Auto Dealer Groups Escalate Battle Against Tesla Stores

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Auto Dealer Groups Escalate Battle Against Tesla Stores

Richard Read

3,349 views Oct 10, 2012

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Tesla's retail store concept

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If we had to pick one word to describe Tesla Motors, "audacious" would be at the top of the list.

Not only did founder Elon Musk decide to build a car company, which in itself is pretty gutsy. He chose to create a car company that builds nothing but electric cars -- pricey, high-end electric cars that hold their own against some of the best luxury models on the market.

Say what you will, the man knows how to make an entrance.

Then again, should we have expected any less from the guy who took on the banking industry by creating PayPal? The man who said, "Space travel? Oh, yeah, I can make that happen." Musk isn't known for going with the flow -- or for losing.

So it should be no surprise that Tesla Motors [NSDQ:TSLA] may be single-handedly changing the way that automakers sell cars. Nor should it be a surprise that the competition is miffed.

Showrooms vs. dealerships

Back in July, Bengt Halvorson attended the opening of Tesla's showroom in Portland, Oregon. He was lucky enough to speak with George Blankenship, the man behind Apple's hugely successful retail stores and Tesla's growing chain of showrooms.

Blankenship summed up what makes Tesla's sales approach so unusual: "The [traditional] model is that they do a bunch of research, hold a bunch of focus groups, and they decide that this is a car we should build; they design that car, they engineer it and manufacture it, and then they sell it to some dealer who then tries to sell it.... That’s just not how we’re doing it."

Instead, Tesla has created a new kind of showroom. So far, there are 17 of them scattered across 10 states and the District of Columbia. And like Apple stores, they're often found in shopping malls.

That's a great way to attract attention and to raise brand awareness, but it may not be such a great way to sell cars -- at least, not if Tesla wants to stay on the right side of the law.

Legal problems

The problem, according to the National Automobile Dealers Association, is that in 48 states, franchise laws forbid or severely restrict the ability of automakers to sell vehicles directly to the public. The content of those laws vary from state to state, but behind most of them is the rationale that allowing big automakers to operate their own retail outlets stifles competition. As a result, today's dealerships tend to be independently owned and operated.

And this is where Tesla finds itself in trouble, because Tesla showrooms are owned by Tesla. In fact, as AutoNews reported, in some cases, business documents even list Elon Musk as the showroom owner.

Blankenship insists that Tesla understands the nuances of these franchise laws and operates according to the restrictions of each state. In most places, for example, Tesla showrooms don't actually sell or even take reservations for vehicles. Instead, they share information about Tesla cars, then refer shoppers to the Tesla website, where they can customize and reserve a vehicle of their own.

Dealers think that's a load of semantic baloney. They insist that even though Tesla's showroom workers don't take money in exchange for vehicles, they're still part of the sales process. And that puts Tesla in violation of the law.

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Comments (27)

Mittar Khalsa Posted: 10/10/2012 11:53am PDT

Car dealerships can suck it. And the fact that they're crying about a boutique car company direct selling is ludicrous. They should be taking notes instead of fling lawsuits.

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Marlon Brown Posted: 10/10/2012 9:57pm PDT

Agreed. Congras to Tesla for this initiative. Dealer stores suck.

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John Briggs Posted: 10/10/2012 11:56am PDT

A very nicely written article with some great insight into Tesla's vision.

The complaint by the Automotive dealers is that they should be allowed to sell vehicles. However, it is not clear that they would be good at it. Look at all the problems Nissan is having selling the LEAF. Sure the car is part of the problem, but so is the fact that the dealers might rather sell something else.

In Tesla's case, they need to control the process, at least for now. Perhaps there needs to be an exemption for low volume car companies. I think it is fair for Tesla to control this process, at least for the next few years. This is such a specialized product, in needs a special sales process.

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Chris O Posted: 10/10/2012 1:35pm PDT

Agreed, this is a nicely written article explaining Tesla's vision and chances rather than just focussing on Tesla's problems which is the approach we have grown used to on this blog with too many articles reading as a Tesla death watch unfortunately.

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Jack Burgess Posted: 10/10/2012 12:53pm PDT

These laws are antiquated, protectionist, and now only serve as an arbitrary barrier to protect a special interest group -- the automobile dealers. Created prior to any Internet commerce, the laws no longer make sense in today's modern markets. They were originally enacted to foster competition. But over time as our modes of commerce have changed, these laws have come to do just the opposite. If we allow them to stay in place, they will continue to stifle true competition, thus harming market efficiencies and the productivity of the automobile industry as a whole. Today, we consumers end up paying a little bit more for our cars due to this now unwarranted protectionism. These laws should have been changed years ago.

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Xiaolong Li Posted: 10/10/2012 2:32pm PDT

Well said.

With internet and access of information, dealership has becoming the road block to fair competition.

