June 17, 2021

Gp Delivers

The excellent automotive artisans

Why Illinois Car Dealers Are Suing Rivian, Secretary Of State To Stop Direct-To-Consumer Sales

The Illinois car dealer lawsuit against electric automaker Rivian is the latest chapter in a nationwide debate over the options consumers have to buy cars.

Many states, including Illinois, have laws to restrict new car sales to independent dealers. University of Michigan law professor Daniel Crane said those are a product of the days the Big Three manufacturers Ford, General Motors and Chrysler dominated car sales, as opposed to the variety of automakers that exist now.

“They had disproportionate bargaining power vis-a-vis their franchise dealers,” said Crane. “You had just the Big Three, dealers were mostly mom and pop organizations, and the argument that dealers made was that the Big Three were taking unfair advantage of them.”

Dealerships aren’t necessarily mom and pop businesses anymore. According to the National Automobile Dealers Association, the average new car dealer in Illinois made close to $49 million in sales last year. That’s before taking services and parts into account.

Why electric automakers go direct

Crane said the dealer model in place now doesn’t work for electric automakers like Tesla and Rivian, because dealers make much of their profit servicing cars. Crane said service on electric vehicles works in a very different way.

“There are no oil changes, there are fewer moving parts, there are no tuneups, lots of the servicing or updates is done over the air by the manufacturer,” said Crane. “This model of ‘make the money on service’ just does not work for the dealers.”

And Crane said the nature of dealer car sales doesn’t work with what EV manufacturers need to do to sell their cars. 

“Most consumers are just learning about this new technology, they’re not gonna make a split decision,” said Crane. “That takes lots of patient education of the customer to get them ready for the decision to switch from internal combustion to electric vehicles.”

Crane said the shift to online sales during the pandemic has raised questions about the necessity of the dealer model.

“People feel a lot more control when they can make a decision online in the comfort of their own home,” said Crane. “Once you’re talking about buying a car online, people start asking, ‘Well, why do I need to go to a dealer?'”

But he added that doesn’t mean that dealers can’t exist in conjunction with company-owned outlets for certain automakers.

“The dealers need to find ways that they can add value in a world where consumers have a lot more flexibility and manufacturers have more flexibility in how they buy or sell cars,” said Crane.

The road to Rivian direct sales

The controversy over direct-to-consumer sales started nearly a decade ago when Tesla announced plans to sell vehicles through company-owned stores and service centers.

For a time, the Illinois Secretary of State’s office said it wouldn’t renew Tesla’s dealer licenses because the company-owned showrooms broke state law. Eventually, Tesla reached a compromise with the Secretary of State and the auto dealers. That deal allowed Tesla to have up to 13 dealer licenses. The Secretary of State’s office assured dealers at the time it wouldn’t grant licenses to other manufacturers.

But Rivian’s entrance onto the scene has forced state agencies to take another look at the laws in place. Last July, an informal opinion from the Attorney General’s office said state law doesn’t explicitly require manufacturers to go through independent dealers to sell their vehicles. The Secretary of State office has subsequently stood by that opinion.

Pete Sander is president of the Illinois Automobile Dealers Association, which filed the lawsuit last month against Rivian.

“When there’s one manufacturer selling one car, there is no competition,” said Sander. “There’s no discounting of price, there’s no rebates, there’s a set price.”

Sander said the Secretary of State’s office has been inconsistent.

“We need to get some type of a determination on how to move forward,” said Sander. “I think the manufacturers need that, the dealers need that and the consumers need that as well as for their own protections.”

Sander said dealers have been embracing new technology such as electric vehicles, and he said they’re ready and willing to sell Rivian’s cars. He said the dealers protect consumers and bring jobs to their communities.

“That’s the importance of having a franchised dealer system out there, to protect not only consumers, but just to make sure that the vehicles are handled in a correct manner,” said Sander. “There’s so many protections built into the law when you get a license to sell in Illinois that those protections go away sometimes when manufacturers sell direct.”

Sander said changes to the laws in place to explicitly prohibit manufacturers from owning dealers “could happen somewhere down the road.”

What’s best for consumers?

Marina Lao is a professor of law at Seton Hall University in New Jersey who specializes in antitrust law. She formerly served as the director of the Office of Policy Planning at the Federal Trade Commission.

She said the auto dealer’s argument about protecting consumers doesn’t make sense.

“If you add a mandatory layer of costs between the manufacturer and the consumer, it probably will increase consumer prices, or at least I’m not sure that you can make an argument that it would reduce consumer prices,” said Lao.

She said the dealer system is an anomaly within the economy at large.

“Most of the time, manufacturers and suppliers in other industries make their own decisions on their distribution model based on their own business considerations, in response, of course, to consumer desires,” said Lao. 

But she said that doesn’t mean government intervention isn’t necessary.

“There may be specific policy objectives that our legislature believes warrants intervention,” said Lao. “I think if that’s the case, the restrictions should be no broader than is necessary to achieve those objectives.”

Lao said it would be better if manufacturers and customers alike can decide what approach works best.

“The fundamental principle of our laws, our competition laws, is that consumers should decide not only where they buy the cars, but how they buy it,” said Lao. “Consumers may well benefit from being able to buy the cars directly from the manufacturers.”

As for the lawsuit against Rivian, Lao said the outcome will depend on how judges read the law.

“If the statute is interpreted as saying that an auto manufacturer that uses the franchise system may only sell through its franchise dealers, then then the law wouldn’t apply to a Tesla, or to a Rivian, which never used the franchise system to begin with,” said Lao.

Rivian would not comment for this story. The company’s vice president of public policy James Chen has said in previous interviews the company has no intention of going to a franchise dealer system.

Rivian has a factory based in Normal. It’s planning to start production on its cars in June.

There’s no subscription fee to listen or read our stories. Everyone can access this essential public service thanks to community support. Help fund your public media with a contribution to WCBU or WGLT.