The Real Reason Tesla Didn’t Win In Michigan

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This week Governor Rick Snyder signed into law House Bill 5606. It is legislation that has been commonly framed as a law to keep electric automaker Tesla and their direct-to-consumer model of selling cars out of the state.

Some are wondering exactly why or how this law happened. Not only did it happen, House Bill 5606 sailed through the legislature (if you add both houses together) almost unanimously by a vote of 144 to 1. There was a last-minute legislative addition to tweak language, but I think that’s a red herring in this discussion.

The bottom line is Governor Rick Snyder was going to sign this legislation. But why? And why did it sail through the House and Senate?

The reasons aren’t what either side would like you to believe. Tesla would like you to think it’s purely about competition and shutting out an upstart with a new idea. On the other hand, many advocates of HB 5606 publicly say it’s about “fairness” that everyone should play by the same rules, or use the words “consumer protection” in some combination of sentences.

For a law to pass with that kind of universal, bi-partisan strength with almost every single Democrat and Republican signing on, there’s another factor at play. It is a factor that touches practically every district in the state.

What neither side wants to come out and say is this: Is that HB 5606, and this entire kerfuffle across the country, is about jobs and protecting them.

And it’s not some ideal of one side or another, but the fact that there would be a lot of real world implications if the dealership model were to collapse and we don’t have clear answers on how we’d deal with those after effects.

The dealer model of selling cars is enshrined in law by many states, has deep historical roots, and it can be quite lucrative for local communities. It goes both ways. Dealerships get protection of their investment, local cities get employment and tax revenue. Here’s some data to chew on from the National Automotive Dealership Association in 2012.

  • The average Michigan new car dealer had $21,218,000 in sales, with statewide dealer sales in total accounting for 12.6 percent of the entire amount of retail trade in Michigan.
  • Dealerships also employed 29,249 people across Michigan, with each employee making on average $1,055 a week or more than $50,000 a year.
  • On average, a dealership in the U.S. spends $621 per car to sell it in advertising spending.

Tesla’s problem with getting into Michigan (and other states, Michigan is not alone in this) is that direct sales model they use. It’s significantly more efficient than the current three tier distribution system, and so it endangers a large chunk of those 29,000+ jobs here.

Without legislative protection, it’s quite possible that Tesla’s model could take hold because substantial evidence shows that customers hate the current car buying experience. Loss of jobs in car dealerships could be akin to the kind of economic change as what the internet did to travel agents, Amazon to brick and mortar book stores and Craigslist to classified ads. Tesla’s direct sales model could render most automotive salespeople and their staffs obsolete, and quickly.

Allowing the auto industry to convert to a direct sales model could in relatively short order (5-10 years) eviscerate millions in advertising spending, tens of thousands of jobs, millions in local tax revenue and charity support from local dealers who currently compete against each other and so have an incentive to spend in various ways. And that’s just in Michigan. Far fewer dealers would be required, and more of the experience would move online. There might be a resulting one-time payout for dealers in the destruction, but that wouldn’t blunt the impact much on the greater economy.

Nationally, nearly one million people (963,000+) are employed by automotive dealerships. Cut that in half, or two-thirds, and you have a very large and very real problem from a socioeconomic perspective.

The “disruption” that’s often talked about in the startup community that Tesla CEO Elon Musk hails from sometimes has a very human cost, and approving bills like HB 5606 makes it so governments don’t have to deal with it. It doesn’t matter how conservative or liberal you are, politicians of all stripes would rather deal with some temporary squawking than the specter of tens of thousands of unemployed people and the political firestorm surrounding that.

And all stripes, almost unanimously, voted for this bill.

Only time will tell what the right decision was. But the bottom line is you won’t be buying a Tesla from a Michigan location anytime soon.

  • I had no idea how many people worked for car dealers or how much they spent. Alot more makes sense.

  • That’s all well and good and I understand their concern… however, we can’t just block new ways of thinking and selling products. Could it possibly cause a huge change in the way cars are bought or sold? yes. Could people who work in the dealership world need to look for a new field of work? possibly. Does that mean we prevent the world from changing, growing, and innovating new ideas? Absolutely not. Uber is changing the Taxi service industry, Amazon is changing the brick-and-mortar stores industry, Kindle changed the bookstore industry, and Tesla is trying to change the automotive industry. I’m sorry it’s threatening to Michiganders, but sooner or later, we all have to accept that we cant prevent the world from moving forward and the best we can do is adapt and innovate ourselves.

  • The article makes a number of valid points, but the truth is, Michigan is not a forward thinking state. Michigan has suffered its economic fall in large part due to the qualitative declines of the American auto industry and rapid outsourcing of manufacturing (furniture, appliances, etc). The state might try to protect what jobs it has left in manufacturing and distribution of B-quality products by passing laws to prevent consumers from buying A quality products elsewhere. But it will ultimately lose by doing so. A smarter Michigan might look more forward and seek a manufacturing partnership with Tesla as Tesla seeks to expand. Should Tesla’s objective of manufacturing 500,000 electric cars a year in the near future become a reality, I would think Michigan would want to see itself more like a partner in that objective from the beginning.

    • the manufacturer. Pretty simple to figure that out. Tesla does it with zero issues. And the manufacturer actually has more incentive to fix a problem than a dealer. Let’s see- a dealer makes 69% of profit from service center, so they have an incentive for cars to come to their shop and work to be done on them. And it doesn’t matter if the customer pays or the warranty via manufacturer pays, they still get their money. Pretty sad. More incentive for dealers to not help the manufacturer improve cars.
      And let’s look at tesla. They own there service centers. They see problems on cars and fix them but also notify the factory and they make the changes quickly on cars being built so that the same problems do not happen in the future. Win for manufacturer and win for consumer.

  • How would they handle, say a large vendor recall? Where would they fix the problem, in my driveway? Is there any thought that maybe with a dealer , repair network that this auto and company is not a flash in the pan? I like my freedom and I like to be free of products that take advantage of people after the sale, some want the freedom to take advantage of others. When Tesla was delivering a new auto to Saginaw, MI , they were unloading in the wrong city until they were told you are not in the correct town , wrong area code. This is not your fathers Oldsmobile.

  • If so many people hate the current car buying (dealership) experience, why should it be protected? Businessmen love to spout that Capitalism is great because it lets the competition of the marketplace weed out the inferior products. Here, the inferior product is being legislatively protected and forced on consumers who now have no choice. Despite employing so many people, dealerships in general are overpriced and do not give great customer service — many of them using downright shady practices. (We all have a dealership rip-off story to tell!) This isn’t a level playing field. This isn’t a free market. Elon Musk is the true entrepreneur here and he is being stifled at the expense of the buying public.

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