Tesla Battles With Dealers and State Legislatures

Direct Sales Model Seeks To Change Car-Buyer Experience

Tesla has set out from the beginning to challenge everything in the auto industry. Tesla’s CEO Elon Musk characterizes himself as an outsider selling a an electric car the auto industry has said it couldn’t build or sell and he set up a network of dealers and chargers all owned by his company. The vertical integration might be something a founding titan like Henry Ford might have appreciated, but it has run into problems in 21st century automotive retail business world.

The issue is state-by-state franchise laws, which set up the conditions for the retail sale of automobiles. They have a long history, rooted in protection for local businesses against potential predatory practices by the deeper pockets of a factory-owned store. Consumer protections are also a part of the franchise system, in theory guaranteeing local recourse for any issue a consumer might have with a product that could have been produced on the other side of the globe.

Tesla argues that the model, like the auto industry itself, is dated and not reflective of new world of electric cars and online ordering. In addition, Tesla says as a start-up it poses little threat to larger, established dealerships and as a purveyor of online pure electric cars, it needs factory control to ensure the educational message about this new technology is fully transmitted.

As Musk told the Automotive News recently, “We’re in a tough spot because I’m not fundamentally opposed to franchising, but I think it’s really difficult for a new company with a new technology to be franchised. It’s not possible to effectively sell a new technology like electric vehicles, for a dealer to do that, without undermining the story behind gasoline cars.”

He added that once Tesla sales reached a certain threshold, said five percent of new car sales, then he would be more comfortable moving to a franchise system. To that end Tesla has supported bills in several legislatures authorizing their direct-sales model with limited success. Musk has also said he might seek national legislation that would override state laws against direct vehicle sales by the factory.

Here’s the state-by-state status of Tesla’s efforts, as compiled by Automotive News:

• In California, its home state, Colorado, Virginia and new Hampshire Tesla factory dealerships operate without trouble.
• On the other end of the spectrum, in Arizona, Texas, Maryland, Massachusetts and, most recently, New Jersey, Tesla is banned from setting up dealerships, limited its presence or sued to get it booted out.

  

• In a slew of other states, Tesla’s model is being or has been challenged by legislation or regulation, including Washington, Minnesota, Ohio, New York and North Carolina.
• Tesla’s dealer status is less clear in several other states, including Oregon, Nevada, Missouri, Illinois, Indiana, Florida, Georgia and Pennsylvania.
• The remaining states (28 in all) don’t have Tesla dealerships yet.
• Of course, even without a dealership, you can arrange for the purchase of a Tesla online.

The most recent activity was in New Jersey, where the state’s motor vehicle commission ordered Tesla’s two stores in the state to close after a new rule on dealership licensing was adopted. Tesla claimed Gov. Chris Christies administration has promised to delay the regulation, which was favored by the New Jersey Coalition of Automotive Retailers. The governor’s office responded that it had indicated its position was that Tesla and the car dealers needed to find a legislative solution to the issue.

According to the National Automobile Dealers Association, 48 states have restrictions on factory-owned dealerships. In addition, Automotive News reports that NADA has said it would oppose any national legislation on the issue.

Meanwhile, Tesla is shifting some of its focus to selling the Model S in Europe and Asia while gearing up for sales of its second model, the SUV-like Model X, in the U.S.

Check out new contributor Spencer Blohm’s in-depth look at Tesla’s debacle in Texas here.

Photos by the manufacturer

Published March 15, 2014

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