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Direct Sale Efforts and Challenges Continue

By Jason T. Allen

Direct Sale Efforts and Challenges Continue

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Manufacturer efforts to sell new motor vehicles directly continues. This is nothing new, but the form of the direct sale efforts continues to evolve. In the last year, there have been new direct sale efforts at the state legislative level, on the agenda for discussion at a federal agency, one OEM (Tesla) has opened retail outlets without a state dealer license and others have explored ways to provide new motor vehicles directly to the consumer outside of the franchise dealer distribution network.

Tesla continues to be at the forefront of the direct sale issue. Tesla has either opened or attempted to open a number of dealerships around the country without utilizing the franchised dealer distribution network. Tesla is also actively pushing legislation in some states that would permit Tesla to operate without a dealer license, which is otherwise required to sell new motor vehicles. Bass Sox Mercer is involved in two of legal battles where Tesla is either operating, or seeking approval to operate, in a state without utilizing franchised dealers. The issues in those matters are Tesla specific, but the ramifications could extend well beyond the Tesla brand.

The Federal Trade Commission held a panel discussion in 2016 about the auto industry generally, and direct sale in particular. The issue of direct sale has traditionally been a matter of state concern, the federal agency’s interest in the matter should tell the reader all it needs to know about the manufacturers’ collective interest in this issue.

More recently, OEM’s such as GM and Hyundai have begun to roll out subscription based services, which have been billed as Netflix for the car industry. In essence, a customer would pay a monthly subscription fee for the right to use a new vehicle, or new vehicle on demand. These services look like rental agreements on the surface, but they are being offered by the OEM directly to the consumer and take the place of a new vehicle purchase. Moreover, the OEM is using the services to attempt to create awareness and demand for the product. The dealer is simply being cut out of the equation.

Another OEM recently updated its franchise agreement to expressly exclude electric vehicles from the product offering definition, which has raised concerns that it will seek to distribute those vehicles directly.

So, what does all of this mean? It means that the market is changing, and OEM’s are seeking ways to connect with customers through new channels. At the end of the day, the OEM wants to sell more vehicles, and it is seeking to do just that. So, while Tesla may be only advocating for its own business interests, the outcome of the various Tesla battles could impact how a new OEM from India or China is treated in the event it seeks to sell directly. And, the same goes for the subscription based services or efforts to carve out product that would otherwise flow to the dealer. All of the efforts could impact the business model.

However, while the examples above may be new, the arguments used to support them have been around for some time. Moreover, many of those arguments have been rejected by Courts in upholding the franchised system both in the auto industry and in other industries. But, we do not expect the arguments to go away any time soon as OEM’s continue to try to find ways to push more product.

SUMMARY:

  • Bass Sox Mercer is battling Tesla direct sales in two states
  • The FTC looked at direct sales issue in 2016
  • OEM subscription services are another way to cut the dealer out of the deal
  • Market is changing and the OEM’s are looking for ways to push more products