The Tesla Direct Sales vs. Franchised Dealership Battle Is Far From Resolution

Tesla

APR 10 2017 BY EVANNEX 15

Tesla Store

Typical Tesla Store

TESLA VS AUTO DEALERS: THE WAR DRAGS ON

Tesla has never felt it necessary to do things the traditional way. When it comes to marketing its vehicles, Tesla tends to take its cues not from industrial-age giants, but from other California-style internet-age companies. This has led to a war with entrenched interests – namely auto dealers, a powerful group both economically and politically. Like the culture wars over marijuana and LGBT rights, this technology war is being fought on a state-by-state basis.

*This article comes to us courtesy of Evannex (which also makes aftermarket Tesla accessories). Authored by Matt Pressman.

During the Roadster era, Tesla established a few stylish showrooms in trendy retail districts. However, it was only once Model S hit the market that auto dealers began to be concerned about this threat to the established order. Tesla’s direct sales model appeared to be illegal in several states, most of which have laws that prohibit automakers from owning dealerships.

Tesla Boutique

Model X at a Tesla Boutique

In September 2012, Tesla opened its 26th retail outlet near Boston. A legal challenge from the Massachusetts State Automobile Dealers Association was settled with an awkward compromise: Tesla was allowed to open the shop, but would not be allowed to actually sell any cars there. Later that year, dealer trade groups in New York and Massachusetts filed suit against Tesla, and the war was on.

Tesla has good reasons for not wanting to get involved with traditional auto dealers, as Elon Musk has explained:

“Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars. It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business. 
Automotive franchise laws were put in place decades ago to prevent a manufacturer from unfairly opening stores in direct competition with an existing franchise dealer that had already invested time, money and effort to open and promote their business. That would, of course, be wrong, but Tesla does not have this issue. We have granted no franchises anywhere in the world that will be harmed by us opening stores.”

Keep in mind that, despite some of the headlines, no one is trying to ban Tesla from selling vehicles. Customers in any state can order a car online, and have it delivered. The war is about whether Tesla can have stores and/or showrooms in a state, and whether sales staff can discuss prices and offer test drives, at those…er…facilities.

Tesla Retail Store

Tesla Retail Store, Brentwood, TN Retail Store (via Twitter @cfitzgibbon)

Over the past five years, lengthy and complex legal battles have been fought in Texas, Michigan, Minnesota, Pennsylvania, New Jersey, Ohio, Arizona and several other states. Tesla’s opponents are the various state auto dealers’ trade groups, which have plenty of influence in most state capitals and in Washington.

Not only do they generate jobs and tax revenue, but they have long been involved in the political process. Dealer groups have spent over $86 million on state election races across the US since 2003, the year of Tesla’s birth. In Washington, seven members of Congress are auto dealers, and the National Automobile Dealers Association has an annual lobbying budget of about $3 million.

In Tesla’s corner are not only advocates of new technology, but also free-market conservatives. Even Texas Governor Rick Perry has said that the rules against direct sales are a relic of the past, which may eventually be reversed. The International Center for Law and Economics, in an open letter to New Jersey Governor Chris Christie, which was signed by more than 70 economists and law professors, wrote:

“There is no justification on any rational economic or public policy grounds for such a restraint of commerce…It is protectionism for auto dealers, pure and simple.”

In 2013, a White House petition to allow Tesla to sell directly to consumers ultimately gathered some 138,469 signatures (of the 100,000 needed for a response). However, it was only a symbolic victory. The Obama administration responded that (full text here):

“We believe in the goal of improving consumer choice for American families, including more vehicles that provide savings at the pump for consumers. However, we understand that pre-empting current state laws on direct-to-consumer auto sales would require an act of Congress.”

We’re You Number 100,000?

The state-by-state battles rage on, and sometimes one side gains a victory, only to suffer a reverse in the next year’s legislative session. In states where Tesla’s efforts have been defeated, it can come back later for another try, as it is now doing in Texas. Lone Star State dealer associations have stymied Tesla’s attempts twice in the past, but the company has now doubled the size of its lobbying team and changed its tactics. The latest bill would allow any manufacturer to sell direct to customers.

“[The bill] will allow manufacturers of vehicles any weight, class, size or shape to sell direct to consumers. It’s a simple, free-market bill to allow that to happen,” said State Representative Jason Isaac, who filed the legislation. “I really believe in the next 10 to 20 years we are going to see a complete change in our transportation system, and the last thing I want is any barrier to that technology being available.”

