FTC officials: Ban on Tesla's direct sales 'bad policy'

Tesla's direct sales approach has pitted it against 17,000 car dealerships in the U.S. that are often family-owned.

UPDATED: 4/24/14 4:06 pm ET -- adds NADA, Tesla statements

WASHINGTON -- In an unusual move, three top officials with the Federal Trade Commission on Thursday came out in opposition to laws that ban automakers like Tesla Motors Inc. from selling automobiles directly to consumers.

Laws that ban car manufacturers from selling their own products are "bad policy" and outdated, the FTC officials said in a blog post. Such laws are currently in place in Arizona, Maryland, New Jersey, Texas and Virginia.

The authors were Andrew Gavil, director of the FTC's Office of Policy Planning; Deborah Feinstein, director of the Bureau of Competition; and Martin Gaynor, director of the Bureau of Economics.

The views are their own and not those of the commission, the three said in the posting. It is not clear if the FTC is considering other action on the auto sales issue.

Dealers argue that the nation's franchise model is good for consumers because dealers compete on price and offer long-term service. They see direct sales of any sort as an existential threat.

The clash is pitting Elon Musk, the billionaire CEO and co-founder of Tesla, which makes electric cars, against some 17,000 car dealerships that are often family-owned and sprawled across the United States.

The FTC officials pointed out that the Internet has changed how people shop for everything from toothpaste to a taxi ride. They urged lawmakers to be skeptical of auto dealers' arguments that they need protection.

"Change can sometimes be difficult for established competitors that are used to operating in a particular way, but consumers can benefit from change that also challenges longstanding competitors," the FTC officials wrote.

The National Automobile Dealers Association took issue with the blog post, saying "fierce competition between local dealers in a given market drives down prices" in and across brands.

"If a factory owned all of its stores it could set prices and buyers would lose virtually all bargaining power," Jonathan Collegio, vice president of public affairs for NADA, said in a statement. "And buying a car isn’t like buying a pair of shoes online. Cars require licensing to operate, insurance and financing to take home, and contain hazardous materials, so states are fully within their rights to protect consumers by standardizing the way cars are sold.”

Tesla continues to study its options to overturn bans on direct sales.

“We didn’t get into this debate by choice, and we didn’t pursue the direct-sales model to disrupt traditional dealer practices,” Diarmuid O’Connell, Tesla’s vice president of business development, told Bloomberg today.

“Statutes that may have been created to protect consumers many years ago have been implemented mainly to protect the dealer body in many states,” he said.

The company “agrees wholeheartedly” with the sentiments expressed in the FTC blog, he said.

The franchise system was set up in the first half of the 20th century by automakers who did not want the expense of building up their own sales network. The FTC officials said that regulations were created to protect dealers from abusive practices by automakers.

"In this case and others, many state and local regulators have eliminated the direct purchasing option for consumers, by taking steps to protect existing middlemen from new competition. We believe this is bad policy," Gavil, Feinstein and Gaynor wrote in the blog post.

"Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated," they wrote.

The conflict between Tesla and dealers came to a head last year after Tesla introduced its Model S, a $60,000-plus sedan that aimed for a wider audience than the two-seat, $101,000 Roadster sports car it introduced in 2009.

Despite the bans, Tesla has found a way to convince customers to look at its cars. In states where sales are prohibited, Tesla employees show off cars in "galleries" and tell customers to complete the sale over the phone or online.

Tesla, which was founded in 2003, had total sales in 2013 of about 22,500 cars.

Musk has said he is not interested in overturning the existing franchise system, but he doesn't want to participate.

Reuters and Bloomberg contributed to this report.

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