The Simplest Way to Sell More Electric Cars in America

Posted by on January 21, 2022 11:45 am
Categories: Everything Else

The Rivian R1T, the $75,000 debut pickup from America’s new electric-truck maker, is unlike any vehicle I have ever driven.

It is, first, really big: 18 feet long and six feet tall, it weighs three and a half tons, heavier than a white rhinoceros or a tricked-out Ford F-150. But this girth is belied by everything else about it. The R1T has an aesthetic unity missing from every mass-market automobile on the road, Teslas included. Like an iPhone, it feels like a cohesive product designed by a single team: The same colors, angles, and textures appear on its seat cushions, its door interiors, its onscreen interface. It can even be—just look at the yellow flashlight hidden in its passenger-side door—downright charming.

And it doesn’t drive like a 7,000-pound truck—it drives like a hovercraft. As with other luxury electric vehicles, when you press the pedal, the vehicle obliges. Accelerating out of a stoplight in a New Jersey industrial park, I experienced an amount of g-force that you normally have to pay Jeff Bezos to receive. (And in a way, you still do—Amazon owns 20 percent of Rivian.) Later, on a state highway, I looked down to discover that the vehicle was handling 70 mph with silent aplomb.

You can’t understand the Rivian R1T until you test-drive it, in other words. But that is a rare and, in a sense, illicit experience, because test-driving the R1T is illegal in more than half of the United States. For perhaps as many as 200 million Americans, local antitrust laws meant to protect car dealers from unfair competition forbid automakers such as Rivian from selling directly to customers.

For decades, this system worked well enough to ignore. But now, when selling more electric vehicles is essential for avoiding the worst disasters of climate change, these dealer-protection laws have become a major impediment to decarbonizing the American economy. And Rivian has teamed up with Tesla and Lucid, another up-and-coming electric-car maker, to fight a state-by-state battle to take them down.

When you want to buy pants, you have a choice. You can go to Macy’s, where they sell many different pant brands, or you can go to, say, J. Crew, where they sell only the pants that J.Crew makes. Virtually every consumer product is sold through one or both of these methods. If you want to buy a chair, you can go to Wayfair, but if you want to buy an IKEA chair, you have to go to IKEA. This is all so normal, so accepted, that it’s strange to describe.

But this is, weirdly, not how it works for cars. Most Americans cannot buy a car directly from the automaker. In 17 states, including Texas, Wisconsin, and Connecticut, laws forbid any automaker from opening a store and selling its vehicles directly to customers. Another 11 states, including New York, New Jersey, and Georgia, allow only one automaker, Tesla, to open stores and sell directly to state residents. If you want to buy a Ford truck, you have to go to a Ford dealership owned by a third-party company.

You may know about these dealer-protection laws—perhaps you heard, a few years ago, when Tesla began fighting them. What you may not know, and what I had not realized, is just how much they shape markets for electric vehicles, or EVs. I didn’t know that until I compared New York and Florida.

By every indication, New York should sell more EVs than nearly any other state. The state has lavished drivers with incentives to switch from gasoline. When a New Yorker buys a new EV, the state covers up to $2,000 of the cost. It pays companies up to $5,000 to build an EV charger in their parking lot. New York has adopted California’s robust tailpipe-pollution rules, has installed “the largest non-Tesla charging hub in the country,” and lets EVs use the carpooling lane on state highways, even if the driver is the only person in the car. Using nearly every tool available, New York has nudged, poked, and cajoled drivers to persuade them: Buy an EV!

Florida, meanwhile, has roughly the same population as New York (give or take a couple million people), but it has only recently begun expanding chargers on its highways. It has no statewide EV-incentive program (although it also lets EV drivers use the HOV lane). Governor Ron DeSantis, a Republican, has described himself as “not a global warming person” and dodged questions about whether humans are causing climate change.

