The franchise system Tesla challenged
Tesla Motors is a startup automobile company that manufactures cars in Northern California. Its first model was a two-seat roadster priced over $100,000; a later sedan came in at roughly $70,000 or $80,000. The cars are all-electric, and Bob Zadek described the sedan as performing well and pleasing its buyers. He framed the subject explicitly as economics rather than automobiles: what interested him was how Tesla sells its product. Worst Ten Economic Mistakes of the 20th Century (2014)
The system Tesla ran into dates to the early auto industry. When General Motors, Ford, Chrysler and the dozens of other companies were created, they sold through dealers under franchise agreements that gave the manufacturer strict control over the franchisee’s conduct — hours, signage, and similar rules. Over time the franchisees accumulated political power: they collected sales tax, employed many people, sponsored Little League and other civic activities, and became favorites of local politicians and chambers of commerce. State legislatures then enacted laws protecting franchisees from manufacturers. Under those laws a manufacturer cannot terminate a franchise because the business decision makes no economic sense; termination is allowed only for cause. A franchise cannot be terminated even when the contract expires, so it can be passed to the owner’s children as part of an estate and functions as an asset. Worst Ten Economic Mistakes of the 20th Century (2014)
The result, in Zadek’s account, is a middleman interposed between manufacturer and buyer. He drew the comparison to computers: a buyer can go to Best Buy and choose among models from many manufacturers, but an Apple product must be bought at an Apple Store because Apple chose to sell direct. Ford is not allowed to sell direct, because state laws protective of franchisees forbid a manufacturer from doing so. There can be no Ford store owned by Ford. Zadek put the cost of the dealer layer at about $1,800 per car, or roughly $25 billion a year, describing it as a wealth transfer to car dealers. Worst Ten Economic Mistakes of the 20th Century (2014)
Tesla’s direct-sales model
Tesla’s approach was to follow the Apple model rather than the franchise model. The company wanted Tesla stores staffed by Tesla employees who would deal directly with customers, and it decided its employees would not be paid on commission, so that they would not be under pressure to sell. Their function, as Zadek described it, was to explain how a technologically different car works. Worst Ten Economic Mistakes of the 20th Century (2014)
A clip of Elon Musk, identified by Zadek as the founder and CEO of Tesla Motors, made the same point: the company trained people to educate rather than to sell, aiming at a low-key, friendly environment where employees are not constantly trying to close deals. Musk also said that if the public overwhelmingly favors something and legislators vote against the public interest, that is a perversion of democracy, and attributed the resistance to car dealers as large contributors to local political campaigns. Worst Ten Economic Mistakes of the 20th Century (2014)
Zadek played a clip of an auto dealer representative arguing that the state laws and extra costs are necessary to protect dealers’ investment in their businesses and in their people. Zadek characterized the position as dealers asking the legislature to protect them from competition. He noted that in polls ranking occupations the public does not trust, car salesmen rank at the bottom, below politicians, though he added that his own recent car purchase had been pleasant and that the show was not about whether dealers are good or bad people. Worst Ten Economic Mistakes of the 20th Century (2014)
Because Tesla will not have franchisees, its stores in states that forbid direct sales operate as a workaround. Tesla goes into a mall rather than an auto row, and the employee there explains the car and can arrange a test drive. When a customer decides to buy, the employee cannot take the order, because that would be selling; instead the customer is led to a computer terminal and buys the car online, as if from home. Worst Ten Economic Mistakes of the 20th Century (2014)
New Jersey and the political fight
The most recent event that brought the issue to Zadek’s attention was a fight in New Jersey involving Governor Christie. Tesla had been given temporary permission to operate a store in the mall on the model described, and was selling cars there. When the temporary license came up for renewal, automobile dealers pressured Christie, and the Motor Vehicle Department shut Tesla down, so that people in New Jersey could no longer buy Tesla cars. The matter went to the courts in New Jersey. Worst Ten Economic Mistakes of the 20th Century (2014)
Zadek noted the inversion of the usual political alignments: a Northern California capitalist shut down by an East Coast Republican. He also said General Motors was seeking political help, asking legislatures to require Tesla to sell through franchisees and thereby add $1,800 to the cost of a car in order to keep intermediaries alive. He described the franchise system as a failed or outmoded economic model that government has no business protecting, invoking creative destruction, and argued that concern about who will repair a Tesla without dealers is a matter for Tesla and its buyers, not for public policy. Worst Ten Economic Mistakes of the 20th Century (2014)
Across episodes
The topic returns in the Derek Khanna episode, where the franchise system is treated as a barrier to entry rather than primarily as a price subsidy. Khanna said the last new entrant to the American car market before Tesla was Chrysler Motors in 1936, and that no successful new entrant in 75 years tells you something is wrong. Zadek agreed and extended the point: the real bar to entry is the established franchise system, not the cost of building a car, and he noted that Tesla in most states is denied the right to sell other than through a franchise dealer. He compared the arrangement to requiring Apple to sell only through Best Buy, and to Uber’s fight with taxi cartels in most American cities. Derek Khanna - What’s Stifling Innovation? (2014)
The later episode also supplies the frame the earlier one lacked. Khanna named the Silicon Valley term “permissionless innovation”: the idea that a person can build an app or website and launch it in the morning without asking anyone’s permission, hiring a lawyer to map the regulatory environment, or paying off a local council member. He contrasted that with creating a new car manufacturer in the United States, which he called the opposite of permissionless innovation, requiring a gaggle of lawyers before an engineer is even on the team. Zadek’s contribution in that episode was to connect the franchise barrier to occupational licensing, which he said had been the subject of many shows over six years, and to the argument that Republicans should support the right to earn an honest living without barriers. Derek Khanna - What’s Stifling Innovation? (2014)
What the sources do not cover
The excerpts do not state the outcome of the New Jersey litigation, nor any ruling in Tesla’s state-by-state challenges. They do not give the name of any bill, the text of any franchise statute, or the amendment or holding in any case. Tesla’s founding date, the date of the New Jersey shutdown, and the identity of the dealer representative in the clip are not supplied. The Khanna episode ends with the interview’s close, and the earlier episode breaks off as Zadek turns to foreign policy and the Ukraine crisis.