Tesla Is a Political Story, Not An Entrepreneurial One

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The latest regulatory challenge for Tesla, the upstart electric vehicle (EV) manufacturer, concerns a potential roadblock to direct consumer distribution of its luxury automobiles in Michigan. Under H.B. 5606, which passed the Michigan Senate 38-0 and the Michigan House 106-1, a new motor vehicle cannot be sold directly to a retail customer other than through a franchised dealer in Michigan, with the exceptions being a nonprofit organization or governmental agency. Moreover, Tesla cannot operate a showroom or gallery featuring its automobiles and provides information without conducting sales, said James Chen, Tesla's vice-president of regulatory affairs, in a recent Wall Street Journal article ("Tesla Fights Michigan Legislation on Direct-Selling", October 9, 2014, by Mike Ramsey). Tesla, a manufacturer of low volume, luxury EVs without an established franchise dealer network, does not presently operate any franchised store or gallery in Michigan, and wants to market and distribute directly to potential customers. This franchise distribution controversy in Michigan is emblematic of what is occurring in other states, most recently in New Jersey and Pennsylvania.

According to a June 16, 2014 Automotive News article ("State Franchise Laws, Sparked by Tesla, Go too Far, Other Automakers Charge" by Amy Wilson) automobile dealership franchisees backed, through June 2014, 33 bills protecting established franchise systems in 26 states, compared to 38 franchise bills in 2013, with 20 of those bills becoming law. "At the request of local dealer groups, states set up a labyrinth of protectionist laws that make the car-buying experience difficult and costly for our customers," said Gloria Bergquist, a spokeswomen for the Alliance of Automobile Manufacturers, representing 12 automotive manufacturers, but not Tesla. Jim Appleton, chairman of the Automotive Trade Association Executives, an industry group representing 115 state and metropolitan dealer associations in the U.S. and Canada, said that the Alliance of Automobile Manufacturers is suggesting that the dealer franchise system is a "lodestone around the neck of innovation or the manufactures' ability to succeed in the marketplace."

State automotive dealer franchise laws are often crafted to prevent automobile manufacturers from opening company-owned dealerships and underpricing their established dealer networks. These franchise laws have also provided automobile dealers protection from the highly competitive online sales environment.

Tesla accuses the Michigan Automobile Dealers Association, a supporter of H.B. 5606, of trying to monopolize the retail automobile marketplace. The company also accuses bill supporters of adding "anti-Tesla" language hours before the bill was successfully voted October 1 in the Michigan Senate (after having been originally passed in the Michigan House in the middle of September), and then returned to the Michigan House (with this new "anti-Tesla" language attached) on October 2, where it was successfully passed.

In an October 15, 2014 letter to Michigan Governor Rick Snyder. Daniel A. Crane, Frederick Paul Furth, Sr., Professor of Law, University of Michigan Law School, called into question the manner in which H.B. 5606 was passed: "Most fundamentally, they [automobile car dealers] should not be able to get away with sneaking amendments into bills at the last minute in a way that precludes fair and open discussion of what know is a highly controversial issue. The people of this great State deserve better than that kind of crony capitalism." Also in his letter to the Governor, Professor Crane notes that a May 2009 U.S. Department of Justice study ("Economic Effects of State Ban on Direct Manufacturer Sales to Car Buyers") by Gerald R. Bodisch, found that direct distribution of automobiles to buyers could save these consumers over $2,200 per vehicle while expanding the consumer's choice of vehicles.

Professor Crane persuasively argues his case, and Governor Snyder should veto this legislation on the merits of a "tainted" process of legislative enactment. Michigan citizens deserve a transparent airing of the regulatory merits (or demerits) of this amended bill. Consumer choice (and potential savings) when purchasing an automobile, whether through the utilization of innovate direct selling technologies, or traditional franchised dealerships, should be the marketplace default and not the exception. In this case, Tesla deserves its new day in the Michigan legislature. But ironically, Tesla is not the "poster child" for the "free market" that Professor Crane supports in his letter to Governor Snyder.

In his recent book, Mass Flourishing, Edmund Phelps, Columbia University economist and Nobel Laureate, defines what he sees as the "new corporatism", where "[T]he state is less a guide choosing the heading than a pilot paid by the passengers to take them where they ask." Phelps argues that much of this political power is shifting back to government, where the state is intensely involved in regulating major sectors of the American economy, including healthcare, financial services (higher education), and energy, the latter being where Tesla has benefitted from this "new corporatism." Since its inception, Tesla, ostensibly because of its use of a non-fossil fuel, "zero emission" energy source powering its vehicles, has been utilizing an array of federal and state government subsidies to support sales of its EVs. The political marketplace has been where Tesla has been utilizing government subsidies to finance its success.

Christopher Koopman, a research associate at the Mercatus Center, George Mason University, in an article ("Tesla is No Success Story: Tesla is Only Profitable Thanks to Politics and Tax Subsidies", June 3, 2013) in Economic Intelligence, outlines how starting with a $465 million low-interest loan awarded by the U.S. Department of Energy through the Advanced Technology Vehicle Manufacturing program in 2009, Tesla has been able to take advantage of additional federal and state subsidies. These subsidies include a $7,500 federal tax credit for the purchase of a new Tesla, as well as additional state income tax credits for new EV automobile purchases, including $6,000 in Colorado and $7,500 in West Virginia.

In California, in 2013, Tesla was able to turn a $57 million loss into an $11 million profit by selling $68 million worth of special credits which Tesla received from the State's Air Resource Board. These special credits, which financially incentivizes auto manufacturers for their production of "zero-emission" vehicles, were purchased from Tesla by other auto manufacturers in California.

In September 2014, after completing intense negotiations with five Western state governments, Tesla announced that it would be building its $5 billion car battery gigafactory in Carson City, Nevada. The estimated cost to the taxpayers of Nevada? Approximately $1 billion in tax abatements and other financial incentives. According to the nonprofit interest group Good Jobs First, some 240 tax subsidies worth more than $75 million each have been passed by state legislatures since 1976 to entice new business development and job creation. Good Jobs First estimates the cost of these tax subsidies to state taxpayers as averaging $456,000 per job created.

Yet these government subsidies, according to a September 2012 study (Global Warming's Six Americas) jointly undertaken by the Yale Project on Climate Change Communication and George Mason University's Center for Climate Change Communication, appear to be strongly supported by the majority of American citizens, especially as it pertains to solar panel and EV manufacturing. Tesla, one could argue, is taking advantage of financial incentives that the American public is providing to facilitate a desired public policy outcome. This rent-seeking behavior, however, encourages a diversion of company efforts from value creation activities for customers in the economic marketplace, to nurturing political favoritism in the political marketplace. It also artificially distorts the economic marketplace, as it does not allow for a "fair" playing field among directly competing products on their merits.

In conclusion, while a final decision by Governor Snyder to veto or sign H.B. 5606 is not required until Tuesday of this week, I would not underestimate the finely honed political acumen that Tesla and CEO Elon Musk can bring to bear in Michigan's state capital, Lansing, before that executive decision is rendered.

Thomas Hemphill (thomashe@umflint.edu) is a policy advisor to The Heartland Institute, and professor of strategy, innovation and public policy, School of Management, University of Michigan at Flint. 

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