Pub. 55 2014-2015 Issue 1

35 2014 FALL and profit for the dealer but often are an expense for the vehicle manufacturer.” 30 In other words, one of Tesla’s stated goals is to avoid (in the interest of saving money) the very consumer ben- efits that independent dealerships provide. Indeed, the so-called “conflict of interest” that Tesla wants to eradicate is in reality a consumer-friendly dynamic that franchise laws operate to foment. Tesla’s comments are particularly telling as they highlight that warranty and recall work is seen by factories as “an expense for the vehicle manufacturer.” Tesla’s own emphasis on financial considerations demonstrates how manufacturers have a disincen- tive when it comes to the completion of warranty and recall work. While there is potential for conflict between the manufacturer and the dealer when dealing with defective products, the safety interests of the consumer always remain paramount. Although Tesla has yet to face a major recall, an independent franchised dealer system would ensure the efficient and properly incentivized completion of recall work as the number of Tesla vehicles on the road increase. 3. Independent franchised dealers provide additional ac- countability. In addition to providing essential warranty and recall work throughout the life of a vehicle, independent franchised dealers also service vehicles in the circumstance in which the vehicle’s manufacturer goes out of business. As was witnessed during the 2008-2009 recession, this became a great concern for owners of Saab, Fisker, and Suzuki vehicles, among others. Given the financial investment associated with purchasing a vehicle, it is exceedingly valuable for consumers to have a reliable and efficient source of service for their vehicles. As a result of these concerns, states require independent fran- chised dealers because dealers serve as a backstop for customers if their vehicle manufacturer ceases to exist. When this occurs, the dealer is more likely to stay in business and will still be around to perform needed repairs and routine maintenance. Many dealer- ships sell multiple brands and consequently will have available trained technicians and expertise in both locating parts and servic- ing vehicles, even if the manufacturer has ceased operation. For example, many former dealers of the shuttered brands mentioned above continue to service their customers’ cars and trucks. Dealers thus ensure the availability of service solutions independent of the manufacturer, providing additional protection to consumers and increasing consumer confidence. 4. Independent franchised dealers create significant local economic benefits. Independent franchised dealers fuel local economic activity, creating jobs and economic opportunity for local residents and generating significant tax revenues. Collectively, the nation’s more than 17,500 dealers employ over one million people, offering high paying jobs with good benefits and attractive opportunities for personal advancement and professional development. And local dealers hire local people for jobs that cannot be outsourced. When the going gets tough, a vertically integrated manufacturer could opt to close a local retail outlet and move on. This will be significantly less likely with a local dealer. Independent franchised dealers also drive local revenues by pay- ing billions in state and local taxes. Sales at new vehicle dealerships account for 15% of all retail sales in the U.S. and consequently generate 15% of sales tax revenue. Similarly, unlike the profits earned by a vertically integrated manufacturer, dealer revenues stay in local communities, helping to support other businesses and thereby creating a local “virtuous cycle” that benefits families and other small businesses. Finally, the local impact that independent franchised dealers have is outsized given the broad distribution of dealers. Dealers are not only located in major urban areas. Rather, they are spread widely around the country. In fact, in many small towns and rural areas they are the primary source of tax revenue, employment, and economic development. Given the history of automotive retailing, it is highly likely that one of the consequences of verti- cal integration would be the elimination of these local ex-urban and rural dealerships in favor of amalgamation into larger urban markets. Historical precedent would imply that while rural dealers are quite capable of being self-sufficient, as they are today, this would change if they were to become just a small part of a larger corporation. There would be increased pressure on margins, substantively higher requirements for return on investments, and higher overhead costs. * * * * * As the foregoing demonstrates, there are several strong policy reasons that warrant restricting direct manufacturer-to-consumer sales in the auto retailing marketplace. Accordingly, far from be- ing absent, the “supportable public policy considerations” that you acknowledge would justify regulation of factory direct sales are very much present in force. Consequently, a state legislature that opts to limit or prohibit vertical integration of this distribution channel would be well within the exercise of prudent judgment. C. The public policy justifications for prohibiting direct factory sales are even stronger when a manufacturer has an established independent franchised dealer network. What is particularly problematic about your writings is that you have called not only for the elimination of franchise laws that prohibit or restrict companies like Tesla (which do not have an existing dealer network) from selling directly to consumers, but also for the repeal of state laws that prohibit manufacturers that have such networks from unfairly competing with their dealers through the establishment of factory-owned stores. Of course, all of the analysis contained in the previous section applies with 30 Tesla Motors Annual Report, form 10-k, filed Feb. 26, 2014, at page 11.