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New York is considering legislation (S1763/A4614) that would remove the restriction on direct sales of electric vehicles. That is, if it can summon the political will to overcome the objection of America’s least-favorite interest group: car dealers.
New York still restricts direct sales from companies like Tesla, Rivian, and Lucid, despite passing the country’s most ambitious climate law two years ago and planned investment of $1 billion to encourage electric vehicle deployment over the next five years.
While these actions are important and necessary, New York may find it gets the biggest bang for its buck by following the lead of California, Massachusetts, Colorado, and Florida and allowing the companies currently selling 80% of America’s battery-electric vehicles to open dealerships in the state.
Dealerships vs. Tesla & Other EV Manufacturers — A Backstory
In order for all of the dots to be connected, you need to know the backstory behind the importance of what’s happening in New York right now.
The current legislation is trying to solve a problem created seven years ago when a group of car dealers worked to change existing state law to kick Tesla out of the state. The fledgling electric car company had opened five stores and had sold a modest total of 645 cars in the state by then. The dealers had first tried using lawyers — filing a lawsuit against the New York DMV for what it claimed was a violation of New York’s Franchised Dealer Act in granting Tesla its licenses.
That suit was dismissed by the New York Supreme Court, which, in its ruling, stated, “The Franchised Dealer Act regulates the relationship between a car company and its franchised dealers.” In hindsight, maybe the dealers should have known that from the title of the Act, but oh well.
Having failed in court, the dealers turned to lobbyists. While their original bill would have forced Tesla to close its five stores, a compromise allowed the five existing stores to remain open but closed the door to future stores owned by Tesla or any other electric vehicle manufacturer wishing to follow in its footsteps. Since then, Tesla has grown to over 10,000 annual sales in NY, and Rivian and Lucid have begun production of EVs that will hit the market this year.
Given New York’s landmark climate goals and billion-dollar investment in deploying electric vehicles, one wonders how it could justify maintaining a restriction on electric vehicle sales that has only been in place since 2014, the same year Governor Cuomo set a goal of 850,000 EVs on the road by 2025 and 2 million by 2030, ironically.
A quick search of New York’s lobbying disclosure site shows that car dealers spent $1,092,868 in lobbying in 2019–2020. They have a powerful PAC that allows them to, in their own words under a section of their website titled Halting Direct Sales, “continue to support and elect candidates for public office that are pro-business and pro-dealer, no matter their party affiliation.” This could explain why the legislation is held up in committee despite its endorsement by 114 environmental groups from every region of the state.
While money talks in the halls of Albany, the dealers are waging a different sort of battle in the court of public opinion. Their central claim in the media has been that franchised dealers provide important protections to consumers that are absent in the direct sales model. This is best articulated by Rochester Automobile Dealers Association President Brad McAreavy in a story yesterday from an upstate NBC affiliate.
Of direct sales, McAreavy says, “Tesla came to the market with that model. They thought they had a better way of doing business. It’s better for them, I suspect, financially, but it’s not better for consumers. To not have the dealer, the independent franchised dealer, in your corner, it’s going to hurt consumers. It doesn’t give them a protection that they currently enjoy today.”
One assumes that after making this point Mr. McAreavy needed to pause for laughter. The illusion presented by the dealership lobby — of the local dealer as an ally and protector of consumers — is so completely at odds with car dealers’ reputation in Americans’ collective psyche that it almost doesn’t need to be refuted. Rivian’s VP of Public Policy, James Chen, recently discussed this matter at length with CleanTechnica in a CleanTech Talk podcast. Have a listen:
Given the success the dealers have had with this talking point, despite how laughable it is, it deserves some attention. In short, the data tells a dramatically different story. To restate an earlier point, car dealers have been rated the least honest and ethical profession in America for four years running according to Gallup’s annual poll on the topic, and have earned the “Least Trustworthy” title more frequently than any other profession — over the last 35 years!
This speaks to the breadth and depth of the negative experiences Americans have had buying cars at franchised dealerships, and the horror stories they have no doubt heard from countless friends and family members. But going beyond that anecdotal evidence reveals a sales model that systematically fails to protect consumers in ways that give the lie to the New York auto dealers’ principal argument against allowing direct sales.
A recent illustrative example of this failure is a case brought less than a year ago by the FTC and the Bronx District Attorney against Bronx Honda, in which the dealer was found to have systematically discriminated against African-American and Hispanic car buyers. From the FTC’s press release on the settlement:
“According to the FTC’s complaint, the defendants told salespeople to charge higher financing markups and fees to African-American and Hispanic customers. The defendants told employees that these groups should be targeted due to their limited education, and not to attempt the same practices with non-Hispanic white consumers. According to the complaint, African-American and Hispanic customers paid more for financing than similarly situated non-Hispanic white consumers.”