Yet for the past three years, Floridians have bought more than 60 percent more electric vehicles than New Yorkers have, according to data provided by IHS Markit, an economic-research firm. From 2019 to the middle of last year, Florida residents bought nearly 59,000 new EVs while New Yorkers bought only about 35,000.

What explains the difference? Floridians, it’s true, drive more than New Yorkers. But the clearest explanation is that Tesla, which sells more EVs than any other automaker, has opened 17 stores and galleries in Florida, from Miami to Jacksonville. In New York, it has only five stores, and it is forbidden from opening more. “In 2020, New York’s nearly 1,000 franchise dealers collectively sold less than two EVs per location,” James Chen, Rivian’s vice president of public policy, told me. But Tesla sold nearly 1,890 vehicles for each of its New York stores.

This picture scales to the national level. Across the country, three out of four EVs sold since 2019 have been sold by a direct-to-consumer automaker—which is to say, Tesla. And a recent Sierra Club blind-shopper study found that legacy car dealerships nationwide were totally unprepared to sell EVs. Many didn’t even have a charged EV on the lot. “There were lots of untrained salespeople who couldn’t answer questions about the technology,” Hieu Le, the author of the study, told me. “In the worst case, the volunteer was urged by the salespeople to buy a gasoline vehicle.”

That’s exactly why the EV companies say they are picking this fight. First-time EV shoppers have lots of questions—about battery range, long-term upkeep, even whether they need to do anything different at the DMV—and only full-time, EV-only salespeople can answer those questions well, Chen said. A third-party dealership’s employees won’t be up to the task.

Daniel Crane, a law professor at the University of Michigan who studies dealer-protection laws, agrees. EVs, with their lower upkeep costs, can’t provide the cash flow that dealers need to survive. Dealers’ “economic model is to make all their money on service,” he told me. “They have a 30 percent margin on service, but only a 5 percent margin on sales. It’s just a very, very different model.

“If you want to see more rapid market penetration of electric vehicles, then prohibitions on direct sales are a major barrier,” he said. Crane frequently testifies on Tesla, Rivian, and Lucid’s behalf, but he says that he’s never accepted money from any of them. He wants to make clear that this is a no-brainer issue. “Whether you’re free market or pro-consumer or pro-environment or pro-competition, there’s something here for everyone,” he said. One of his proudest moments was getting the Sierra Club and the Koch brothers to sign a letter opposing the same law.

Dealers contend that they are actually the ones fighting for consumer choice and market competition. “It’s just common sense that to cater effectively to mass-market buyers—of any drivetrain—you need to capitalize on what has worked for mass-market buyers for generations,” Jared Allen, a vice president at the National Automobile Dealers Association, told me in a statement. He cited a report from the market-research firm Escalent that found 57 percent of EV buyers prefer “the traditional approach to car buying.”

“The assumption that future EV buyers want the Tesla direct-sales model is just flat wrong, ” he said. “In a very real way, Escalent revealed that one of the reasons Tesla’s experiment with selling direct worked was only because the company just never gave their customers any other choice.”

But the laws are not about consumer choice at all, Crane said. When the laws first went on the books in the 1940s, they were meant to protect dealers from directly competing with automakers, which could presumably undercut them on price. In some states, that’s what the laws still do: California, for instance, prevents automakers from opening a location within 10 miles of one of their franchise dealers. But in most states, the laws have become far more aggressive, insulating dealers from any other sales model. They enshrine a century-old model of car sales, built at the time when the local reputation of a dealer might matter as much, if not more than, the reputation of the brand.

Over time, dealers have parlayed their position into real political power: The top dealership groups in America have a total revenue of $10 billion, and they command more market share than any car company, Crane said. “These are huge multistate businesses. Lots of them are publicly traded, and they’re politically extremely powerful.” Dealers are major donors to local and state campaigns, or have run for office themselves. Chen called out two state legislators who lead auto dealerships—Representative Amy Walen of Washington, a Democrat, and Senator Butch Miller of Georgia, a Republican—for “killing” or “freezing” bills that would have opened up their respective states. (Both of the legislators flatly denied the claim, saying the bills had no path to passage.“My friend who is a wine-store owner doesn’t weigh in on wine bills, and I don’t weigh in on auto-dealer issues,” Walen said.)

