30% of a car’s price comes from the distribution model which Tesla is disrupting

Tesla @ Home

Car dealers are awful. It’s time to kill the dumb laws that keep them in business.
[Via Vox – All]

For the first time in my life, I bought a new car last week and it was an entirely crazy-making process.

Shopping for furniture or appliances or other consumer durables is pretty straightforward. You look up what items are for sale and what they cost, you decide what you’re interested in, and then you can pay. Sometimes the item you’re looking for isn’t in stock locally (this happened to me with a couch recently) so you’re told you’ll have to wait a few weeks for delivery.

With cars, though, everything is nuts. You need to go from dealer to dealer, each of whom has their own inventory. One guy only has blue paint. The other guy doesn’t have the blue paint, and also only has dark gray seats. And they each have their own fake sticker prices and complicated cash-back offers. It’s no wonder that 83 percent consumers say they would rather skip the haggling, and a third of people say doing taxes is less annoying than working with a car dealer.

But it’s not just the hassle. State bans on direct sales turn out to cost consumers an enormous amount of cash. It’s an enormous problem, and it warrants a federal solution.

Auto distribution is expensive

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Stacks and stacks of expensive inventory (Shutterstock)

Cars are the most expensive consumer product that the typical consumer buys. And while it may seem obvious that cars are expensive due to the material and labor required to build them, the logistics of distributing cars is actually a very expensive part of the process. Research by Eric Marti, Garth Saloner, and Michael Spence has concluded that as much as 30 percent of the cost of a car is the cost of distribution.

Along most aspects of the automobile value chain, manufacturers work hard to find less costly ways of producing automobiles. Initially these savings accrue to manufacturers in the form of higher profits. But as competition leads to the dissemination of new techniques, consumers win by getting cheaper or more advanced cars.

And yet there is little innovation in the distribution process, largely because distribution needs to be run through a dispersed network of dealerships. What’s visible about this to consumers is the limited choice and anachronistic haggling involved in the dealership model. The more economically savvy will note that for the dealerships to be profitable, consumers must be paying an extra, unnecessary markup.

But as Gerald Bodish wrote in a 2009 analysis from the US Department of Justice, the most expensive part of the whole process is hiding in plain sight — it’s the stockpiles of unsold vehicles sitting around on dealers’ lots. He observes that in late 2008, there was a staggering $100 billion worth of unsold dealer inventory, with an annual carrying cost of $890 million.

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$100 billion in unsold inventory! All to keep a model that everyone hates around. Tesla wants to sell cars a new way but many elected officials who are beholden to car dealers are making it illegal.

Authority trying to maintain power against distributed approaches.

Talk about regulatory capture. Good thing those buggy makers were not around to do the same thing.

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