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A New Direction: Do Utah’s dealer franchise laws drive the auto industry or slow it down?

Imagine you’re in the market for a new car—but this time you want something different. Something like a Tesla Model X, a luxury electric sports utility vehicle that boasts a 90 kWh battery providing 257 miles of range. As you research your dream purchase, you learn that you can’t buy a Tesla in Utah. Tesla isn’t permitted to sell its cars in the state because it doesn’t use the dealership franchise system. You wonder, “What’s this franchise system all about and why can’t I buy what I want?”

The auto dealers franchise system and its corresponding laws were developed decades ago to help auto manufacturers distribute vehicles across the country. In many ways, the franchise system made sense. Vehicle manufacturers, who desperately struggled to sell their automobiles directly to consumers, could now build a robust network of community dealers spanning the country, from big cities to rural towns. Together, car manufacturers and dealers created a relationship that worked well for them and consumers.

Though the franchise laws have been through twists and turns over the years, the system has primarily remained unchanged during its nearly 100-year history. Today, nearly every state in the country continues to use the dealership franchise system, with laws in place to guarantee it stays on track.

But times have changed, and the auto industry is changing, too. Some are beginning to wonder whether the franchise system remains relevant. New car manufacturers, like luxury electric car maker Tesla and three-wheeled economic car maker Elio, are challenging the status quo. Not only are manufacturers like Tesla and Elio making vehicles that are unlike customary models, their selling and distribution strategies are breaking the mold. In short, they just don’t see a need for the traditional dealership network. Instead, they want to remove the middle man and have direct-to-consumer sales.

But many states, including Utah, have dealership laws in place prohibiting just that.

Tesla is now preparing to challenge Utah’s dealership franchise system at the Utah Supreme Court. They join many voices who say it’s time for auto sales to move in a new direction. But is it really time to change a system that has worked so well for nearly a century?

If it’s not broken…

Craig Bickmore, executive director of the New Car Dealers of Utah Association, says the franchise system is a win-win-win, benefiting manufacturers, dealers and, most importantly, consumers.

“The relationship between manufacturers and dealers can be a really good partnership, if it’s properly done,” he says. “The franchise law keeps the manufacturer doing what they do best, and that is to produce world-class vehicles. And it keeps the dealers doing what they do best, and that is to sell and service vehicles and help customers be satisfied and have a great buying experience.”

The system, Bickmore says, helps manufacturers who are able to unload their inventory on dealerships. Dealerships, on the other hand, depend on the franchise system to ensure there’s give and take from the manufacturer, who often dictates the rules a dealership must follow. The system also drives price competition among dealers and avoids automaker monopolies, Bickmore says.

“If you’re a dealer who has put tens of millions of dollars of capital into your dealership, equipment and inventory, you would have no input with respect to the manufacturer and how they deal with you without the franchise system,” Bickmore says. “That is why it is so very important to have [the franchise system]. It’s no different than the FCC (Federal Communications Commission) with communications or a JOA (joint operating agreement) with newspapers. Those are similar types of circumstances where legislatively they’ve made the playing field somewhat equal and level in different industries. It keeps that manufacturer/dealer relationship workable.”

Consumers are the system’s greatest beneficiary, says Bickmore, who points to vehicle recalls as an example of how having a local franchise dealership network in place helps the average Joe. “When there’s a recall, those consumers come into these dealerships. They don’t go to Detroit, Japan or Germany, where the car manufacturers are. They go to the local hometown dealer to get their vehicles serviced and fixed. The dealers become the advocates to get those problems solved and taken care of. They’re the frontline folks.”

Spencer Young, CEO of Young Automotive Group, agrees with Bickmore. “The franchise law in place is set up to actually protect the consumer and to protect the current new car dealers who have invested millions of dollars in the community,” he says, adding that past challenges to the system have failed.

“The most recent time it was challenged was with the Ford dealer network. Ford came into Utah—they tried three different trial markets. Ford managed and owned the franchise. Well, it was a miserable failure. It was a chaotic time. Within a few years, Ford gave up, and said, ‘Let’s give it back to the dealers.’”

Young breaks down why the system works in three points: “First, you have a local rep in the business community who is part of the community, investing millions of dollars in the community and employing a bunch of people. Second, the distribution method. [The vehicle] goes from manufacturer’s balance sheet onto the dealer’s financial statement. That model doesn’t tie up the manufacturer’s capital and assets. Third, the local business man can address problems and issues with the car. If you had an issue with Tesla, who do you call? Who’s going to be your advocate locally?”

Unnecessary roadblock?

Bickmore and Young both say they’d like to see Tesla enter the Utah market, and they were both in favor of a plan presented during the 2016 legislative session that would have created a pathway for Tesla to open up shop in Utah.

Sponsored by Rep. Kim Coleman, R-West Jordan, HB 384 was thought to be a compromise among interested parties that would have given Tesla the green light to open a showroom and permit buyers to make car orders. Tesla, however, wouldn’t be able to keep a large inventory in the state and buyers wouldn’t be able to drive their newly purchased vehicle off the lot. Though initially onboard, Tesla backed out of the compromise, stating that it was too restrictive.

