Why Is It Illegal To Buy A Car From The Manufacturer?

Car Buying Policy

Edmunds (automotive marketplace website) published a study. That found 1 in 5 Americans would give up physical relations for a month to avoid the process of 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 it’s illegal to buy a car directly from the manufacturer.

Why is it illegal to buy a car from the manufacturer?

The 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. In many states, buying a car like Tesla directly from the manufacturer 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 manufacturer direct sales prohibitions so that 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.

Bottom line, some say state laws prohibiting direct sales to consumers are protecting 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 place your order and get your paperwork sent to you from a Tesla store, anywhere outside of the state of 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 go pick up your car, and Texas will be more than obliged to register it for you 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, and 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. If you’re willing to special order it and wait for delivery, you’ll likely get a better deal.

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 offered 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 up dealerships were independent entrepreneurs spending their own 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 at their disposal 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 already 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:

Why Can Tesla Sell Direct To Consumers?

Why Do Not We Use Water Powered Cars?


Sources:

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.

Julia Rose

My name is Julia Rose. I'm a registered clinical therapist, researcher, and coach. I'm the author of this blog. There are also two authors: Dr. Monica Ciagne, a registered psychologist and motivational coach, and Douglas Jones, a university lecturer & science researcher. I would love to hear your opinion, question, suggestions, please let me know. We will try to help you.

Leave a Reply

Your email address will not be published.