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Is Tesla a Threat?

The car maker’s business model cuts out the middlemen—and civil society
tesla super red

The electric car company Tesla has been on a roll of late, turning its first profit while piling up accolades for what is one of the most lauded new cars to hit the market in decades. The Model S has nearly swept the major magazines‘ Car of the Year awards, and it received a nearly perfect score from Consumer Reports. The luxury sedan’s closest competitor is probably the 560-horsepower, twin-turbo V8-powered BMW M5, and here’s what Tesla’s battery-powered family sedan did to it:

And now the rent-seekers want to shut the fun down. That’s the word out of North Carolina, where the state Senate’s Commerce Committee recently unanimously voted to approve a bill, backed by politically powerful auto dealers, that would prohibit direct sale of automobiles over the internet, essentially prohibiting the residents of the East Coast’s Silicon Valley from buying the automotive gem of the original. It’s a blatant extension of a long-time effort by auto dealerships to prevent direct sales between car manufacturers and consumers. The result is that whenever you want to buy a new car, you have to go through the dealer, and you always pay the middleman.

That’s how Slate and Wonkblog tell the story, and they aren’t wrong. But there is more to the situation.

While auto-dealership laws go back to the ’20s and ’30s, the dealers’ nationwide legal grip on selling cars was established by state legislatures in the postwar era out of concern that the Big Three would establish networks of their own dealers. It was a time haunted by bigness, as Americans stared at the giant corporations that had swelled to dominate the economic landscape and feared that consumers would soon become subject to whatever whims the companies cared to impose on them. Smaller businesses feared General Motors, General Electric, and the rest of corporate America for the same reason those companies could promise a lifetime of employment followed by a generous pension: they seemed immortal. As Kenneth Elzinga of UVA explained recently at an ISI Faculty Seminar, there was a palpable fear that big companies would slash their prices below cost until all their smaller competitors were driven out, and then, having the market to themselves, they would dramatically raise prices.

For the auto industry this was particularly feared, as 1950s cars were, compared to today, terribly unreliable. The state antitrust laws that prohibited manufacturers from selling direct also set limits on entry and exit in order to ensure that a car company could not decide a region to be undesirable and just pull up stakes, leaving the customers they had sold long-term products to without a source of spare parts or service. Legislators feared that allowing manufacturers to set up their own dealerships would make the communities subject to the whims of the latest Detroit strategy document, so they sought to break up the process. With independent dealers, states hoped to insulate themselves from concentrated corporate power and force it to serve their communities if it wanted to sell to them.

That was ever so long ago, however.  Today, as Neil Irwin writes, “Essentially, the auto dealers are using their political connections and their legacy of benefiting from regulation to fight the tide of the past several decades, which has been toward leaner, nationally run retail.” For him, “It’s understandable that those rationales would appeal to politicians, but they are deeply contrary to the idea of free markets,” as described in this test case from the not-so-distant past:

After all, a generation ago, each city had numerous locally owned department stores that occupied prime downtown real estate, paid their employees decent wages, gave generously to local charities, politicians and chambers of commerce, and were generally good corporate citizens. One by one, they went bankrupt or got bought out. Now there are only a few national department store chains, and much of the share of retail sales that once went to local department stores now goes to big-box chains like Target or online retailers like Amazon.

Few companies better seem to embody the virtues of the progressive free market than Tesla does today. Its founder and CEO, Elon Musk, is a South African immigrant who worked his way into Queens University and the University of Pennsylvania, then to Silicon Valley where he made fortunes starting companies such as PayPal. Tesla itself is not only celebrated but at the moment is that rarest of things for a tech start-up: profitable. It has accomplished technical feats with lithium batteries that the automotive industry swore were a decade or more away, it is quickly building its own fast-charging infrastructure across the country, and, most importantly, it has produced a genuinely great car.

