Lucid Sues Texas Over Direct Sales Ban
Franchise dealer groups may be the second most powerful political force in America, second only to MAGA election deniers. According to Bloomberg, Lucid Group has filed suit in the US District Court for the Western District of Texas (Austin division) claiming the state’s rules on auto dealerships are a form “economic protectionism.” Monique Johnston, the director of the Motor Vehicle Division at the Texas Department of Motor Vehicles is named as the defendant in the suit
As with many other electric vehicle startups, the Newark, California-based company markets its vehicles online and through a network of stores that it owns. According to InsideEVs, Lucid argues that its direct sales and in-house and after sales services are so intertwined that using an independent franchised dealer would not be economically viable and would harm the business.
“That tight and fast feedback loop, and the benefits it brings to Lucid’s customers, would be impossible with third-party dealers interposed between Lucid and consumers,” according to the plaintiff’s statement seen by Bloomberg.
Tesla has been embroiled in similar legal skirmishes in several states. After more than three years of litigation against the state of Michigan, the parties came to an agreement that allows Tesla vehicles to be sold and serviced in that state. Yet, despite choosing Texas to be Tesla’s new corporate headquarters, it still has not won permission to sell its vehicles directly to consumers in the Lone Star State.
Lucid, which is 60% owned by the Saudi Sovereign Wealth Fund, is struggling to establish itself in the marketplace. While it says it booked orders for 37,000 cars in the second quarter, it only built 2,282 cars and delivered just 1,398 in the third quarter of this year. Its Lucid Air sells for more than $100,000 but the upcoming Air Pure costs “only” $87,400 and is scheduled to launch next week. To meet its 2022 goals, it must produce at least 2.300 vehicles in the fourth quarter, which is rapidly approaching the mid-way point.
The Takeaway
Dealer franchise laws came into effect more than 70 years ago as a response to gross abuses by manufacturers, who could withhold inventory from dealers who annoyed the home office. In some cases, a manufacturer would award a franchise to a different dealer next door or across the street. The original dealer would often be driven out of business as a result.
But like all good ideas, it grew into a monster that eats its own tail. Dealer groups now have enormous power over manufacturers and have cemented their position by donating generously and often to local and state politicians. It is checkbook democracy and its leaves many customers holding the short end of the stick. The loser in all this is the buying public, who get slapped around all the time by dealers with little recourse.
The ultimate factor in all this should be the Interstate Commerce Clause of the federal constitution, which makes federal law pre-eminent over state law, but there is little appetite for enforcing its provisions by federal courts these days in order to avoid revolts by the states.
Nevertheless, state franchise dealer laws fatten dealers’ profits while providing very few benefits to consumers. United Airlines doesn’t buy 787 Dreamliners through airplane dealers. They deal directly with manufacturers. Amazon sells over a million items online every day without using dealers. Online sales have taken off this century with no apparent negative impacts on consumers. In fact, feedback from customers makes sellers especially keen to keep their satisfaction ratings high. That’s where the competition between sellers comes in.
Dealer franchise laws are an anachronism left over from an earlier time. Today, their primary purpose is to fatten the bottom line of dealers. It’s time for them to be struck down. Maybe Lucid will strike the blow that destroys this archaic, anti-competitive business model. And not a moment too soon. Power to consumers. Right on!
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