Rick Haglund: Tesla settlement means more changes for Michigan’s auto industry

January 24, 2020 10:33 am

Elon Musk, co-founder and Chief Executive Officer of Tesla Inc., speaks at an unveiling event for The Boring Company Hawthorne test tunnel December 18, 2018 in Hawthorne, California. | Robyn Beck-Pool/Getty Images

The settlement of a long-running lawsuit between Tesla and the state of Michigan this week cleverly allows the California-based automaker to sell vehicles directly to consumers, sidestepping the state’s dealer franchise laws.

But that doesn’t mean auto dealers, whose business model has been protected by state law since cars and trucks started rolling off assembly lines more than a century ago, can declare victory.

A report released on the same day as the state’s settlement with Tesla shows that dealers are not immune from rapid change roiling the auto industry.

Two out of three people are dissatisfied with the current dealership model, according to the survey of 2,000 consumers by Cox Automotive, an automotive marketing and research firm.

“The message in the research is clear: Consumers want to spend less time at traditional dealerships,” the Cox study found. “They want their experience to be convenient, personalized and easy, based on their preferences and schedule.”

And despite Michigan’s prohibition of direct vehicle sales, thousands of consumers in the state have managed to procure forbidden Teslas. There were 3,896 Teslas registered in Michigan as of Thursday, according to the Michigan Secretary of State.

State franchise laws also can’t ensure that dealers and manufacturers who don’t adapt to the changing desires of consumers will stay in business. But Michigan tried.

In 2014, the state Legislature passed and then-Gov Rick Snyder signed, a bill that strengthened Michigan’s laws requiring new cars and trucks to be sold by franchised dealers.

General Motors headquarters, Detroit | Susan J. Demas

Tesla complained that the bill, which was supported by General Motors Co. and Ford Motor Co., was strictly aimed at keeping Tesla from playing in the Detroit automakers’ backyard.

Ironically, GM played a role in the growth of Tesla. The Detroit automaker sold the Fremont, Calif., assembly plant it co-owned with Toyota to Tesla in 2010. All Tesla vehicles sold in the United States are built there.

In 2016, Tesla sued the state, saying its direct sales model didn’t violate Michigan’s dealer franchise laws because it didn’t have any dealers that would be harmed by direct sales.

The settlement allows Tesla to sell directly to Michigan buyers as long as the vehicle is titled in another state and transferred to Michigan. Tesla also can establish service centers through its wholly owned subsidiary, Tesla Michigan.

Attorney General Dana Nessel at the Mackinac Policy Conference, May 29, 2019 | Andrew Roth

“The big hurdle for Tesla owners was service, which was prohibited,” said Kelly Rossman-McKinney, spokeswoman for Attorney General Dana Nessel.

Prior to the settlement, buyers had to go to Illinois or Ohio to purchase Teslas. The closest Tesla service center is in Toledo.

Tesla also has a “gallery” in the Somerset Collection shopping mall in Troy, where workers haven’t been allowed to discuss pricing or initiate sales.

The company’s plans for Michigan investment are unclear. Rossman-McKinney said Tesla can’t establish a dealership-like operation that sells vehicles from inventory on a sales lot. Tesla can only sell build-to-order vehicles through showrooms or the company’s website, she said.

Tesla’s only reaction to the settlement came from its quirky founder and Chief Executive Elon Musk, who tweeted “Yay!” on Wednesday.

Dealer franchise laws were initially enacted mainly to protect small, independent dealers from the manufacturers that supplied the cars they sold. Automakers had a great deal of control over dealers in those days.

They could deny vehicles to dealers or force them to take cars and trucks they didn’t want. And they could sever franchise agreements at will.

Some of those tactics are still used, but automakers’ leverage over dealers has diminished with the advent of powerful dealer groups that dominate auto retailing.

Automakers have experimented with operating their own dealerships in the past, but now say franchised dealers who know their local markets are generally the best channel for selling cars and trucks.

And don’t expect lawmakers to change dealer franchise laws to make it easier for automakers to sell direct to consumers anytime soon.

Dealers are a powerful lobbying force in Lansing and make significant contributions to the state’s economy. There are 613 new car dealerships in the state employing 36,600 workers who earn an average $58,643 a year, according to the Michigan Automobile Dealers Association.

Almost 30% of state sales tax revenues in 2018 came from vehicle sales by new-car dealers.

The dealer association declined to comment on the Tesla settlement, saying it was not a party to the lawsuit or involved in settlement discussions.

Mark Schirmer, a Cox Automotive spokesman, said the company’s survey found that car buyers want customer experience centers free of sales pressure, like the one Tesla operates at the Somerset Collection.

“Our report clarified the fact that many of today’s best practices—things Tesla is doing — will likely become mainstream in a few years,” he told me. And customers “are willing to switch brands to get those services.

“Nothing Tesla does is absolutely unique,” Schirmer said. “Any good dealer today could match Tesla in terms of customer experience and service.”

Just about everything in the auto industry is changing. Electric vehicles are slowly replacing those powered by internal combustion engines. Cars might someday drive themselves. Tech companies are getting in the automotive business.

It’s hard to see how the process of selling and servicing vehicles will escape the historic transformation of the auto business, even with state laws trying to preserve the status quo.

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Rick Haglund
Rick Haglund

Rick Haglund writes the "Micheconomy" column for the Michigan Advance. He's a former reporter and business columnist for Booth Newspapers, now the MLive Media Group, with extensive experience covering Michigan’s economy and the auto industry. He now works as a freelance writer based in Southeast Michigan.