May/June 2021 | Vol. 26 No. 3

by James Chen, Vice President of Public Policy and Chief Regulatory Counsel, Rivian

James “Jim” Chen brings nearly 30 years of experience to Rivian in the areas of policy, law, and regulation for the automotiveindustry

A debate is unfolding nationwide over whether new automobile manufacturers should have the freedom to sell their vehicles directly to customers or be required to operate through third-party franchise dealers. This contention is actually about something very simple that exists in every part of the economy—a direct relationship between a manufacturer and a customer—but it has become a flashpoint with massive implications for the American auto industry’s future global competitiveness.

Rivian and Tesla, Lordstown, Lucid, and other EV- dedicated manufacturers want the freedom to use the direct sales system to improve the customer experience and streamline operations. A broad coalition of free-market advocates, consumer interest groups, environmental advocates, and other experts are united in seeing why direct sales are important and will have far more benefits than downsides. But franchise dealers at the state and national level oppose any alternative method for buying new cars. Here, we explain some of the histories of dealer protection laws and why direct sales are so essential for a more robust American auto market.

WHY DOES THIS RESTRICTION EXIST IN THE FIRST PLACE?

The dealer-franchise sales model emerged in the early 1900s to enable early automakers to focus on production, while dealerships managed distribution. Laws protecting dealers were established mid-century to prevent opportunistic behavior from their own franchising manufacturers.

While dealer protections may have served an important purpose in the 20th Century, dealer associations have pushed for those protections to be cemented and expanded to companies that never entered the franchise system at all. For this reason, Tesla has a specific settlement in 9 states (including Georgia, Washington, and New York) to use direct sales, but other new manufacturers are blocked from doing the same.

In 21 states including California, Massachusetts, Illinois, and Florida, new EV companies are eligible to apply for and receive a dealer license to conduct sales of as a regulated dealer. This gives consumers full access to their products by enabling manufacturers to invest in the state, establish a retail location, hire local workers, and introduce their products to motorists.

Whether a state is open or closed to direct sales, the vehicle can still be purchased online and delivered to the customer. But in closed states, customers are faced with unnecessary inconveniences like increased paperwork and having to travel outside the state to pick up their vehicle. We know that the best way to sell electric vehicles is to get drivers behind the wheel: Direct sales allows customers to interact with the vehicle, go for test drives, speak to a product specialist, and ask questions about the car and ownership experience.

WHY DIRECT SALES MATTER FOR EVS

In 2020, 80 percent of electric vehicles sold were through direct sales, while a simple calculation of EVs sold per manufacturer divided by number of dealers shows that the average franchise dealership in the United States only sold 5-10 EVs. There are several reasons why EV manufacturers need direct sales to grow and scale.

• Franchise Dealerships are Reluctant to Sell EVs: A study by the Sierra Club found that 74 percent of auto dealerships nationwide do not have a single EV on their lot for sale. The study found that even at dealerships where EVs were available, consumers were still not being given important information about charging, battery range, and financial incentives impacting their purchase.
• EVs Cut Service Revenue for Dealerships: Traditional franchise dealerships earn an estimated 40% of their gross profits from servicing gas-powered vehicles. With only 10% of the moving parts and no need for petrochemical lubricants, EVs do not require the same level of service, making the franchise dealership model untenable in its current form for the electric future. By contrast, EV companies do not use servicing as a profit center.
• Competition and Innovation: Direct sales creates a better marketplace for consumers. A study by Cox Automotive shows that only 1 in 3 customers is satisfied with the franchise dealer sales model, and 7 in 10 would prefer a “brand experience center” where they can learn about the vehicle without being in a high-pressure sales environment. The dealer business model depends on high volume and rapid turnover— direct sales allows companies to offer customers a different, no-pressure experience and evolve.

THE BIGGER PICTURE

The companies leveraging a direct sales model— Tesla, Rivian, Lordstown, Lucid, and others—are American companies creating tens of thousands of domestic manufacturing and engineering jobs. They are all-in on EVs from the start, while larger automakers are still balancing a transition away from internal combustion vehicles. The United States has always been a proud leader of the automotive industry, but these outdated distribution laws must change to maintain global competitiveness.

Franchise dealerships oppose allowing a new sales model to break their monopoly on new vehicle sales, but just because a product has been sold a certain way for a long time doesn’t mean it should be the only option forever. Significantly, allowing direct sales doesn’t interfere with their existing contracts with traditional automakers, and they can continue doing business as usual. In fact, in the years since Tesla entered the market—from 2012 to 2019—total dealership sales grew by 52 percent nationwide, and employment grew by 18 percent, according to data from the NADA. Direct sales states outperformed closed states by both metrics.

Electric vehicles are one of the most exciting growth opportunities for the electrical manufacturing industry—beyond the vehicles themselves, this shift is giving rise to a proliferation of charging opportunities at home, work, and in public. The growing EV-ecosystem is also accelerating development of battery storage solutions and other vehicle-to-grid or vehicle-to- home integrations that will allow further research, development, and innovation. Direct sales are one of the most powerful policy levers to accelerate EV deployment at no cost to the taxpayer or downsides to implementation—it simply allows access so that electric vehicles can thrive. ei