Who’s Afraid Of Direct Sales?

This is how you don't change a business... (courtesy: Opensecrets.org)

This is how you don’t change a business… (courtesy: Opensecrets.org)

In my most recent post at Bloomberg View, I draw a connection between Michigan’s new law blocking Tesla’s direct-sales model and the interests of the automakers based there. General Motors has taken the lead among Michigan’s automakers in opposing Tesla’s state-by-state battle for direct sales, publicly pushing Governors to protect the franchise system in Ohio and now in Michigan. In both cases, GM positioned itself as defender of “an even playing field” in the car business rather than arguing against direct sales or defending the franchise model. As I point out in the column, this is nothing short of absurd: GM’s extraordinary bailout make it the auto industry’s least-qualified advocate for fair play. But it’s also strangely telling: GM may not want Tesla to sell directly to consumers in states where it has a franchise dealer network, but it is hardly settled on the issue of direct sales themselves.

After all, GM was leading the push for direct sales back at the turn of the Millenium, way back when Tesla was still just an AC Propulsion project. In 1999 GM introduced its “e-GM” initiative, one of its regular “fix everything” efforts that focused on the then-hot “E-Commerce” trend. At the time, CNN reported:

This new e-GM unit will pull all of GM’s electronic business-to-business, business-to-consumer, and in-vehicle wireless and Web-based service initiatives together under a single chain of command that will extend to the top of the global organization.

Clearly, GM’s goal is to offer more of its dozens of car models directly to thousands of end-users anywhere across the globe via a single Web transaction. Then GM will swell that customer relationship to include wireless Internet services through the life of the car, making GM an Internet service and application provider.

That’s right, GM planned on reinventing itself for the new millennium by moving towards direct sales. At one point, GM even told the press that 80% of its customers would be able to buy cars online by 2003. Fifteen years later GM is starting to become an internet provider of sorts with its (in my opinion, ill-fated)  in-car 4G hotspots, but it seems to have made a complete about-face on the direct sales issue. So what the hell happened?

To some extent, this is the story of GM itself: the automakers history is littered with overambitious reinventions that fell victim to its change-resistant bureaucracy. From Saturn to the bailout, GM has squandered so many opportunities for reinvention that it’s hard to tell which, if any, even had a chance of success. Was e-GM window dressing for naive investors, a cynical ploy to cash in on the dot com boom, or a genuine re-imagining of an industrial giant that fell victim to some of the most notorious institutional inertia in American business? With the executive in charge of e-GM (Mark Hogan) now on the board at Toyota, it’s unlikely that we’ll hear the inside story any time soon.

It’s clear, however, that GM’s move towards direct sales was more than mere rhetoric. As now Nissan-Renault Alliance communications boss Rachel Konrad reported for CNET back in 2000, GM introduced a program in Brazil that offered consumers a 6% discount for purchasing Chevrolet Celta subcompacts directly from the factory. By 2001, Hogan was bragging that GM had sold over 25,000 vehicles directly to consumers in Brazil, the UK and Taiwan, with plans to offer the model to German Opel buyers as well. Clearly GM’s push towards direct sales was not purely rhetorical.

So why did it fall apart? Hogan foresaw the two biggest problems with pushing direct sales into the US market: consumer habit and dealers. As one of the most expensive purchases a consumer ever makes, there has long been a school of thought that says car purchases are too important for consumers to make online… and these voices were loudest as the dot com bubble burst. Hogan acknowledged this criticism in a 2001 speech, but argued “online auto retailing is evolving, not dissolving – and just as GM has learned about innovation, we have to accept that we won’t get our e-business initiatives 100-percent right the first time.” This evolution has been slow but steady, and if GM had stuck with its push towards direct sales it might be a very different company.

The other obstacle, the parochial resistance of dealers to the new model, proved to be the more intractable foe. Hogan acknowledged that “Our dealers have a lot of influence. They are among the most important businesses in the community. They have a lot of influence in the political process, and the outgrowth of franchise laws is certainly part of that whole tapestry.” GM’s overseas experiments were like catnip for US dealers, who believed that GM would put them out of business while praising the franchise system, and complained accordingly. At the time, GM was worried about dealers opening low-cost online retail channels of their own and the standoff led to something of a détente. In the face of the infinite possibilities of web-based commerce, GM and its dealers decided to ignore the whole mess rather than go to war over how to divide the spoils of this new opportunity.

Lobbying on the federal level by the National Auto Dealers Association exploded from 1999 to 2002, as fears of direct sales shook the industry. As the dot com boom turned to bust, dealer lobbying leveled off before taking off radically in the leadup to the bailout of GM and Chrysler. NADA’s lobbying continued to grow as GM and Chrysler sought government aid, including a culling of their bloated dealer ranks. In overturning that cull with the help of legislators, dealers learned just how much power they are able to wield. That power was extended when dealers sought and received an exemption from CFPB regulation of auto credit. The slightly more than $60 million spent by dealers on lobbying and campaign contributions (on the federal level) has been well spent thus far, protecting as it does an industry that did more than $730 million in new-car sales last year.

If we accept that the politicization of auto dealers was a major factor in crushing any momentum there might have been to introduce direct car sales in the US, it is all the more unlikely that GM will go back to its e-GM strategy. Not because it doesn’t want direct sales in the US, but because it can’t afford to alienate its dealers. GM relies on its dealers to order more inventory than it can sell, the major factors behind its perennial inventory problems and resulting incentives and “red tag sales.” GM already has to work with Cadillac dealers to deal with the extreme inventory issues at that brand’s retailers, and GM pushed volume on its Chevy dealers this summer to make up for recall-battered retail sales. If any OEM is ill-positioned to take on the new car dealer franchise at this point, it’s probably GM. In fact, lobbying against Tesla is an easy way for GM to earn brownie points with its politically powerful “retail partners.”

This is Tesla’s predicament: rather than simply fighting dealers state-by-state, it has to take on automakers like GM as well. How different things might have been if GM had stuck with its own push into direct sales.