Auto & Mobility
As EV Startups Enter the Market, They Say Dealerships -- and a Decades-Old Legal Structure -- Stand in Their Way
Arguing that traditional dealerships and direct-to-consumer sales should coexist, EV startups are waging a campaign for access to state markets that currently only allow dealerships or online sales.
But dealerships have pushed back, saying the EV companies are welcome to operate within the existing system, and that the patchwork of state laws blocking direct sales protects customers from vertical integration in the automotive industry.
Meanwhile, legacy automakers like GM that have begun working toward goals of producing all EVs in the next decade have repeatedly said they are committed to their franchise relationships, though they also plan to move more toward online sales and a new consumer experience.
This is the first in a two-part series on U.S. dealerships and electric vehicle companies. The second part uses Morning Consult data to examine how the consumer factors into the equation.
To buy a new car in the United States, the dealership is an inevitability: The “new car smell,” the test-driving, the anxious negotiating, the potential upselling and, finally, the car pulling onto your own street. The tradition is uniquely American in its universality, considering that most states actually mandate that car manufacturers connect through a middle man.
However, with the shift toward electric vehicles, new players have begun angling to change how car sales are done in the United States.
This plod toward a new system began roughly a decade ago, when EV success-story Tesla Inc. determined that the dealership system was not compatible with the customer education and sales experience it had in mind. Because each state’s laws differ in the extent to which direct vehicle sales -- through a manufacturer-owned-and-operated showroom that typically offers test drives but not negotiation -- are allowed, Tesla had to tackle those with more restrictive markets one by one.
The company’s efforts have further complicated the existing landscape of state laws: While 22 states allow direct sales for all, the negotiations have resulted in Tesla-only exemptions in 11 others. As several newer EV manufacturers prepare to bring their own models to market, those one-company exemptions have proved pesky.
This year, things have come to a head. As President Joe Biden has said he intends to invest in charging stations to speed the electrification of the transportation sector, the companies that have been honing their EVs in recent years seem to have chosen a serendipitous time to do so. Their main concern: their chosen business model remains illegal in many states.
A number of state legislatures -- including Connecticut, Georgia, Nebraska, Nevada, New York and Washington -- are mulling bills that would allow direct sales, if not for all manufacturers, then at least for those that exclusively sell zero-emissions vehicles. And so a steady state-by-state campaign has emerged, pitting EV manufacturers Rivian Automotive LLC, Lucid Motors and Lordstown Motors Corp. and their allies -- including Tesla -- against the dealerships that have informed the American understanding of car sales for decades.
Early days of the dealership
In the early days of the country’s love affair with the passenger vehicle, manufacturers had few restrictions on how they could sell them: dealerships, manufacturer-run showrooms and retail outlets, traveling salespeople and even big-box retailers such as the F. W. Woolworth Co. were fair game.
But in the 1950s, the dealers -- predominantly small mom-and-pop establishments -- began arguing to state governments that they were being taken advantage of by the Big Three automakers: Ford Motor Co., Chrysler and General Motors Co. “One quip that I’ve heard before is that there’s a dealer in every district,” said University of Michigan law professor Daniel Crane, who specializes in antitrust law and has advocated for direct sales. “And it’s true: The dealers tend to be influential businesses in every legislative district in the country.”
Proving amenable to these complaints of unequal bargaining power, states passed laws regulating the franchise-dealer relationship, including the one currently plaguing small EV companies: prohibiting manufacturers from distributing and servicing their vehicles directly.
In the decades since, dealerships have grown in size and influence, erasing the David vs. Goliath dynamic that brought about franchise laws in the first place. Many of the nation’s dealerships today belong to groups like AutoNation Inc. or Penske Automotive Group Inc., and as of 2019, the 16,682 franchised light-vehicle dealers in the country raked in over $1.02 trillion via the sale of 17.1 million vehicles.
The question of coexistence
Jared Allen, vice president of communications for the National Automobile Dealers Association, rejects the idea that the laws’ primary function today is protectionist.
“Yes, they prohibit manufacturers from being able to compete with their own dealers. That is a fact,” he said. “But the benefit of the system that those laws create is the prevention of vertical integration in auto manufacturing and sales.” This dynamic, Allen said, results in intrabrand competition -- between, say, Toyota dealer A and Toyota dealer B -- that drives down prices.
In NADA’s view, dealerships are a lifeline for consumers, offering both guidance and the opportunity for easy servicing should something go wrong or need updating in the future. But newcomers argue that there is no reason that dealerships and manufacturer-run facilities cannot operate in the same space (especially considering they seem to do so happily in virtually every other country and for many other sectors in the United States). For instance, two systems already coexist for Apple Inc.’s iPhone -- sold at company stores and at other retailers like WalMart Inc. -- and for countless other brands and products that have thrived using a variety of distribution models.
“We are not anti-franchise,” said Jim Chen, Rivian’s vice president of public policy and chief regulatory counsel. “We’re just saying it’s not right for our business model.”
Tesla has sided with Rivian, Lucid and Lordstown against the dealers in state legislative battles; senior policy manager Thad Kurowski said in a hearing last month over Washington State H.B. 1388 that the company backs its competition’s “desires to sell direct-to-consumers, to invest, to create jobs and to do that unfettered as we are allowed.” And over the years, a collection of strange bedfellows have also joined the fray, including the Koch-backed Americans for Prosperity, the Sierra Club and the staff of the Federal Trade Commission.
While these bills have proliferated in 2021, certain states have already served as a case study in direct sales.