The practice of marking up loan rates is nearly universal in the franchised dealer business, where more than half the gross profit from the new and used car departments comes from negotiations in the “Finance and Insurance” office. With many lenders competing for a loan, a dealer may choose the lender that gives the greatest leeway in marking up the interest rate, which can add thousands in pure margin to a deal.
Here is a concise summary of the practice from a Yale professor who has been examining this for three decades, and whose research has informed many successful settlements. In this case, Bronx Honda paid a $1.5 million fine to settle the case and is now prohibited from misrepresenting the cost to buy or finance a car. Unfortunately, this is far from an isolated example.
The Myth Of Consumer Protection Provided By Dealerships
Although some may buy the illusion of the protective dealership, most people would find it laughable. In fact, dealerships protect their customers about as well as burning buildings do. A simple Google search will show exactly what I mean here.
According to HG.org, most types of fraudulent activities that take place in auto dealerships include withholding information that affects the value of a vehicle, such as whether or not it was involved in a collision, had any other type of damage, or has an expired warranty.
In another type of common dealership fraud known as affirmative misrepresentation, auto dealer salespeople may tamper with the odometer, use bait-and-switch advertising, and promise that the vehicle has options or features that it actually doesn’t have. In other cases, dealers have been known to lie to customers about a car being new when it’s actually used or falsely label the vehicle as pre-owned when the manufacturer made no such endorsement.
How is lying to customers “consumer protection?” The answer: it’s not. The idea is a myth. For the past four years, car salespeople have been rated as least trustworthy in Gallup’s annual poll on honesty/ethics in professions. The question that is asked is, “Please tell me how you would rate the honesty and ethical standards of people in these different fields — very high, high, average, low, or very low?”
The National Consumer Law Center, widely known as the premier consumer protection group in the United States, has produced several reports and co-litigated numerous class-action lawsuits in recent years focused on dealer interest rate markups and their disproportionate impacts on people of color buying cars. These lawsuits resulted in settlement agreements between 2003 and 2007 with Toyota, Daimler, Chrysler, Ford, GM, Nissan, and Honda, with each paying millions in fines and agreeing to limit discretionary rate markups for five years.
According to data obtained in those lawsuits, “dealers were twice as likely to add a markup to loans to African-Americans than to loans taken out by comparable white borrowers.” And when both were marked up, African-Americans paid significantly more. The data from this study casts New York car dealers in a particularly harsh light. Interest rates at New York dealerships were 311% higher for Black customers than for White customers. Only three other states showed a greater disparity than New York.
In the neighboring state of Connecticut, itself the subject of a battle between car dealers and environmental groups over a similar direct sales bill, interest rate markups were 279% higher for Black customers than for White customers.
NCLC’s 2019 report Time to Stop Racing Cars: The Role of Race and Ethnicity in Buying and Using a Car notes that these practices continued immediately upon the expiration of the last of those settlement agreements in 2012, and GM, Honda, and Toyota began settling cases based on new charges starting the following year, this time from CFPB and DOJ after those agencies found that 235,000 minority customers had been charged significantly higher interest rates in loans arranged by dealers between 2011 and 2013.
When the Obama CFPB sought to create permanent regulations banning this practice, the National Automobile Dealers Association made it a top priority to roll them back, and succeeded under the Trump administration. Even though NADA has a page dedicated to arguing that this problem doesn’t exist, it continues to be documented by consumer organizations like Consumer Reports, the Center for Responsible Lending, NCLC, and the Fair Housing Alliance.
Recently, New York’s Attorney General joined 32 states and the District of Columbia in pursuing a $550 million settlement with the nation’s largest subprime auto financing company for, among other things, “turning a blind eye to dealer abuse and failing to meaningfully monitor dealer behavior” in marking up interest rates offered to vulnerable customers.
These adverse outcomes are not limited to interest rate markups. In a sales process in which pricing on everything is discretionary, from the price of a car to a loan rate to the cost of service contracts and other add-ons, car dealers are remarkably consistent when choosing which customers to squeeze the hardest in each of those negotiations. A 2003 analysis cited in NCLC’s 2017 report Auto Add-Ons: How Dealer Discretion Drives Excessive, Inconsistent, and Discriminatory Pricing studied over half a million car purchases at over 3,500 dealerships and found that among in-person car buyers, Black and Hispanic customers paid significantly more in purchase price than White customers.