In fact, in my experience with buying my Volt and trying out Leaf, I would say dealers are the reasons those cars aren't doing as well as they could....

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Marlon Brown Posted: 10/10/2012 9:57pm PDT

Oh Man, you bought yourself a Volt. Geeee... sell that and go Tesla.

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Xiaolong Li Posted: 10/11/2012 3:57pm PDT

I am waiting for the $30k Tesla. In the mean time, I am happy with my Volt (The fastest EV under $45K).

I can't afford a $100k Tesla. The $60K Tesla base can't meet my long range requirement. Volt meets my daily commute requirement without using any gas...

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CDspeed . Posted: 10/10/2012 2:13pm PDT

One thing you can't do at a Tesla store is pick a car out of an inventory and go home in your new car the same day. I'm getting tired of not finding what I want in stores and then having to go home and buy it on the Internet. Plus the few Tesla store employees I've dealt with should be working in electronics stores not selling luxury cars. But on the other hand Tesla is still very new as far as car brands go. And I think for Tesla the stores are a good way to make people aware of who they are. The only thing dealers need to learn is that customers hate overly aggressive sales people, cars are an expensive purchase people need a calm place to figure out what they want not a place that pushes them into a car and out the door.

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Anne vdbom Posted: 10/14/2012 4:27am PDT

"... pick a car out of an inventory and go home in your new car the same day. I'm getting tired of not finding what I want in stores and then having to go home and buy it on the Internet."

en then you say:

" cars are an expensive purchase people need a calm place to figure out what they want not a place that pushes them into a car and out the door. "

So all people except you need protection from buying a car in an impulse? ;)

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Jeff Hre Posted: 10/18/2012 3:20am PDT

"The only thing dealers need to learn is that customers hate overly aggressive sales people" OK, so maybe sometime in the next hundred years huh? Since it didn't work out that way in the first 100.

And if if frustrates you not to see the one product out of billions in the store that you want; stay home! Order it online, save some gas, create less traffic on the streets, make less pollution, have less stress. It'll be delivered right to you. Just the way Tesla does it, with exactly the options and colors you want.

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Yair Yépez Posted: 10/10/2012 2:24pm PDT

There it is!!!!"according to the National Automobile Dealers Association, is that in 48 states, franchise laws forbid or severely restrict the ability of automakers to sell vehicles directly to the public"..There is the solution!!! i am serious!!

To avoid any problem...then Tesla should not SELL vehicles to the public. Tesla should SELL the vehicle as a SERVICE to the public. Zipcar already proofs that the ownership of a car is avery bad idea. then Tesla can make money by following zipcar model. If Tesla offers me a "Tesla Membership" for lets say 700usd a month...and that entitles me to drive a Tesla (full time) for as long I pay my membership then Tesla can have my dollars for the next +40 years of life that I still have!!!

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Erik Roberts Posted: 10/11/2012 8:11am PDT

Yair, not a bad idea in addition to the purchase option. You should send it to Tesla and see what they think. Although I think they already have a waiting list of a few thousand paid reservation holders...so I don't think they are hurting for customers this year or next. Tesla is building as many S models as they can this year and probably at least the next two years just to fulfill customer demand.

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Jay Hollenkamp Posted: 10/11/2012 10:19am PDT

Good idea, but I doubt this would not work. It's a common tactic in other areas - avoiding calling it a sale by structuring a rent agreement that amounts to a sale. The UCC has provisions that cause such transactions to nonetheless be treated as a sale.

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Jeff Hre Posted: 10/18/2012 3:26am PDT

Yair Yépez, That is a good idea for business developers and finance companies that run those businesses. Although Tesla is a car company they could cooperate with folks that start such businesses. Certainly they would not choose for their entire business to rely on that one customer, and what would they do with the 13,000 pre-orders they have collected so far anyway?

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Yair Yépez Posted: 10/26/2012 10:45am PDT

Glad that others like you like the idea...However the point is for consumer to not own a Tesla but to always have access to it. Ownership is a liability for the buyer and the seller...buyer has to insure the car and seller must offer a warranty...this is the old 20th century model...the 21st century demands for access to services...People want to drive a Tesla not to own it...there is a big chance for Tesla to create a new economy based on services thatn struggling to change the old expired model...just like thay did when redesigning the car...they should redesign the car ownership concept.

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Martin Black Posted: 10/10/2012 7:20pm PDT

The oil companies are behind these lawsuits.

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robok2 Posted: 10/11/2012 9:22am PDT

Uh, no, they're not. Dealers see this as a possible end to their monopoly and livelihoods. They don't need the eternal fear of the oil companies to see the threat to what they do for a living. It doesn't mean I agree, but this has nothing to do with the oil companies. Telling car dealers we don't need you anymore is the whole deal and of course they will resist.