Even Tesla’s business model is, in stark contrast to its competitors, wholly of the 21st century. Instead of sprawling dealerships eating up entire neighborhoods, it employs “galleries” in downtowns and malls to show off its product. Knowledgeable representatives are on hand to teach and demonstrate the unique features and requirements of a luxury long-range electric car; these salespersons bear little resemblance to the commission hounding “vultures” that embody the traditional auto dealer to many. Instead, once they have given you all the information you want to know, you leave. You customize and order your car online, which Tesla will deliver to your door, unless you prefer factory pickup. No middleman, no inefficiency. A straightforward exchange between consumer and producer.

Yet Tesla is not quite the free-market paragon it appears at first glance. While it certainly compares favorably to the entrenched car dealers, Tesla’s existence has been enabled from very early on by government subsidies. Go to Tesla’s website, and the price of one of its Model S’s will already be adjusted with a $7,500 federal tax credit. The California production facility that turns out the Model S was funded by a massive $465 million loan from the Department of Energy that got the company, wrongly, lumped in with failed fellow domestic electric car maker Fisker. Though Tesla repaid that loan early, critics still see it as an unjustified sweetheart deal, and Musk’s close ties to the Obama administration have not gone unnoticed.

Moreover, as we look back on retail’s recent past, are we so sure that the Wal-Mart-and-Amazon era Irwin describes as the future redounds to our benefit so much more than those local department stores did? We can now buy innumerably more things at lower prices, and we can now leave our families Thanksgiving night to go camp out for even steeper discounts on TVs or DVDs. But that commerce contributes very little to civil society—in fact, it may be antithetical to it.

As George Packer details in his recent New Yorker look at Silicon Valley’s politics, the tech industry, to which Tesla belongs, often has little appreciation for the interconnections and inefficiencies of communities, even those that tech executives live in. Packer describes how “San Francisco is becoming a city without a middle class” as Silicon Valley millionaires are whisked by private shuttle from town to “campus,” where they stay hermetically sealed away from contamination by outsiders. For the Valley, “rapid growth and human progress are seen as virtually indistinguishable,” and they hold an abiding hatred for “friction,” anything that interferes with the free flow of desires. From an entrepreneurial enclave of techno-libertarianism, then, come many of the same themes that inspired the urban planners of the 1950s, from whose overconfident excesses we are still just starting to recover.

One of the most widely disparaged lines in the coverage of NC’s dealership protectionism was offered by Robert Glaser, president of the auto dealers association in North Carolina. He gestured towards Tesla’s representatives and said: “You tell me they’re gonna support the little leagues and the YMCA?” To which Will Oremus, who is a very good and thoughtful tech writer, responded:

If that’s the real issue, then I may have some good news for all concerned: I asked O’Connell [a Tesla VP], and he assured me Tesla would be happy to support the little leagues and the YMCA if that’s what North Carolina requires in order to do business there. Problem solved! Right, Mr. Glaser?

All joking aside, civil society cannot be parachuted in from afar, and necessarily takes place in the “space between.” Often that refers to space between the individual and the government, but it just might also be able to refer to a space in between the efficient manufacturer and the liberated consumer. Amazon might contribute to big charities, but it will never prop up local ones because it ships its products to destinations, not places.

Even as the auto dealerships throw their collective weight around to legislate out a disruptive competitor, it is important to recognize how they act, despite themselves, as a series of commercial mediating institutions. The chains of dealerships are embedded in their community in ways that big boxes, and small glamor shops like Tesla and Apple stores, have a very hard time being. Dealerships, excepting a few national chains, have necessarily come up in the community they serve, are legally hard-pressed to leave them, and have the moderate financial concentration to fund them. It doesn’t hurt that auto dealerships are one of the few places a high-school graduate can get a potentially good-paying job and have hope of advancement based on the merits of his work, with little need of an expensive college degree.

But Tesla isn’t the problem. A start-up should be able to pioneer a new business model, and the big car makers should probably be allowed to adopt it as well. Yet the broader forces at work in our economy, which Tesla is only riding, should bear scrutiny. In each particular instance, we as consumers may leap to direct satisfaction while still enjoying the societal framework those brick-and-mortar institutions helped scaffold. But as the economy optimizes and cash flows polarize between consumer and producer, we may find our communities inexplicably hollowing out, even as we hum along in our American-made electric cars.

Jonathan Coppage is editorial assistant, digital at The American Conservative.



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