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Free Enterprise & Government Regulation: Direct Automobile Sales

TCCRI's recently published Free Enterprise & Government Regulation Task Force Report explored the issue of direct auto sales in Texas.What follows is an excerpt from the Report on that topic.

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The Occupations Code contains thousands of pages of regulations covering everything from “Healing Art Practitioners” to “Bingo” games. Quite often these regulations are anticompetitive and protectionist in nature. Take, for example, Section 2301.476, which prevents auto manufacturers from directly selling their products to consumers.

The practical effect of 2301.476 is to set in law the means by which an automobile manufacturer must sell its automobiles in Texas. That has been a successful model for a long time, but successful business models need to be protected in statute from new models that may challenge the status quo.

The old model was built around the internal combustion engine. Now, there is a competitor to that model in the form of electric cars that does not have the same needs in terms of engine service and upkeep. The old model does not translate directly to this newer technology. Manufacturers of this newer technology would like to operate under a different business model and there are multiple reasons why it makes sense for them to do so.

Electric cars use a completely different kind of technology from the internal combustion engine, they are sold with a high level of customization, and the costs of maintenance on fully electric vehicles are quite low which is important because traditional dealerships earn most of their revenues through service, which would clearly not be the case for electric cars. Moreover, selling through franchises and dealerships would increase their costs unnecessarily, making it more difficult for manufacturers to turn a profit and would undoubtedly increase the cost for the consumers. In short, the old business model codified in Section 2301.476 of the Occupations Code does not serve the needs of a changing marketplace.


The Ongoing Fight Over Direct Automobile Sales

The fight over maintaining the current statutory dealership franchise model in Texas is well documented. During the 87th Legislative Session House Bill 4379 was introduced which would have provided an exception for electric car manufacturers—like Tesla—would have been carved out of 2301.473. In the 83rd Legislative Session a similar bill was filed and despite neither piece of legislation having a direct impact on the current automobile dealer model, the dealer industry objected loudly. Indeed, of the parties testifying against HB 3351 in its 2013 Business and Industry Committee hearing, five of the six were automobile dealers, and all six had an interest in maintaining the status quo: Traditional automobile dealers cannot be faulted for protecting their own interests. However, the purpose of government is not to protect the “franchise system” from competition. Other industries across the board are permitted to experiment with different means of distribution. Apple, for instance, sells their products in most retail stores and directly through their own stores. It is difficult to imagine any legislator supporting a bill that would prevent Apple from selling iPhones in its own stores, but that is essentially how 2301.476 treats automobile manufacturers. The main difference is that somewhere along the way, automobile dealers’ business model became codified in law in a way that protects them from such competition. Since Texas law prohibits motor vehicle manufacturers from also owning dealerships, Tesla, and companies like it are excluded from the Texas Light-Duty Motor Vehicle Purchase or Lease Program. There is much debate to be had about whether or not the state should be funneling taxpayer money to subsidize expensive new electric vehicles but if the program is going to operate, it should not unfairly punish the most popular manufacturer of electric vehicles because they simply wish to do business differently.

It is unclear who—besides the automobile dealers—might object to lifting restrictions on direct automobile sales. What is clear, however, is that 2301.476 protects automobile dealerships from new business models. Leaving it in place is government endorsement of a one-size-fits-all distribution method for automobiles. This prevents new companies from innovating, and it restricts choices among consumers. Companies like Tesla may succeed or fail, but that outcome should be the result of the quality of their product, and not because they were restricted from using the business model that they believe gives them the best opportunity to succeed.

Policy Recommendation: Repeal Restrictive Provisions in Section 2301.476 of the Occupations Code

Statutorily protecting a specific business model is anti-competitive, and it is not the proper role of government. As the cliché goes, government should not pick winners and losers in the marketplace.

If Tesla and future companies want to try something different, they should be permitted to do so. The 88th Legislature should repeal 2301.476(c) and related provisions to allow automobile manufacturers to sell directly to their customers.

Policy Recommendation: Create an Exemption for Electric Car Manufacturers

Should the Legislature be unwilling to open the automobile dealership market to free market competition, allowing direct sales by manufacturers of electric cars would be a step in the right direction. This would cause little to no disruption in the existing market and it would show that legislators in Texas are committed to reassessing market restrictions.


You can read this and the rest of the report here.

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Note that citations have been omitted from this excerpt, but are present in the full Report linked above.

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