Outdated Wisconsin law hampers electric automaker’s direct-sales business model

By Paul Gores for the Badger Institute

Chris Lundh loves his Tesla Model 3.

The all-electric car will never need an oil change or spew air-polluting exhaust. Its battery pack can be re-energized at home or at thousands of Tesla charging stations across the state and nation. If there are minor issues like a broken part or a strange squeak, Tesla will send a mobile service technician to his driveway for repairs.

“It’s awesome,” says Lundh, of Waukesha.

Still, he says, it seems silly that had he to drive to Illinois to pick up the car that he ordered.

Under Wisconsin dealer franchise statutes, Tesla and other auto manufacturers aren’t allowed to sell directly to consumers here. Other than a few exceptions for specialty trucks, all vehicles must be sold through dealerships that are not owned by the manufacturer — a mode of doing business that Lundh says is outdated.

“I think it’s a bit ridiculous the way this is set up,” he says.

As it stands today, state law prohibits Tesla from opening company-owned locations — Tesla calls them stores — where Wisconsin residents could see and purchase the cars. In states that allow them, Tesla locations typically carry only a small inventory, and most customers order the car from Tesla.com and pick it up at the Tesla store.

But some state legislators agree with Lundh that it’s time for Wisconsin to adjust the law to let Tesla operate its business model in Wisconsin and scrap the mandated middleman.

Chief among those proponents is state Sen. Chris Kapenga (R-Delafield), who is a Tesla owner but, moreover, is a self-described free-market advocate.

“We’ve got people who want to buy their vehicles, want to get their vehicles serviced here, and because of an archaic protectionist law that’s in place on the books, Tesla is not able to sell into the marketplace directly,” Kapenga says.

At a time when many products can be ordered online and delivered to Wisconsin consumers, all-electric vehicles like Tesla shouldn’t be prohibited from being sold directly here as well, he says.

The Wisconsin Automobile & Truck Dealers Association doesn’t see it that way and has been successful in holding off direct sales of Tesla cars in the Badger State. For now, at least, the dealers have state law on their side, and they are citing it to try to prevent Tesla from introducing its direct-to-consumer online ordering and delivery approach in Wisconsin.

Nearly 100-year-old law

The law mandating that vehicles be sold through dealerships goes back to the 1930s, when dealers were concerned that their heavy investments in lots, showrooms, service centers, employees and inventory could be undermined if an automaker were to open its own lots and sell directly to consumers.

In today’s environment of technology that constantly disrupts industries, the law may seem anti-competitive to some. But Bill Sepic, president of the Wisconsin Automobile & Truck Dealers Association, says there is plenty of competition among dealers, which benefits consumers under the current rules. In addition, dealerships give buyers a place to turn to if there are problems with the vehicles or safety recalls, he says.

“Pick two Chevy dealers and go to them and pit one against the other. Who’s going to be the winner? You are — you as the consumer,” Sepic says. “Pit three against each other. Might get pretty close to cost. So there is certainly a consumer benefit to the dealer network.”

A manufacturer-run store creates a monopoly for that type of vehicle, he says. “You eliminate any consumer ability to negotiate.”

In addition, Sepic contends, a dealership will welcome safety recall work and go to bat for customers in disputes with manufacturers. A manufacturer sees those only as expense issues, not as an opportunity to build rapport and loyalty with customers, he says.

The law exists to “protect the relationship between manufacturer, dealer and consumer,” Sepic says.

Kapenga argues that the only one being protected is the auto dealers. He has sponsored legislation to allow direct sales of electric vehicles in Wisconsin, but it has gone nowhere in Madison.

A provision in the 2019-’21 state budget that would have given the OK to direct sales of electric vehicles was vetoed last summer by Gov. Tony Evers. The governor said he objected to “significant changes to existing motor vehicle dealership law and the consumer protections they provide to Wisconsin” being included in the budget bill because there hadn’t been enough public input and debate about the issue.

His veto came in the wake of accusations by opponents that Kapenga — whose vote was crucial to approving the budget — sought the provision because he has a side business that sells extra parts of Teslas that he has salvaged and restored.

Kapenga, also an accountant, rejects the claim that he would benefit financially from the provision, saying he has a “gear head” devotion to restoring vehicles and that his hobby is not profitable. “This costs me money. It’s like golf — it’s a hobby.”

