the Warren Court’s approach to antitrust law was there’s ultimately lawless. As Potter Stewart said in his dissent, ‘The only commonality is that the government always wins.” And that was the commonality. And that’s not how we run a system under the rule of law. There have to be objective measures that are contestable, that the government has to prove its case. And until we have that, I’m very concerned, not just about the economic consequences, but about the consequences for the rule of law.

Rob Atkinson: Dan, that is a very important point. And for those who are listening, if you want to hear Dan talk about that, he’ll be on an upcoming antitrust podcast that our colleague [inaudible 00:27:50] is doing.

So, with that, thank you, Dan. That was just great to hear you talk about this.

Daniel Crane: Well, thanks, Rob. And thanks, Jackie. It was great to be with you.

Jackie Whisman: And that’s it for this week. If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to [email protected].

You can find the show notes and sign up for our weekly email newsletter on our website ITIF.org and follow us on Twitter, Facebook and LinkedIn @ITIFDC.

Rob Atkinson: And we have more episodes and great guests lined up. New episodes drop every other Monday. So, we hope you continue to tune in.

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Podcast: The Future of Buying Cars, With Daniel Crane