It wouldn't be that hard to modify the laws or Tesla to tweak its stores. Allowing a customer to order the vehicle on line inside the store, though, contradicts the "no sales" claim, and is just splitting hairs. Tesla can do this, but it will need to be careful and can't just ignore the laws, antiquated or not. The delaers have far more political power than Tesla does now.

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Jay Hollenkamp Posted: 10/11/2012 10:25am PDT

I wonder why Tesla can't simply contract with a separate showroom company. Just because they can't operate a show room themselves does not mean their only option is car dealerships. I really love the idea of a showroom and have said before that I believe all car companies should have them and still leave selling to the dealerships. I'm sure it's frustrating for Chevy to have the Volt sold by someone who knows little about the car and sells so few he has little incentive to learn. An "experience" type showroom like what Tesla is doing fits for other car companies as well, even if they still use dealerships.

If Tesla is not allowed to sell directly, why can they sell over the internet?

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Richard Read Posted: 10/11/2012 12:23pm PDT

Ooh, nice idea on the 3rd-party partnership. Best Buy is the company that immediately springs to mind, even though it's probably too downmarket for Tesla. Given the way Best Buy is courting EV shoppers, though, you never know: http://www.greencarreports.com/news/1053355_best-buy-adds-onstar-electric-car-chargers-are-cars-next

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robok2 Posted: 10/11/2012 1:01pm PDT

Jay, I'm not an attorney at all, but the whole "we don't sell cars, but you can order them yourself from a computer in our store" isn't likely to pass legal muster. Buying a car isn't just signing a contract, it's a whole process. But it's not that simple, of course, as different states have different laws.

Although Tesla believes that it can allow customers to buy cars through the internet through stores, many disagree and seem to have a point, at least in some states. Like others here, I think a little flexibility by Tesla can allow it to work around most issues, but I don't think the current stores will work in some states. This could be interesting.

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Brian Henderson Posted: 10/11/2012 2:29pm PDT

Remember few years back; these same Auto Dealership Associations fought to block new vehicle sales over the internet?

In unrelated news auto dealerships are wondering why the younger population is not coming into their dealerships! Today 43% under 30 use a tablet & >80% use a smartphone, however majority of dealerships rely on Flash sites (not viewable on mobile device) to view & configure a vehicle. Not to mention manufacture sites that require "enter your location/email" to get brochure with detailed specs!

Manufactures & dealers need to move to where their customers are, or they'll have pay to find customers.

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Jeff Hre Posted: 10/18/2012 3:33am PDT

They do pay to find customers. They even use a chunk of their budgets to pay for dealers to run retail sites dedicated to finding customers, and then dealers pay to hire salesmen to churn the customers that are found. Not sure how they could potentially pay more than that to find customers...

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Phillip Van Garrick Posted: 10/15/2012 9:18pm PDT

Legal problems

"The problem, according to the National Automobile Dealers Association, is that in 48 states, franchise laws forbid or severely restrict the ability of automakers to sell vehicles directly to the public. The content of those laws vary from state to state, but behind most of them is the rationale that allowing big automakers to operate their own retail outlets stifles competition. As a result, today's dealerships tend to be independently owned and operated. "
It's obvious that the dealers want to use a law intended to counter the stifling of competition, want to use them to stifle competition, and keep a superior product from the market place. Boo, Hiss!

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george kiekens Posted: 10/16/2012 12:42am PDT

What tesla is doing in those malls is simple advertising. I remember when the Hummer first came out, which is decidedly not electric, and they had a few Hummers with models and advertising and even sales people at Yorkdale Mall by 401 hwy in Toronto Ontario. Anyone wanting to see a gas guzzling Hummer just had to drive off the freeway and go ‘shopping’ at Yorkdale mall. It is an immense shopping plaza one of the biggest in Ontario, but no car sales are there. All the car sales, coincidently, are across the street from Yorkdale mall. The same thing happened when the first Lexus model came on the scene. In fact every new model of ford, GM, and all varied and sundry vehicle manufacturers all end up at Yorkdale Mall.

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george kiekens Posted: 10/16/2012 12:44am PDT

I have had 3 electric vehicles in china. Even though the officials don't understand them the people enjoy having the PWM high speed chargers to charge the electric bike in 10 minutes. very popular.

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Andrew Bell Posted: 10/18/2012 7:51am PDT

I am sure Mr. Musk has a good set of lawyers to put this to rest!

As a 'Tesla Virgin', in that I've never ever seen one in the flesh before, i'm excited to visit a Tesla Store in southern California during our x-mas vacation from Alberta!

Dodge phoned up the other week looking for more business. I told them that I am now enjoying my converted Prius PHEV with 100+mpg and will only buy electric in the future and wont see me on their lot until they can step up to the plate as they are so far behind already. The response on the phone was, "YOU GET MORE THAN 100MPG"?!?! Gawd that felt good! :)

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