Edmunds (automotive marketplace website) published a study. That found 1 in 5 Americans would give up physical relations for a month to avoid haggling when buying a car! That 1 in 3 would rather do their taxes. A Gallup poll found that car salespeople were ranked dead last in a list of professions and their perceived commitment to honesty and ethics.
The public does not like car dealerships very much. But how did that happen? Consumers used to have a lot of options when it came to buying a car. But in an age when you can buy anything online, you still can’t buy a new car from your phone. So, we will find out why buying a car directly from the manufacturer is illegal.
Why is it illegal to buy a car from the manufacturer?
Many car manufacturers have authorized dealerships that sell their vehicles to consumers. However, there are certain restrictions and regulations in place in some jurisdictions that may affect the direct sale of cars by manufacturers. Here are a few reasons why such restrictions exist:
Franchise Laws: In many countries, including the United States, there are laws known as franchise laws that govern the relationships between manufacturers and dealerships. These laws are designed to protect the interests of independent dealerships by preventing manufacturers from competing directly with their authorized dealers. As a result, manufacturers typically must sell their vehicles through authorized dealerships rather than directly to consumers.
Consumer Protection: Laws and regulations are aimed at ensuring consumer protection. Authorized dealerships are typically required to meet specific standards and provide certain consumer protections, such as warranties and after-sales services. Selling directly from the manufacturer may be seen as bypassing these consumer protections.
Market Competition: Independent dealerships promote market competition and give consumers more vehicle purchase options. Restricting direct sales by manufacturers helps maintain a competitive market with multiple dealerships offering different brands and models.
Political and Lobbying Influence: Some restrictions on direct sales by manufacturers may be influenced by political considerations or lobbying efforts by dealer associations and organizations that advocate for the interests of independent dealerships. These organizations may push for regulations that protect their business models.
Buying ability means what you want from whoever you want, whenever you want. It’s called competition, the foundation of the most successful consumer economy the world has ever known. But there’s one place where competition seems to be breaking down the car showroom. Buying a car like Tesla directly from the manufacturer in many states is illegal.
Instead, state laws on the books for years require you to go to a dealer. Some staffers at the Federal Trade Commission think it’s time these old state laws hit the road. In an ideal world, the states would remove these manufacturers’ direct sales prohibitions so consumers could access a wider range of products.
Some dealer associations have been lobbying states to keep laws prohibiting direct-to-consumer car sales. The National Automobile Dealers Association has produced print and videos defending the current system. But recently, some have suggested weakening these laws.
Some say state laws prohibiting direct sales to consumers protect car dealers. Some say they’re protecting consumers. Maybe open to debate, but it’s keeping your hands off the wheel.
Tesla has galleries where you can view the cars and talk to experts about them. You order and get your paperwork from a Tesla store outside Texas. Then you can go ahead and pay for the vehicle.
Tesla can then ship the car to one of eight service centers they have around the state of Texas. You can pick up your car, and Texas will be obliged to register it and collect the appropriate taxes due.
Pros & Cons: Ordering a car from the manufacturer or dealer
You can’t order a vehicle yourself and still need to do it through a dealer, except for Tesla. So I have advantages and disadvantages to both.
Pros: One of the biggest advantages of special ordering a vehicle is that you’ll get to equip it with the exact options and colors you desire. Some vehicles have many options and configurations that a dealer can’t stock.
You may have difficulty finding some obscure option installed on the car you want; special ordering may be the only way to get that done. Another benefit to ordering your car directly is that the dealer may offer you a better deal.
It’s an easy sale for them, and they won’t incur any financing costs for keeping the car in their inventory on their lot. This is true if you want a hot-selling car in high demand. You’ll likely get a better deal if you’re willing to special order it and wait for delivery.
Cons: One of the biggest issues with ordering a car from the factory is the wait time. It can sometimes take several months to get the car delivered, and frequently you won’t know when that will be. In worst-case scenarios, the union may strike and shut down production. That’s the worst-case scenario. You could end up waiting a few extra weeks or even months.
Another disadvantage is that you may not get the same incentives when placing your order. Incentives are applied when the car is delivered. If the manufacturer discontinues their rebates while your car is being built, you are out of luck. So I recommend that you don’t involve trade-in if you’re going to order a car from the factory.
Finally, special ordering is usually limited to domestic brands. Usually, you can order a foreign car, but the dealer will try to fill your order with the closest match instead of having your car custom-built at the factory. BMW is an exception! They’re currently testing out made-to-order vehicles for some of their models.
Buying car law and the real story
The optimistic story behind state franchise laws is intended to protect consumers and local communities. Back then, people opening dealerships were independent entrepreneurs spending money to buy or lease land and equipment, build facilities, and hire local people.
Suppose the major auto manufacturers could come in with their nearly limitless resources to set up their distribution. In that case, no one on the local level could compete. A local dealership could spend years and hundreds of thousands of dollars establishing a presence in a particular territory. A manufacturer could only swoop in and run them out of business by undercutting them on price. That’s not good.
Manufacturers set their market price at the highest point they can get away with, whether at a wholesale or retail low. Also, any attempt to increase that price would drive down the demand in an elastic market, offering an advantage to the competition.
With the franchise model requiring dealerships to maintain vast inventories of cars, the maintenance cost will always be passed on to the consumer. That’s why dealerships initially started lobbying for these laws in the first place. They try to establish a foothold in a specific market, only to have the manufacturers take over by offering the product at a lower price. The dealers have already admitted that they can’t compete with manufacturers regarding price. A fact that should be obvious to anyone.
These arguments were very successful, at least at the state level. Every US state has some version of franchise laws on the books. Automobile dealers day in court act of 1956 says that,
Dealers are allowed to bring a federal suit against any manufacturer who fails to comply with the terms of a franchise agreement, or terminates, cancels, or refuses, to renew a franchise.
According to the National Auto Dealer Association, The 16,623 franchise light-vehicle dealers in the US sold 14.5 million light-duty vehicles in 2020, a drop of about 15% from the 17.1 million sold in 2019. Yet, total sales topping $980 billion in 2020 represent almost 50%.
Read more about cars:
The automotive industry at the Encyclopædia Britannica
“The 2021 EU Industrial R&D Investment Scoreboard”. European Commission.
Scientific and Technical Societies of the United States (Eighth ed.). Washington DC: National Academy of Sciences.