Detroit Fights Innovation -- Again

What consumers want, they should get.

The U.S. auto industry is at it again, pushing elected officials to adopt policies that protect it from innovative new entrants to the marketplace. This time, the threat to the auto industry comes not from Japan but from Silicon Valley -- home of Elon Musk and his electric-car company, Tesla.

Michigan this week joined a growing list of states that have acted to restrict the sale of Teslas. Michigan's Republican governor, Rick Snyder, signed a bill banning auto manufacturers from selling directly to consumers, as Tesla's business model requires. Manufacturers must instead go through a middleman: dealerships.

Snyder argues that direct auto sales are already banned under Michigan law. Taking no chances, the state's lawmakers have now prohibited manufacturers from selling "any new motor vehicle directly to a retail customer other than through franchised dealers." Presumably they wanted to deprive state judges of wiggle room.

There's no good reason for government to grant exclusive selling rights to auto dealerships. So far, consumers have mostly shrugged at the bans, because Tesla is a niche product -- but that doesn't make the idea any less absurd. Imagine telling Apple it couldn't sell iPhones from its own stores.

Efforts to protect incumbents from competition have a lousy record -- especially in the auto industry. In the 1980s, Detroit's Big Three auto manufacturers persuaded Congress and the Ronald Reagan administration to restrict Japanese imports, which were eating into sales of domestic gas guzzlers. The policy raised prices for American consumers, slowed U.S. innovation, and hastened Detroit along the road to long-term decay, ending in the largest municipal bankruptcy in American history.

Snyder, who has won plaudits for his work to rescue Detroit from bankruptcy, says legislators should revisit the issue next year. Fat chance, given the industry's clout. As long as campaign donations and union endorsements matter in elections, the industry will have no shortage of friends in high places -- and Tesla will continue to fight an uphill battle.

Yet Tesla may not even be the industry's biggest concern. "Automakers and dealers worry that foreign automakers will enter the U.S. -- perhaps from China -- and set up operations that skirt franchise laws by having factory-owned stores," according to one industry analyst. "Existing automakers and their dealers fear that would put them at a competitive disadvantage and open the flood gates to even more such operations."

That's right: Sometimes, competition from newcomers does put incumbent firms at "a competitive disadvantage." It's a good thing. Tesla is the first company that is trying to knock down the dealers' monopoly on sales, but with luck, it won't be the last. Any industry that shelters behind government restrictions that hurt consumers is headed for decline and deserves to be.

--Editors: Francis Barry, Clive Crook.

To contact the editor on this story:
David Shipley at davidshipley@bloomberg.net