A different philosophy is being pursued in Indiana, where the legislature is working on a new ban on direct vehicle sales by automakers. The Roads and Transportation committee approved an amendment to the bill that creates a special exception for Tesla.

“It’s very clear – it’s not ambiguous – no auto manufacturer may sell directly to the public,” said State Representative Ed Soliday, who introduced the bill. “We grandfathered in Tesla and any manufacturers of motor vehicles that registered before July 1st, 2015. We don’t think there are any other [manufacturers] out there, but this makes certain that we are only allowing this kind of sales with people that have demonstrated consumer service and accountability.”

A swanky Tesla boutique store

Tesla recently won another battle in Wyoming, where the Legislature has approved a bill that will allow direct sales to customers. The estimated 50 Tesla owners in the sparsely-populated state, which currently has no Tesla store or service center, face a long drive to Denver or Salt Lake City to have their vehicles serviced.

Following a strategy that has worked in the past, Tesla brought a Model S to Cheyenne and took legislators for test drives. The Dinosaurs of Detroit lobbyed against the bill, so far in vain. As the Casper Star Tribune reported, “the bill had detractors, including an organization that represents legacy carmakers [emphasis added], which argued the legislation creates unfair competition. SF57 puts other automakers at a disadvantage because they must continue following franchise code, with its strict dictates on how manufacturers and dealerships do business, said Dan Gage of the Washington-based Alliance of Automobile Manufacturers.”  The bill will now go to the Governor’s office, and Tesla is planning to open a service location in the state.

Meanwhile, a pitched battle is underway in Connecticut, where a bill that would allow direct sales of EVs has been introduced. The state’s Transportation Committee recently held its first hearing on the bill, and the usual pro and con arguments were eloquently stated.

“There are thousands of [Model 3] reservations in the state from consumers that want to buy this car when it goes into production,” said Tesla’s Deputy General Counsel Jonathan Chang in his hour-long testimony. “We want to be able to conduct those sales here in Connecticut, not have those sales go to New York or Massachusetts or some other neighboring state.”

The only opposition came from representatives of local dealers. Jason Vianese, General Manager of a local Chevrolet dealership, conceded that Tesla’s model may be more efficient. “Because they’re cutting out the dealerships and selling direct distribution, what could happen is they would have lower expense structure.” Vianese believes the Chevy Bolt can compete against Model 3, but only through the third-party dealership model. However, a study by the Sierra Club (see below) demonstrates that electric vehicle shopping at Chevy dealerships is not as positive an experience as at Tesla stores.

Tesla

Sierra Club’s Report on electric vehicle shopping found that Tesla stores provided a far more positive experience compared to franchise dealerships from the other automakers (Source: Sierra Club)

Chang also suggested that, when it comes to electric vehicles, dealers “are not doing their job.” Tesla has two models available, and no store in the state, whereas the dozens of dealerships in Connecticut have 33 different plug-in models on offer. And yet Teslas make up about two thirds of the 2,000 or so electric vehicles in Connecticut. This is the third time such a bill has been proposed in Connecticut.

So, what is the current state of play? It’s tough to say exactly. In many states, existing laws were vague, and both pro- and anti-Tesla bills have been filed to clarify the situation. These bills typically take months or years to make their ways through the legislative process, and are then subject to challenges in the courts.

At the moment, the US map is a patchwork, both in terms of what Tesla is allowed to do and in terms of the legal justification for it. In Massachusetts and New York, where the war began, state courts have ruled that dealer franchise laws do not apply to Tesla stores. Other states, including New Hampshire and Maryland, have enacted laws to specifically permit Tesla stores. Some states, including Virginia, New Jersey and Indiana, allow a limited number of Tesla stores.

According to Daniel Gatti of the Union of Concerned Scientists, states that currently ban Tesla stores include Texas, Michigan, West Virginia, Utah and Arizona, in addition to Connecticut.

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Source: Teslarati, Electrek, Union of Concerned Scientists

*Editor’s Note: EVANNEX, which also sells aftermarket gear for Teslas, has kindly allowed us to share some of its content with our readers. Our thanks go out to EVANNEX, Check out the site here.

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15 Comments on "The Tesla Direct Sales vs. Franchised Dealership Battle Is Far From Resolution"

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(⌐■_■) Trollnonymous

Stupid NADA.

Trying to hold onto the Dinosaur ways in an ever evolving world.
I hope they go the way of the Dinosaurs.

I’ll vote with my wallet.
Knowing NADA and the big legacy manufactures fight against CARB/EPA (Legacy manufacturers) and the Tesla Sales model (NADA), I’ll buy from Tesla.

