Chenrui Gao: It's Time to Let Direct Selling Disrupt Our Expensive System of Car Dealerships

I am very proud of the writing of the students in my “Monetary and Financial Theory” class. I ask them to write three blog posts a week. Here is a great one, from Chenrui Gao:

After a long period of fruitless lobbying efforts, Tesla Motor, a public electric car manufacturer, decidee to stop selling its luxury vehicles in New Jersey because the state doesn’t allow it to sell cars directly to consumers. Besides Texas and Arizona, the New Jersey government stands firmly with the dealers and made itself the third state to ban direct sales. Tesla’s mistrust of dealers and its strong faith in directing selling motivates its defense for manufacturer sales. However, dealers afraid that the directing selling could spread to other manufacturers are resisting Tesla’s plan resolutely. The heated discussion between the manufacturer and the state government once again brings back the issue of whether manufacturer sales should be banned or not. I want to argue that manufacturer sales should become an available option because it could benefit both manufactures and consumers.

First of all, manufacturer sales could become a very effective cost-cutting measure. If the manufacturers could avoid the cost of distributing cars to dealers all over the country and accept orders direct from consumers, the vehicle price could be significantly lower. Research by Gerald Bodisch indicates that the cost of the auto distribution system in the United States averages up to 30 percent of the car price. We know form the last financial crisis that General Motors and Chrysler suffered a lot and received 17.4 billion dollars in loans under the Troubled Asset Relief Program. They need effective plans to improve their financial performance and earn more profit. These companies could cut distribution costs by reducing the number of dealers from 6200 to 4100. Also, the build-to-order model could save much of the money spent on storage for products, adding to profitability. According to other research, the total value of new car inventory held by 20700 car dealerships in 2008 was about 100 billion dollars and the annual carrying cost of that inventory was estimated as 890 million dollars. GM started to use this method to produce Celta in Brazil eight years ago and now the Celta is one of the sales leaders in the local market.

Moreover, sometimes it is necessary to let manufactures sell their products directly so that the consumers can have better service. For example, some high-tech vehicle manufacturers like Tesla would do better at explaining their products than dealers who barely know about the functions by studying the instructions themselves.

Some might argue that the Auto Franchise System enforced by most of the states historically benefits manufactures because it helps them focus on developing and producing cars. And they might say dealers do better at assessing and fostering consumer demand than manufactures. However, those arguments assume that the production of a type of vehicle large-scale and that the demand for them is enormous, otherwise a national-wide distribution of dealers is just a faster way to increase costs. The emerging market of electric vehicles is still in its infant stage, with manufacturers Nissan LEAF, Chevrolet Volt and Tesla all fairly new to electric cars. They need more flexible ways to lower costs and expand the market.

Although the Auto Franchise System may make sense in some situations, manufacturers should be allowed to use another distribution system when that fits the product better. 

Chenrui Gao

Chenrui Gao