About a year ago, Colorado passed a law allowing newcomers to the market (including Rivian and company but not legacy automakers) to sell directly to the state’s consumers, writing over the existing law that only allowed an exemption for Tesla. Given Colorado’s goal of 940,000 EVs on the road by 2030, the state’s energy office backed the bill because it wants to “maximize the choices available for Colorado consumers to go electric,” said Will Toor, its executive director.
Asked whether the state is worried about the long-term impacts of vertical integration on the vehicle markets, Toor said his office doesn’t see “any compelling arguments that one model is better than the other, or that there is a legitimate government role to prohibit one business model over the other.”
The federal government has so far removed itself from these discussions, having historically regulated the vehicle while allowing states to regulate the sale and the driver, but Crane said Congress has the authority to act pre-emptively on direct sales.
EV startups and the decision to go it alone
Lucid, a luxury EV startup that plans to compete with Tesla by focusing on increasing the range of its vehicles, currently has six direct sales locations in California and Florida, and at least 10 more slated to open in direct sales states by the end of 2021. And while the cars are still in pre-production, the regulatory patchwork of where these direct sales are allowed has already informed where the company is focusing its energies.
The more receptive the state, “the more likely we are to invest in those markets, to increase the awareness of our brand, to increase the sales,” said Daniel Witt, Lucid’s public policy lead. “It’s why we have started out in California and Florida: There aren't any encumbrances to our ability to set up shop there, and as a result we've invested heavily in early days. It is not just a coincidence that those are the two largest markets for EVs right now.”
Like Tesla before it, Lucid has chosen to forego the dealership model entirely. Witt said the company believes it is “important to have a little bit more control” over the consumer experience of purchasing an EV. Rivian, which is developing electric pickup trucks and other utility vehicles, concurs.
Because there is a learning curve associated with the adoption of any new technology, said Chen, “there are going to be questions, and so it has to be more of an education experience versus simply moving the metal.”
Furthermore, dealerships are generally such large and fast-paced operations that both Witt and Chen said it was unlikely that EV startups would be able to provide enough inventory in their first few years of operation to make the manufacturer-dealership relationship worthwhile on either side, an issue they say was at the root of Tesla’s initial break with the dealership model. (Both Witt and Chen worked together on the Tesla team pushing for state-level exemptions nearly a decade ago).
And frankly, the EV companies do not trust existing dealers to have the expertise or motivation to sell their cars.
One oft-cited 2019 Sierra Club study found that 74 percent of auto dealerships were not selling EVs, and that salespeople were not particularly informative about the technology or consumer incentives for purchasing them. The market survey included dealerships that are franchises of manufacturers that do not produce any EVs at all in their study, a point of irritation for NADA.
“At the time of the publication of that report, about half of the roughly 32,000 individual franchises that existed wouldn't possibly stock a purely electric vehicle because their auto manufacturer didn't make one,” Allen said of the study, which surveyed a representative sample of 909 dealerships in all 50 states.
A blog post from NADA Chief Executive Mike Stanton published this month took aim at the idea that dealerships are unprepared or unwilling to sell EVs, calling it a myth “propagated by the handful of companies that want to destroy the franchise system.” While there was indeed some initial uneasiness when EVs were new and unimpressive in the early aughts, he said, “the level of investment and commitment that traditional automakers have made in battery electric technology is night-and-day different than it was even five years ago.”
Stuck in the middle with legacy automakers
Increasingly, it is not just the small fish that will be determining whether the franchise system is compatible with selling EVs. GM announced last year that it aims to bring to market 30 new EV models by 2025 and exclusively sell EVs by 2035. Its competitors are following suit, though so far most have set less ambitious goals.
While these legacy companies are likely to face the same learning curve that their smaller competitors already have when it comes to weaning customers off the internal combustion engine, so far GM has expressed commitment to the dealership model. GM President Mark Reuss said during a Washington Post event this month that dealers see EVs as a “growth opportunity” that is “going to change the way that people buy vehicles.”
At the Barclays Global Automotive Conference last year, Chief GM EV Officer Travis Hester said the company’s investment in EVs would involve improving its use of e-commerce and digital retail, a practice that all manufacturers, both EV and legacy, have already used (and is more central to EV startups’ business models, in the absence of direct sales in many states). Hester has also suggested the dealership itself could be reimagined as the world electrifies and customer preferences evolve.
“It will involve charging infrastructure,” he said. “It will involve clear and transparent pricing. It will be a more consumer-friendly way to purchase the vehicle. And it will also involve a relationship to manage that product beyond the original sale in a way that consumers really haven’t experienced before.”
Meanwhile, Volvo Cars announced earlier this month that it aims to be fully electric globally by 2030, with plans to launch new EVs in the coming years, available solely online. Lower in the press release is a note that like GM, the company plans to maintain its dealership relationships, largely for test driving and servicing purposes.
Whether these reorientations of the franchise relationships will allow space for direct sales and dealerships to coexist remains to be seen. Dramatic change probably won’t happen at once, but Chen is at least mildly optimistic about EV startups successfully following the winding path Tesla paved a decade ago.
“People are waking up more and more to the fact that traditional dealership models don't work for electric vehicles,” he said. ”And it really is an impediment to the proliferation of electric vehicles.”
Correction: An earlier version of the map incorrectly identified the District of Columbia as a place where direct sales are not allowed.
Lisa Martine Jenkins previously worked at Morning Consult as a senior reporter covering energy and climate change.