FTC urges Michigan to drop Tesla sales ban

David Shepardson
Detroit News Washington Bureau

Washington — The Federal Trade Commission strongly urged the Michigan state Legislature to reconsider its ban on Tesla Motors Inc. and other automakers from directly selling vehicles to owners.

In an 11-page letter to Michigan State Sen. Darwin Booher, R-Evart, three senior FTC staff members on Monday urged the state to drop its bar to automakers selling vehicles directly to consumers, saying it amounts to "protectionism" for dealers, and is "likely harming both competition and consumers."

However, the federal agency's power is limited. It can only advise states as to what is in the best interest of consumers and cannot compel Michigan to change its laws.

In October, Gov. Rick Snyder signed a bill banning automakers from selling vehicles directly to customers in Michigan. The bill was approved overwhelmingly by both houses, and was backed by Michigan's new-car dealership lobby. The new law closed a loophole that Palo Alto, California-based Tesla has used in other states to maintain company-owned retail stores for its electric cars, bypassing the dealership route.

Snyder said then that the law — which effectively bars Tesla sales from opening factory stores like it operates in 19 states and the District of Columbia — "clarifies and strengthens" an existing long-standing law that prohibited direct sales of new cars in Michigan. On Monday, Snyder told The Detroit News at an event in Detroit that he was unaware of the FTC letter but would take a look at it.

The letter from the FTC came after Booher asked the agency about a pending Michigan Senate bill that would create a limited exception to state law that would allow manufacturers of "autocycles" — enclosed three-wheelers that are more like cars than motorcycles — to sell vehicles in some circumstances. But the FTC said the Senate bill does not go far enough and would "largely perpetuate the current law's protectionism for independent franchised dealers, to the detriment of Michigan car buyers."

"Michigan's consumers would more fully benefit from a complete repeal of the prohibition on direct sales by all automakers," said the commission, which voted 5-0 in favor of the comments.

Tesla said in a Twitter message Monday it agreed with the FTC's affirmation that states should "allow consumers to choose how they buy their cars."

Booher said in a statement Monday that he was reviewing the FTC's comments. His bill was introduced April 15 and referred to the state Senate economic development committee, which has taken no action.

Direct sales ban 'anomaly'

The autocycle measure came after Elio Motors announced plans to build the three-wheelers at a former General Motors plant in Shreveport, La., starting next year. It won't have dealers. Warranty service will be provided through the Pep Boys auto service chain.

At least three other states have specifically passed laws to prohibit Tesla sales: West Virginia, Texas and Arizona. Tesla has galleries in Texas and Arizona, but customers can only look at the cars, not buy them. And it's not clear the automaker would be able to open in many of the other states where it doesn't currently sell vehicles.

Last month, Maryland approved up to four Tesla stores; other states also have limited the number of stores the upstart electric-car builder may operate.

Auto dealers have long insisted protections are needed for franchise dealers who have invested millions in store fronts; they worry dealers could be undercut if automakers sell directly to consumers. State laws were passed in the wake of questionable tactics by some automakers more than a half-century ago.

NADA spokesman Jared Allen said the current system saves owners money: "The data prove that price competition by auto dealers lowers car prices for consumers, often by $500 or more per car. More dealers means more places for consumers to shop, and real-world evidence proves how that translates into lower prices."

The FTC noted in the letter that barring direct sales by manufacturers is an "anomaly" in the U.S. economy. In virtually no other business are manufacturers legally barred from directly selling to consumers, it said: "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."

The nation's 17,000 new-car dealers are among the most politically powerful business owners in many states, making regular donations to politicians and emphasizing the economic impact of new car sales. Auto dealers employ 1.22 million in the United States and often are major contributors to charitable causes in local communities.

50 Teslas in Michigan

As of October, 50 Teslas were registered in Michigan despite the absence of dealers, according to research firm IHS Automotive.

Last week, Tesla told The Detroit News it was acquiring a Cascade Township-based auto supplier and tool-and-die manufacturer — its first investment in the state — to speed production of its cars.

Detroit News Staff Writer Mike Wayland contributed.