Time has come for a grand bargain on direct vehicle sales to customers

Ever since Tesla broke into the market in 2014, a state-by-state battle has been waged across the country over state motor vehicle franchise laws that restrict a manufacturer's right to sell cars directly to consumers. Tesla has led the charge for direct distribution, arguing that selling electric vehicles through franchised dealers is not a viable option. Dealers have resisted Tesla's efforts, arguing that mid-20th century protection laws prohibit direct sales and service.

Tesla has won many of these battles — whether in court, state legislatures or motor vehicle commissions — and is now selling directly in many states. However, with a host of new EV manufacturers coming to market, the issue is now much larger than Tesla. New entrants such as Rivian, Lordstown Motors and Lucid Motors also plan to sell directly to consumers and argue that their right to do so is vital to their market access.

A recent skirmish in the Michigan legislature highlights the dynamic nature of the political battles over direct sales. Dealers supported a bill that would have codified a January settlement between Tesla and the state that allowed Tesla to sell and service cars (with a few formal hoops to jump through), but prohibited direct sales by other EV manufacturers. The bill passed a House committee but, with strong opposition from environmental, free-market and consumer groups, thus far has not reached a vote in the House.

Something interesting happened during the latest Michigan battle. Ford Motor Co. and General Motors, which have mostly backed dealers to date, switched sides and opposed the dealers bill. One could chalk this up to opposition to a Tesla-specific carve-out, but GM made clear that it opposed the direct-sales prohibition even beyond the Tesla carve-out. Further, the UAW opposed the bill as well. Have we reached a political tipping point?

When it was just Tesla fighting to sell direct, GM and Ford's biggest concern was that Tesla would obtain a competitive advantage by bypassing the independent franchisee distribution system, so they sided with the dealers. But now the world is changing.

For one, GM and Ford are investing heavily in EV startups. Ford has put half a billion dollars into Rivian; GM reportedly is investing in Lordstown and Nikola. Further, with Tesla increasingly gaining the right to sell direct and new entrants poised to do so as well, the worst-case scenario for GM and Ford is that new EV manufacturers are allowed to sell directly while legacy manufacturers are stuck with the dated franchised dealer model. As EVs gain market acceptance, GM and Ford need flexibility in distribution methods to remain competitive.

If GM and Ford support direct distribution, the politics will tilt decidedly against dealers, especially in a bellwether state such as Michigan. Already, dealers have to contend with a "strange bedfellows" coalition of environmental, free-market and consumer groups supporting direct sales. Add to that a business coalition of well-funded EV startups, legacy automobile manufacturers and labor, and it's hard to see how dealers continue to score many more political victories.

The dealers lobby must see the handwriting on the wall. Dealers may feel that they are facing an existential threat, but the turning of the tide on dealer franchise laws should be a small part of their worries. Much larger social, economic, technological and political forces are threatening the franchised dealership model with extinction.

The trend toward ride-sharing and autonomous vehicles means fewer and fewer people will buy their own cars. Customers increasingly demand the option to purchase vehicles online, as they do almost every other product. Further, as EVs increasingly gain market share, the dealers' economic model — which is heavily reliant on making profits from servicing cars — is under attack, since EVs require much less traditional dealer servicing than internal-combustion vehicles. California's mandate to restrict sales of new vehicles to EVs only by 2035 is a much greater threat to the dealership model than relaxation of any prohibition on direct sales.

Dealers have been resisting direct sales ostensibly on consumer protection grounds, but that position is unsustainable. All of the consumer organizations support direct sales and oppose the dealers. Dealers' real objection is that they have made substantial investments in reliance on the existing franchised dealership system and the laws that protected it. Dealers must feel that the rug is about to be pulled out from underneath them.

Dealers' reliance interests should be respected, but not in a way that codifies mid-20th century distribution methods forever. Dealers have had fair warning for some time that the world is changing. They must adapt their business model and find ways to provide value given the dynamic economic, technological and social circumstances.

Dealers have the strongest case that their franchising manufacturers should not be allowed to compete against them with respect to internal-combustion vehicles. It was that concern that motivated the direct-distribution prohibitions decades ago. On the other hand, dealers have little standing to argue that electric vehicle sales should be channeled exclusively through them.

Here's a possible compromise: State laws could continue to require sales and service by franchised dealers of internal-combustion vehicles for any manufacturer that uses franchised dealers. On the other hand, EVs (or any other new technologies) could be sold and serviced directly by the manufacturer, whether legacy or startup. This compromise would guarantee dealers a continuing role during the waning years of internal-combustion engines, but create a freer market for consumer and manufacturer choice with respect to EVs.

Such a compromise should find ready support from EV startups and the public interest groups supporting direct distribution. The legacy manufacturers should find it in their interest to go along as well. Dealers surely will not like any loosening of state direct-distribution prohibitions, but given the continued weakening of their political position, it's time for them to secure at least the internal-combustion business.

Without this kind of a compromise, dealers may end up in an even worse place.

Change is coming, and change inevitably creates winners and losers. The grand bargain I suggest is not exactly win-win for everyone, but it would guarantee that no one is a clear loser. Let's give it a try.