This particularly local political power has created a mottled map of dealership laws that resemble no other divisions in American life. Deep-red Utah allows direct sales, but blue-blooded Connecticut does not. Tax-and-spend California permits direct sales, but free-market-loving Texas doesn’t. You can open an EV store in Tennessee and Mississippi but not in Alabama or Arkansas; Idaho allows them, but Montana doesn’t. The most striking pattern is geographic: A stripe of states running down the middle of the country, from North Dakota to Texas, block direct sales, while most states in the Mountain West and West Coast permit them.

Right now, the conflict between this vision of car sales and the continued existence of dealer-protection laws is leaving America behind. The global electric-car revolution arrived during the coronavirus pandemic—and Americans who do not make a habit of reading energy statistics may not have noticed. In 2019, EVs composed 2 percent of new-car sales in the world, according to Fatih Birol, the director of the International Energy Agency. But last month, a scant three years later, EVs made up 20 percent of new-car sales in Europe and Asia. But they still lag in the United States, Birol said.

The EV market is also changing quickly. In the next few years, legacy brands such as Ford, Chrysler, and Volkswagen will let loose a flood of new EV models, and dealerships will get to prove that they can sell them. “Franchised dealers are all-in on EVs and incredibly excited about the new electrified products that are being announced almost daily,” Allen, the vice president at the dealers’ association, told me. So far, demand has been high—the Ford Mustang Mach-E nearly outsold the gas-powered Mustang last year—but the road hasn’t been entirely smooth. Some Ford dealerships price-gouged customers to let them skip the line for Ford F-150 Lightning reservations, according to the automaker. (Ford has since forbidden them from doing so.)

Behind the law looms a larger question: How much will America remake itself to combat climate change—and how much should it change itself? To hear the EV automakers tell it, the need to leave fossil fuels is an opportunity, an opening to make the economy more efficient, more productive, and less constrained by cronyism. Oh, it’s an opening alright, the dealers retort—an opening for Wall Street to clear out the little guy and finally turn the auto business into the tech industry, where consumer desire is ceaselessly transformed into revenue through the magic of vertical integration. Why else would investors value Rivian at $63 billion, or more than two-thirds of Ford’s market cap, when, as of the new year, Rivian had only ever produced 1,015 vehicles? Why would they make Elon Musk the richest man alive? It’s because they smell monopoly profits.

Not that the dealers are heroes, of course. In practice, car dealerships act more like local financial institutions—they’re essentially loan-generation concerns—than small businesses. A recent Consumer Reports investigation found that auto loans in many states are exempt from usury laws, allowing dealers to charge more than 18 percent on interest. (In one case, an Arkansas court upheld a 20.6 percent loan on a Dodge Charger.) Only at car dealerships do you have to negotiate to buy a consumer good at a fair price, a practice that disadvantages women, people of color, and not a small number of white men.

There’s a path here where not much changes. Now that the legacy automakers are building good EVs, will the dealers switch their business model accordingly? Will the transition to EVs really be that simple? Very possibly not. Car dealerships’ business model relies heavily enough on maintenance that they might quickly find that they can exist only in the economic niche created by internal-combustion engines.

The economist Mancur Olson believed that as national economies grew, their richest industries and interest groups acquired more and more political power, allowing them to implement laws and rules that hindered the country’s productivity and growth over time. That is what the dealership-protection laws are starting to look like. Not all climate fights can be answered easily by markets, but this one, the question of whether dealerships or EV automakers can more quickly sell EVs to America, the market is eminently qualified to decide. Car dealers might seem like an immovable feature of American life, but Manhattan once had plenty of horse veterinarians. Perhaps one day, dealerships will go the same way.

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