AT one time, showroom/service center combos were a very good thing for consumers. Consumers want to test drive many vehicles before they buy. They want to have a range of options on hand to chose from. After they buy, they want somewhere they can entrust their car to for repairs. In summary, the type of role the dealership fills was and possibly still is an important role in the automotive market.

This is where dealerships came from. Manufacturers, especially when they were smaller, didn't want to deal with establishing such a presence in every town in America, so they left it to private business.

This brings us to the existing franchise laws. I'm told the rationale goes like this; if a manufacturer were to suddenly decide to sell its own vehicles and cut out the middleman, said middleman would be completely and utterly screwed for obvious reasons. The laws, thus, are a form of guarantee for the prospective middleman. He knows his extremely capitol-intensive venture cannot be toppled two years later when the manufacturer decides to sell direct. If such protections were not in place, (so the story goes) entrepreneurs would be hesitant to start a dealership, the absence of which would have been a negative for everybody.

Of course, a strong franchise contract with the manufacturer would have fixed this problem just as well (probably better) as legislation. And it would have only applied to parties who agreed to the terms.

Sure, there's a bunch of ways to do it. I'm not taking a position on the legislation, merely trying to answer my parent's question.

Here's the Planet Money episode that explains the history of these laws and why they are so hard to get rid of:

http://www.npr.org/blogs/money/2013/02/19/172402376/why-buyi...

There are historical reasons why the existence of dealerships would have helped the consumer -- via more showrooms, real estate, distribution, etc -- but I'm of the opinion that those times are past. Things like the internet have mostly made those requirements irrelevant, and dealers are more than capable of reaching out to most of the consumer base now.

Middle men don't like confronting their own mortality. If Tesla succeeds, they can't sink their fangs into the revenue stream. If Tesla really succeeds over a longer period of time, the other car makers might start getting ideas.

so how did it ever come to be where car manufacturers are required to sell through dealerships?

There's 2 reasons on top of the generic problems with vertical integration, at least that I know of. First, once an independent dealership opens, they're gonna forever be afraid that the manufacturer is going to cut off their supply and then open an official dealership next door. It screws up the value equation for opening a dealership in that the small family owned business takes all the risk so the giant mega corp can swoop in and take all the profits once they finally show up (at least that's how you pitch it to the voters).

Second, dealerships make their money off of the maintenance as well as the sale. Allowing the manufacturer to dip into that maintenance revenue stream will create perverse incentives that hurt consumers.

The first one doesn't really apply, as Tesla has the capital to start all of the dealerships they need and that's basically what they want; they don't want 3rd party dealerships popping up at all. The second one applies to Tesla, but I don't think it really matters. They are The Experts in electric cars right now, so any significant maintenance will probably just get shipped back to their factory anyway.

Running a local car dealer takes a lot of capital investment to pay for inventory and trained personal. With the franchise law, the government is encouraging, and protecting, the local business's upfront investment. This creates revenue, employment, and consumer supply to a local area. If the manufacturers dictated the price, as apposed to suggesting it (MSRP), it could starve the dealers, eliminate consumer choice, and lower local government revenue. (Local, in this case, can be considered city, county, or state government)