As noted, the company is taking its case to the Utah Supreme Court. A decision is expected sometime this fall.

Tesla, which declined to participate in this article, has argued that selling through the traditional franchise system wouldn’t work for its specialized product, as convincing customers to make the switch from gas to electric isn’t an easy sell. Moreover, Tesla has argued that selling an electric car would prove to be a direct conflict for dealers who primarily sell gas vehicles. Instead, Tesla wants to sell its cars directly to consumers without a third-party representative.

Rep. Coleman agrees the franchise system places an unnecessary roadblock in front of Tesla and other auto manufacturers that wish to sell their products directly to consumers.

“I believe this is an unconstitutional restraint on trade. A regulation that says a company can’t sell its own product in its own way is unconstitutionally prohibitive,” she says. “If I made a product that I believed in and loved and wanted to sell, I don’t know that I would want to give that control over to someone else. Dealerships have a lot of control in selling these cars. It makes sense that a manufacturer would choose to sell that product themselves versus giving it to someone else, who will mark up price. They’ll lose control over the product, how it’s marketed and how it’s sold.”

Coleman adds, however, that it’s well within a manufacturer’s right to use a third-party seller if they wish to. “If it serves a purpose for the manufacturer that wants to engage that system and they feel it is in their best interest to have franchises sell their product, then that should be their choice. But some new manufacturers are coming along that don’t want to do that, and I believe they should also be able to [sell directly to consumers].”

While the current franchise system works for many auto manufacturers and dealerships, Coleman says that today’s modern technology allows for more consumer options. “The franchise model exists because you had manufacturers in Detroit that were pumping out large volumes of product. Before the internet and before extensive highway systems, the best way to distribute was to sell the cars locally to the franchise. Detroit did what they did—build cars—then locally you have a franchise selling them. But that’s not always needed now.”

Coleman says the traditional dealership’s reluctance to accept a new selling model is likely based on fear. “Local dealers might be concerned that a new model [of distribution] could demonstrate that they’re not necessary as a middle man,” she says. “Even the FTC (Federal Trade Commission) has said that the franchise system limits innovation and raises prices for consumers. When consumers figure it out, that a middle man raises the price of the product, the concern of the dealership is that will eventually put them out of business.”

Down the road

As Tesla’s argument heads to the Utah Supreme Court, Coleman says she hopes the ruling comes out in Tesla’s favor, which will open the door to other manufacturers who could potentially be stifled by the state’s franchise law.

“[Tesla] was denied their dealership license based on the fact that they were not a franchise. If the courts say that since Tesla is not a franchise, none of this even applies to them, then they can do what they want. It comes down to interpretation of the law. If the court does not rule in their favor and says [Tesla] is subject to the franchise law, then I will run legislation again,” she says.

Bickmore says he supported Coleman’s 2016 legislation and hopes there will be a compromise in the future, as long as it does not negatively impact current dealerships. “To the manufacturer’s credit and dealer’s credit, the franchise system has been honed really well. It enables this whole automotive system to work really, really well for the consuming public. If you look at the reviews, the buying public is satisfied to a very large degree with their buying experience.”

Young stresses that he’d also like to see Tesla enter the state, but not at the expense of Utah’s many dealerships already in place. “The local business man at the dealership is contributing not only by hiring employees and paying property tax, but he’s also contributing to the  little league team, the little miss pageants,” says Young. “A lot of times, in a local community, the dealer is the biggest business in town. Dealerships are so good for the consumer, community and for the manufacturer. They help everybody.”

 

Exotic Cars Roll into Utah

Utah’s roadways are getting more and more luxury vehicles. In May, Ken Garff Automotive Group opened an Alfa Romero dealership, which is the only Alfa Romeo dealership in Utah. It offers the latest models in the luxury sports car line, like the acclaimed Alfa 4C and Giulia Quadrifoglio. But if you’d rather drive a Maserati, Jaguar Porche or Ferrari, you don’t have to look far. Salt Lake is home to several dealerships that specialize in these luxury vehicles.

And if you’re not ready to purchase the car of your dreams, Enterprise Rent a Car just launched an exotic rental collection in Utah.

Craig Bickmore, executive director of the New Car Dealers of Utah Association, says these luxury and exotic cars are a sign Utah’s automotive industry is moving full-speed ahead. Moreover, Bickmore says the growth of luxury dealerships in the state shows that consumers are excited about the cars they drive.

“The car business is getting better and better. Our leadership in government has done a nice job of making Utah, altogether, a great place to do business,” he says. “Garff is just one company that is seeing the opportunity in the [luxury] segment. Obviously they’re only going to risk capital to bring other makes and models here if it makes financial sense to them—they’re a bright group. So all of this signals that there are some good things ahead.”

As the auto industry strengthens, Bickmore notes its important role in Utah’s economy. “We are in excess of $7 billion in sales and somewhere between 14 and 16 percent of taxable retail sales come from our industry. That’s a lot to the state of Utah. There’s about 9,000 employees, and a multiplier of another 10,000 employees that work for the tire companies, part suppliers, credit unions and banks. This industry is huge. It’s a key component of the state’s economy.

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