My next 2 cars will be Tesla’s, no more ICE!

TomArt

I’ve been of the same opinion as Musk’s statement above. The laws were there for a specific, and arguably valid, reason. They should stay there, for that reason, as well. However, the laws should be stated (as some were, but were then changed) where OEMs that never had any sort of 3rd-party dealership may sell direct.

I wonder if NADA thinks that OEMs entering the US market (like Chinese companies, eventually) would be able to take advantage of that provision?

I doubt that the existing OEMs could get around such laws by creating subsidiaries and re-branding everything. Probably not worth the mess.

Pushmi-Pullyu

“I wonder if NADA thinks that OEMs entering the US market (like Chinese companies, eventually) would be able to take advantage of that provision?”

Pretty much, yes. It’s not just Tesla. The dealership model is outdated, outmoded, and will soon be obsolete. It can’t compete with the more efficient economic model of direct sales, nor can traditional high-pressure salesman techniques win against a “no haggle” sales model that makes the buying experience significantly more pleasant for the customer. For all these reasons, it seems likely that most or all new auto makers will choose the direct sales model over the traditional dealership model.

NADA and the various Auto Dealership Associations in the States quite correctly see Tesla as an existential threat to their entire business model. Their misuse of various State laws protecting auto dealerships may prop up the outmoded, inefficient business model for a few years in some States, but in the long run it’s doomed to go the way of the dinosaurs.

Robert Weekley

And to think that one my Tesla Owning acquaintances suggested I not wait for my Model 3, but Lease a Bolt EV while I await the Tesla!!

Considering I had my first EV in 2006, as an EV Conversion that I bought, I think awaiting for the Model 3 to make it to Ontario, Canada, is the Wiser choice, plus, it may be available in AWD choices by then!

(⌐■_■) Trollnonymous

I’m in the same boat wanting the AWD.
I figure I’m far enough back in the list that they won’t get to me till the AWD is available……I hope!

speculawyer

You ever get the feeling that if Tesla manufactured specialty cars with V8 Hemis, this battle would have gone much differently?

Alonso Perez

Probably​ not. I don’t​ see how the dealers could ever be friendly to a precedent that cut them out of the business.

Roy_H

Tesla and fans should make it an election issue in states banning direct sales/service by forcing candidates to declare if they are in favor of consumer choice or state restriction of choice.

JIMJFOX

‘Free trade’- another myth.

Willyl

Don’t get this wrong, I’m a fan of Tesla but the only reason for not having a dealer network is to increase your profit margin on each sale by not having to sell at wholesale prices. Greed perhaps but with a new startup in competitive market it helps get the ball rolling

TomArt

And the fact that a dealership that sells EVs (and actually promotes them), is inherently shaming their ICE offerings. Plus, a dealership’s gravy train is service, and EVs don’t need as much service.

Besides, dealerships just add to the cost to the consumer for a new car.

It is difficult to imagine how the dealership model will survive in a pure EV market.

Karl Ermatinger

Willyl, without profit there is no business and Tesla wouldn’t have been created, so get over the “fake” greed and profit argument. I bought a Ford from a dealer two years ago and the experience was horrible in large part because of the disconnect between the dealer and Ford. Dealers are independently-owned businesses and the manufacturer has limited control over the process and they certainly don’t fully share information with each other. My car took 16 weeks to get delivered and the dealer was either clueless or intentionally ignorant of the process and information.

I think Elon and Tesla chose direct sales to maximize the selling experience. The above buying report proves that. I want a premium experience directly from the manufacturer and eliminate dealers who don’t know what’s going on and who promise things they can’t fulfill.

Pushmi-Pullyu

“…but the only reason for not having a dealer network is to increase your profit margin on each sale by not having to sell at wholesale prices. Greed perhaps…”

That’s rather a negative way to look at the situation.

A more positive way to look at the same thing is to say that cutting out the middleman of the dealership is one thing, perhaps the most important thing, that Tesla has been able to do which enables this small (but growing!) auto maker to successfully compete with much larger, much longer established auto makers.

Let us not forget that Tesla is the first American car maker to go public since the Ford Motor Company had its IPO in 1956. Succeeding in this market is very difficult indeed, and Tesla needs all the advantages it can get!

Dwayne

Utah’s governor just signed into law H.B. 369 which allows the direct sales model for EV in Utah.

Dwayne

Utah’s governor just signed into law H.B. 369 which allows the direct sales model for EVs.