Christie and Tesla

Christie and Tesla

Gingrich Productions
March 12, 2014
Newt Gingrich

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In New Jersey, Apple can sell its iPhones directly to customers in its Apple stores. The Gap can sell its blue jeans in every mall. And Starbucks can sell its coffee on every street corner.

But one innovative car company learned yesterday that the state will prohibit it from selling its cars to New Jerseyans in either of its two showrooms there.

The Garden State had been fertile territory for Tesla, the high-end automotive startup that makes the all-electric Model S (which Consumer Reports recently rated the best overall car, period). But the company is crashing up against century-old state laws that require cars to be sold through franchised dealerships like the big manufacturers use.

This is a vivid example of how prison guards of the past use government, bureaucracy, and lobbying to insulate themselves artificially from their competition. In states like New Jersey, you can buy almost anything over the Internet: wedding rings, art worth more than the average home, historic artifacts, and massive industrial equipment. But you can’t buy a new car from anybody but the dealer.

There is no rational justification for the state to intervene and impose an obsolete business model on a 21st century startup. But the car dealers want to co-opt the law to protect their profits.

A recent Wall Street Journal report made the prison guards’ case for their protection racket loud and clear.

“The focus of the power struggle between [Tesla] and auto dealers is a thicket of state franchise laws, many of which go back to the auto industry’s earliest days when industry pioneer Henry Ford began turning to eager entrepreneurs to help sell his Model T,” it said.

“Dealers say laws passed over the decades to prevent car makers from selling directly to consumers are justified,” it continued, “because without them auto makers could use their economic clout to sell vehicles for less than their independent franchisees.”

So the dealers’ actual argument is that without the restrictions, cars would be substantially less expensive for consumers, because they wouldn’t need to pay the middle man anymore.

How much less expensive might they be? In 2000, an in-depth analysis by Goldman Sachs concluded that selling cars directly to consumers would knock nearly 10 percent off the cost of an average car–a savings of $2,225 for a $26,000 vehicle. Others peg the cost of distribution through dealerships as up to 15 percent of the vehicles’ price.

You can understand why the dealers would want to protect that system, but why would consumers? And just as importantly, why would voters? Why would they tolerate their government deliberately protecting the past and blocking the future–at the public’s expense?

It’s not just New Jersey where Tesla is clashing with the prison guards. The company’s business model is explicitly banned in Texas and Arizona, too. And Tesla is fighting assaults from the dealers in a number of other states, including North Carolina and Virginia.

As I describe in my new book, Breakout, Tesla’s battle is part of a much larger pattern of innovators being forced to fight costly legal and political battles merely for the chance to compete with the large incumbents, who have usually fixed the regulatory system in their own favor. Tesla joins Uber (which I wrote about in another newsletter) as a test case of whether pioneers with new models to provide better quality at lower cost can overcome our entrenched transportation bureaucracies.

In New Jersey, Governor Chris Christie now faces an important choice about whether to passively defend the past or to actively fight for the future. Every concerned American should ask him to advocate for greater freedom and more innovation.

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