Since their recent override of Governor Nixon’s tax cut veto, Missouri’s Republican legislators have been touting their commitment to innovation and entrepreneurship in our state. But a high tax rate isn’t the only policy that squelches innovation. Regulation also matters. And in that area, some Republicans are proving themselves more committed to crony capitalism than free enterprise.
Last week, Sen. Jay Wasson (R-Nixa) sneaked some innovation-killing language into an otherwise straightforward House bill addressing the definition, licensing, and use of off-road and utility vehicles. The language was drafted by the Missouri Automobile Dealers Association, a major donor to Sen. Wasson’s last campaign. It would bar automobile manufacturers from operating their own retail outlets in Missouri, forcing them to distribute through independent dealers.
One notable carmaker — Tesla — currently uses the forbidden approach. Missouri’s automobile dealers would like to offer Tesla’s flashy electric vehicles on their lots, but they haven’t been able to convince Tesla to utilize their services. That’s why they want the government toforce
Tesla to do so.
But neither the car dealers nor the folks in Jefferson City are in a good position to dictate how Teslas are sold to consumers. Tesla alone should make that decision.
Product distribution, you see, is just another input for a carmaker. As with all inputs, the producer faces a “make or buy” decision about distribution. It could “buy” distribution services by selling through dealers, effectively paying them the difference between the wholesale price dealers pay and the higher retail price they collect from consumers. Alternatively, it could “make” distribution by selling its cars directly to consumers, cutting out the middleman and earning the higher retail price on each sale. Left to its own devices, it will pick whichever approach creates the most value.
For most carmakers, the traditional independent dealer network created value by taking advantage of local market retail expertise and by giving consumers a chance to compare makes and models in person. Now, however, most car buyers do much of their car shopping online before ever visiting a local dealer. Moreover, dealers may be reluctant to make investments in promoting a disruptive technological innovation like Tesla, particularly if Tesla sales will cannibalize sales of traditional vehicles. For a brand like Tesla, it may well be in the interest of the producer to provide distribution itself.
We’re not saying self-distribution is necessarily the optimal approach for Tesla. We don’t know what’s best. But neither do the automobile dealers, who have an obvious conflict of interest on the matter, or the good folks in Jefferson City. Tesla itself is best poised to determine which distribution model is most cost-effective, and to profit or lose by its own choice. Consumers—who ultimately pay all product costs, including the costs of distribution—will be best off if this decision is left to Tesla.
Despite this economic logic, car dealers have asserted several arguments in support of a direct distribution ban. Each is unsound.
First, the dealers have argued that a direct distribution ban is needed to break up monopoly power. That’s absurd. The automobile market is intensely competitive, and Tesla’s market share in Missouri is tiny. Moreover, even if the market wereelectric
cars, where Tesla might have market power, the company would have an easy means of exploiting such power even if required to sell through dealers. It could simply jack up its wholesale prices.
Car dealers have also argued that independent dealer distribution is necessary to guarantee adequate aftermarket servicing of vehicles. Tesla, though, has every incentive to ensure that its cars can be easily serviced. If they can’t be, Tesla’s sales will plummet.
Finally, some have argued that dealer distribution will lead to more safety recalls because dealers, unlike manufacturers, benefit from servicing recalls. But this ignores the fact that dealers don’t initiate recalls. Manufacturers and the government do that. Dealer distribution is therefore unlikely to increase the incidence of safety recalls.
We feel no special affinity for Tesla, itself a beneficiary of crony capitalism in the form of massive federal tax credits for purchasers of its luxury automobiles. But two wrongs don’t make a right. The anti-Tesla language in House Bill 1124 rewards well-connected political interests at the expense of innovation and consumers. If our Republican-dominated legislature really wants to be seen as fostering innovation in our state, then it can’t just talk the talk. This is Missouri. Show us.