FTC Tells Michigan to End Ban on Direct Tesla Sales

Tesla Motors is banned from directly selling its electric cars in Michigan, a restriction the Federal Trade Commission says goes too far. (Photo via Tesla Motors)

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Michigan should end a ban prohibiting Tesla Motors Inc. from selling its electric cars directly to customers, the Federal Trade Commission said Monday.

Three senior FTC members said in a 10-page letter to state Sen. Darwin Booher, R-Evart, that Michigan consumers would “fully benefit” if the ban prohibiting Tesla and other automakers from selling directly to customers were lifted, The Detroit News reports.

The comments in the letter were approved, 5-0, by the commission, and came after Booher asked for an exception to the law that would allow Elio Motors to directly sell its three-wheeled “autocycles” – enclosed, three-wheeled vehicles that are a hybrid of motorcycles and automobiles – to consumers.

By only carving out an exception for the autocycles, lawmakers “would largely perpetuate the current law’s protectionism for independent franchised dealers, to the detriment of Michigan car buyers,” according to the FTC letter.

Instead, the FTC urged Michigan lawmakers to consider a “complete repeal of the prohibition on direct sales by all manufacturers, rather than the enactment of any limited, selective set of exceptions.”

Related:

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The Legislature passed and Gov. Rick Snyder signed a tough law last year that banned California-based Tesla and other automakers from even talking with potential customers in Michigan about its cars. The law, backed by the Michigan Auto Dealers Association, required Michiganders who wanted to buy the car to purchase them directly through a network of franchise dealerships.

In an unscientific Patch.com reader poll last year after Michigan lawmakers imposed the ban, 84 percent of 1,290 people answering the poll opposed the ban.

The 2014 law wasn’t entirely new, nor is the restriction unique to Michigan. Automakers were already required to sell through licensed dealerships; however, Tesla argued at the time that because it sells its cars online, it was in compliance with the law, which Tesla interpreted to apply only to those manufacturers with showrooms in Michigan. Last year’s legislation closed that loophole.

In its letter, which can be found on the Consumerist website, the FTC did not address the merits of direct sales versus dealership purchases, but said “consumers are the ones best situated to choose for themselves both the vehicles they want to buy and how they want to buy them.”

In January, Tesla founder Elon Musk told the Automotive News World Congress in Detroit that he’s not opposed to eventually using licensed dealerships to sell his cars, but said the company must first “establish a solid base with our own stores.”

Also in January, Musk said his company hadn’t ruled out building a factory in Detroit, but took a swipe at the Legislature in doing so. “Not out of the question – maybe Michigan shouldn’t stop us from selling cars,” he said. “That would be a nice gesture.”

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Tesla does plan to establish a presence in the state with the acquisition of a tool-and-die manufacturer in western Michigan to speed production of its electric vehicles.

“This acquisition enables Tesla to bring additional capabilities in-house, streamlining production and facilitating the introduction of Model X and increased production at the Tesla Fremont (California) factory,” Tesla spokeswoman Alexis Georgeson said, according to The Detroit News.

Jack R. Nerad, executive managing editor at Kelley Blue Book’s KBB.com, said by eschewing dealerships, “Musk is making Tesla Motors’ task harder than it needs to be,” according to the Detroit Free Press. Dealerships provide special services that benefit both the buyer and the seller, Nerad said.

However, Musk said he’s not ready to hand over the future of his company to third parties that may not understand the nuanced approach to selling electric cars, according to The Consumerist.

“It is hard to sell electric cars; it’s a lot more effort to sell it than a gasoline car,” Musk said. “There’s a lot more education needed.”

Barring direct sales to consumers is an “anomaly” unique to the auto industry, the FTC said in its letter.

“Past studies by both academic researchers and FTC staff have concluded that state-imposed restrictions on automobile manufacturers’ ability to negotiate with their dealers increased the prices paid by consumers without leading to notable improvements in service quality,” according to the letter.