Support of direct sales

While Evers says there hasn’t been enough discussion about allowing direct sales of vehicles, there has been some debate about the issue.

In a legislative committee hearing on Kapenga’s bill and a similar measure in the Assembly in 2017, a proposal to allow direct sales by electric vehicle makers was supported by groups such as the Metropolitan Milwaukee Association of Commerce and the Wisconsin Technology Council.

“Why not direct sales, especially when it’s a new technology that is being more widely embraced and will require a different kind of infrastructure?” Tom Still, president of the council, tells the Badger Institute.

The staff of the Federal Trade Commission also has been on the record favoring an end to state prohibitions on direct-to-consumer vehicle sales.

“States should allow consumers to choose not only the cars they buy, but also how they buy them,” the FTC officials wrote in 2015.

Among those opposing the Wisconsin legislation, along with the Wisconsin Automobile & Truck Dealers Association, has been the Alliance of Automobile Manufacturers, which contends a change “would unfairly create two different sets of rules within state law for competitors in the same market place” and would open the door for electric car makers besides Tesla to take advantage of it.

Almost half of the U.S. states prohibit direct auto sales, according to Sepic, so Wisconsin isn’t the only place Tesla’s business model has created a stir.

Most Wisconsin residents who want a Tesla travel to Illinois and Minnesota. Illinois has four stores in the Chicago area, including one in Highland Park, where Lundh bought his car. Minnesota has two stores, both in the Minneapolis-St. Paul area.

There are no Tesla stores in Iowa, but other Midwestern metro areas with locations include St. Louis and Kansas City, Missouri, Indianapolis, Cleveland and Cincinnati. California has many Tesla locations, as do the East Coast of the United States and Florida.

Michigan deal could be model

This winter, the electric car maker settled its 2016 lawsuit against Michigan officials over a law that banned direct sales. Under the deal, Tesla will be allowed to sell cars to Michigan customers and establish Tesla locations as long as the sales contract indicates the purchase took place and the title was issued in a state other than Michigan — a technicality that the Tesla locations can help customers navigate.

Tesla declined to comment on the settlement, but the deal in Michigan could end up being a model for settling disputes over the direct-sales model elsewhere.

In January, the Milwaukee Journal Sentinel reported that Tesla plans to open an auto service center and showroom on Milwaukee’s northwest side, giving the automaker its first physical presence in Wisconsin. Kapenga says a similar facility might be on the drawing board for Madison. (Last spring, Wauwatosa rejected a development plan that included a Tesla showroom and service center.)

The Milwaukee and Madison moves could set the stage for a court challenge over Wisconsin’s law. Sepic maintains that even a showroom discussion about a Tesla with a car shopper constitutes part of the direct-sales process.

“If I have showroom set up and I have a vehicle in there and you ask me any question about it, then I’m engaging in sales, and that would break the law,” Sepic says.

While the auto dealers group is ready for a skirmish, the Michigan settlement and the combinations of Teslas’ environmentally friendly nature, expected long operating life and special features such as near-instant acceleration could make it hard to resist the company’s business model in Wisconsin and elsewhere over the long run.

Tesla already has a dozen of its quick-charging “supercharger” stations across Wisconsin, and more are on the way. It has over 1,800 such stations with over 16,000 superchargers in North America.

Overall, the company generated $24.6 billion in revenue last year, up 14.5% from 2018, and delivered a record 367,500 vehicles and expects to top 500,000 in 2020. It has yet to post an annual profit, but its losses have shrunk, and Tesla did have a profitable fourth quarter in 2019 of $105 million.

Tesla expects state car dealer organizations to oppose the company’s direct-sales business model, but the Palo Alto, California-based automaker told securities regulators in its 2019 year-end report that “we intend to actively fight any such efforts to limit our ability to sell and service our own vehicles.”

Among battlegrounds will be Wisconsin, where Tesla’s direct-to-consumer approach to sales and service has an ally in Kapenga.

“We’re going to keep pushing it. I’m not going to give up on this because I believe the free market is the only answer we have,” Kapenga says.

“We can’t have government control and protectionism for a few groups that pay enough money to legislators and elected officials to keep their protection in place. I’ll keep fighting that, and we’ll see what happens,” he says.

Paul Gores is a retired business reporter for the Milwaukee Journal Sentinel. Reposted from the Badger Institute with permission.

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