Car Buyers Get Hijacked by Crony Capitalism

Bad auto laws keep costs high and stifle competition... even in Texas.


Gov. Rick Perry is fond of saying that Texas is "wide open for business." A couple of months ago he was in Illinois offering hope to local companies suffering from burdensome government regulation. "There is an escape route to economic freedom," he said, "a route to Texas."

He had a point. His state offers businesses room to roam. But there is an exception: Tesla, a maker of luxury electric cars, which has found that the road into the Lone Star State is a dead end.

Tesla offers a new kind of car, which this year was named "Car of the Year" by Motor Trend. It also has a new way of selling—directly to consumers, without going through a franchised car lot.

It says the old system inflates the cost of buying a car. It has no faith in existing dealers, who mostly handle gasoline-powered vehicles. "How do you sell the future if your business depends on the present?" a Tesla official has asked.

But that approach faces many obstacles. No fewer than 48 states ban or limit direct sales of automobiles. Some states allow Tesla to sell its cars through company-owned stores. Some allow Tesla to open showrooms but not sell cars in them.

Texas is virtually closed for business. The Austin American-Statesman reports: "You can visit one of the two galleries Tesla Motors operates in the state—one in Austin, the other in Houston—but employees can't tell you how much the car costs. They can't offer you a test drive. They can't even give you their website address. And if you buy one, the car is delivered by a third party—in a truck that's not allowed to have Tesla markings."

The state senate in North Carolina has approved a measure forbidding sales except through franchised dealers. After Tesla opened a store near Denver, the Colorado legislature passed a law to prevent it from opening any more. Illinois, by contrast, allows Tesla to sell cars at company-owned outlets.

The effort to prevent direct sales comes from existing car dealers, who like the arrangement they have. They claim to be trying to prevent "unfair competition," but the competition they prevent looks unfair only to those who profit from a protected market.

Bob Glaser, head of the North Carolina Automobile Dealers Association, told the Associated Press, "It's a consumer protection, and why we say that is a dealer who has invested a significant amount of capital in a community is more committed to taking care of that area's customers."

But deciding who will take better care of an area's customers is normally left up to those customers. If Tesla treats them badly, it's not likely to survive. Ask the former owners of online retailers like Lillian Vernon and RedEnvelope, which went from success to bankruptcy.

The correct complaint about Tesla is that it relies so heavily on federal loans and tax credits aimed at promoting greater fuel efficiency. But General Motors got some help, too, and no one is trying to punish it.

There is no reason to expect direct sellers to mistreat consumers. Amazon has become a $60 billion operation by serving them better or cheaper than local stores. Michael Dell made his fortune shipping computers directly to consumers. At this point, direct sales are not a fearsome leap into the unknown.

Glaser conjured another reason why the people at Tesla should not be allowed to operate as they prefer. "You tell me they're gonna support the little leagues and the YMCA?" he demanded. Tesla says, actually, it will—not that sponsoring youth athletics is, or should be, required to do business in America.

A more honest assessment came from Bill Wolters, president of the Texas Automobile Dealers Association, who fears that "if they change the franchise laws, it allows every other manufacturer to come in and do what Tesla is going to—compete with our family-owned businesses."

Among those li'l ol' businesses is Red McCombs Ford in San Antonio. McCombs used to own the San Antonio Spurs and the Minnesota Vikings, and his net worth is about $1.4 billion. But never mind that. Since when is "compete" a bad word in free-market Texas?

This is not about protecting consumers or even assuring the survival of Little League baseball. It's about established businesses leveraging government power to enrich themselves. They get the express lane to themselves, and consumers get left by the side of the road.