“Black and Hispanic customers paid significantly more in purchase price than White customers.”
For service contracts, which represent over a quarter of the gross profit from the vehicle sales departments of a typical dealership, the average markup was significantly higher for Hispanics than for non-Hispanics in 14 states, two of which were New York and Connecticut. It is important to note here that service contracts were marked up to an egregious degree across all customers in the study, regardless of race, with an average profit margin of 83%.
How This Relates To Direct Sales
So, how does all of this relate to direct sales, other than by demonstrating the absurdity of the auto dealers’ argument against it? The connection is perhaps best made by the FTC in a statement made almost exactly seven years ago, ironically about a month after the dealers had succeeded in changing New York law to block Tesla. It summarized the issue well, while also providing some insight into how a more competitive marketplace can benefit consumers:
“When the automobile industry was in its infancy, auto manufacturers recruited independent, locally owned dealers to reach consumers in localities across the country. State laws progressively embraced wide-ranging protections for these dealers due to a perceived imbalance of power between the typically small local dealers and major national manufacturers. Dealers persuaded lawmakers that they needed protections from abusive practices by manufacturers. Federal laws, too, developed to protect auto dealers from abuse.
“These protections expanded until in many states they included outright bans on the sale of new cars by anyone other than a dealer—specifically, an auto manufacturer. Instead of ‘protecting,’ these state laws became ‘protectionist,’ perpetuating one way of selling cars—the independent car dealer. Such blanket bans are an anomaly in the broader economy, where most manufacturers compete to respond to consumer needs by choosing from among direct sales to consumers, reliance on independent dealers, or some combination of the two.
“We have consistently urged legislators and regulators to consider the potential harmful consequences this can have for competition and consumers. How manufacturers choose to supply their products and services to consumers is just as much a function of competition as what they sell—and competition ultimately provides the best protections for consumers and the best chances for new businesses to develop and succeed.”
In many places, there is only one way of selling cars — through the franchised dealer model. Tesla has chosen a different way to sell cars — one that offers transparent, uniform prices and doesn’t have to add points to an interest rate between a lender and the borrower in order to generate a profit. People like buying cars this way, as is evidenced by Tesla’s #1 ranking in the Consumer Reports customer satisfaction poll for the last four years.
Tesla’s success in popularizing electric vehicles has been achieved by building compelling cars that people want to buy and finding innovative, simple ways to sell them. And just as Tesla’s success in building compelling cars has played an important role in pushing the broader car industry toward electrification, alongside many other efforts — including those by elected officials and environmental advocates to pass laws like New York’s climate law and 2035 ZEV mandate — so can its success in finding a new way to sell them play an important role in pushing the broader industry toward a sales process that doesn’t leave people feeling as if they’ve been taken advantage of, ripped off, and discriminated against.
The Climate and Community Leadership Protection Act (CLCPA), as New York’s climate law is known, includes a mandate from the legislature to state agencies to consider equity outcomes as well as climate outcomes when evaluating agency decisions in pursuit of the law’s emission reduction targets. As the legislature considers the direct sales legislation now before them, there is hope that they will apply the same consideration and find that maintaining this protectionist policy fails both tests.
New York’s energy future is hanging in the balance and the bill is what could unlock that green future if it’s made into law. The bill would enable EV manufacturers to sell directly to consumers and increase the accessibility of EVs while allowing all New Yorkers to join the EV revolution.
The website EV Freedom NY noted that New York will not be able to build its clean-energy economy or achieve its goals unless it changes the way it operates and overhauls the outdated rules that protect the fossil fuel industry. The market needs to be opened for EV manufacturers to address climate change and meet the state’s environmental goals. On that, a total of 114 environmental groups agree.
The State of New York has a goal to encourage 2 million people to adopt zero-emissions vehicles by 2030. If the state’s citizens are blocked from making purchases by outdated rules that favor the dealerships, there is a chance the state will fail at meeting its goals.
Although the EV market in New York has flourished along with the state’s climate policies and goals, New York has a long road ahead. What would help accelerate its growth is the passing of legislation that would remove the sales location cap and ensure that all of the state’s citizens have access to this new technology, thereby enabling the state to achieve its clean energy goals.
How You Can Help
If you live in New York and you want your state to pass legislation that would support clean energy and electric vehicles, then EV Freedom NY has a way for you to do this. It encourages you to contact your legislators, which you can do quickly and easily through their website — just click here.
Your voice counts. If I was in New York, I’d add mine to that list.
All images designed by Johnna Crider.
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