Auto Dealers' Fight Against Tesla Stores: Elon Musk Weighs In

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Tesla Motors gallery in Houston Galleria, opened October 2011, with Model S on display

Tesla Motors gallery in Houston Galleria, opened October 2011, with Model S on display

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Tesla Motors is facing a formidable opponent it may not have sufficiently appreciated: the auto dealers of America, and their state associations.

Tesla, you may remember, is selling its electric cars online, not through franchised, independently owned dealers, and delivering them directly to buyers from the factory.

In doing so, Tesla Motors [NSDQ:TSLA] has removed the two parts of car shopping that customers clearly hate most: haggling and buying.

Its Tesla Stores, it says, are simply educational showrooms where no cars are actually sold.

Dealer groups--who view the approach as a dire threat--do not believe this, and they are both changing state laws and suing Tesla to prevent the company from opening its stores.

By the beginning of this month, Tesla faced lawsuits in four states over its stores.

Conciliatory, polite

On Monday, Tesla CEO Elon Musk weighed in, posting what was for him a relatively polite, conciliatory response to those challenges on the company website.

"In many respects," he wrote, "it would be easier to pursue the traditional franchise dealership model," which would save Tesla money and broaden its distribution much more quickly.

The problem, he argued, is that any conventional dealer has a fundamental conflict in explaining the advantages of battery electric cars when they rely on gasoline vehicles for the bulk of their sales and profits.

The 2012 Tesla Model S is so different from any other car, he said, that consumers require a great deal of education before they can even start to think about buying.

That's what the Tesla Stores do, he wrote: let the public learn about the Model S from product specialists--who are not on commission--and, critically, about electric cars in general.

'Revenge of the Electric Car' premiere: Elon Musk arrives in a Tesla Roadster

'Revenge of the Electric Car' premiere: Elon Musk arrives in a Tesla Roadster

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"Their goal and the sole metric of their success is to have you enjoy the experience of visiting so much that you look forward to returning again," Musk said.

Contrary to spirit of the law?

He acknowledged existing state laws and pledged that Tesla follows them. "We do not seek to change those rules," he wrote, "and we have taken great care not to act in a manner contrary to those rules."

In respect to two lawsuits filed against the company, he said Tesla believes they are "starkly contrary to the spirit and the letter of the law."

Musk noted that they were filed in one case by a Fisker dealer, and in the other, by "an auto group that has repeatedly demanded that it be granted a Tesla franchise."

He also noted that U.S.-style franchise laws do not exist elsewhere in the world, and described Tesla's plans for service facilities in some detail.

Laws in 48 states

In 48 states, according to the National Automobile Dealers Association (NADA), franchise laws forbid or severely restrict the ability of automakers to sell vehicles directly to the public.

Tesla Store - Portland OR

Tesla Store - Portland OR

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The specific wording of those laws varies from state to state, but most are based on the rationale that letting big automakers sell cars to customers would stifle competition.

And there's some history--from half a century ago--that supports the notion that franchised auto dealers may face unfair competition from factory stores selling the same cars.

Tesla Motors, of course, doesn't have a single franchised dealer.

It has only factory showrooms, and the only way to purchase a Tesla Model S is to order it online.

[UPDATE: Yesterday, NADA upped the ante. It said in an e-mailed statement it was seeking a meeting with the startup automaker to explore "serious concerns about Tesla's intentions."

Its chairman William Underriner told reporters the dealers' group "has 'a whole mess of lawyers in Washington' who work on state franchise laws," which presumably NADA could deploy in every state where Tesla has or seeks to open a store or service facility.]

Changing Colorado law

But dealers insist that Tesla's showroom workers are part of the sales process, even though they can't take money for cars.

They view that as a violation of state laws, and are fighting the company on several fronts.

In Colorado, for instance, the state dealer association got a bill passed in 2010 that amended the laws governing dealer operations and their business arrangements with automakers. 

The bill, which was signed on March 22, 2010 and took effect immediately, prohibited Tesla from opening any further stores in the state.

Tim W. Jackson, president, Colorado Automobile Dealers Association

Tim W. Jackson, president, Colorado Automobile Dealers Association

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As the association wrote in its 2010 End of Session Report:

An existing provision in Colorado law already prevented a manufacturer from operating a dealership so long as they were not [sic] franchised dealerships. This statue [sic] narrows provision [sic] so a manufacturer that has any dealerships in Colorado, whether franchised or not, is prohibited from operating a dealership.

A Tesla Store in Colorado had opened in 2009, spurred in part by interest in a then-active $42,000 tax credit for the purchase of a Tesla Roadster.

Asked for comment on the 2010 Colorado legislation, Tesla spokeswoman Shanna Hendriks said only:

Tesla’s business model was developed in the best interests of consumers and the advancement of electric vehicle technology. In doing so, we have worked closely with regulators to operate within compliance of all current state and municipal laws.

That's as close to a "no comment" as you'll get. Tesla currently has just one Colorado facility, in Lone Tree, south of Denver.

Dealerships: the best way to protect buyers

Two weeks ago, Tim Jackson, president of the Colorado Automobile Dealers Association, spoke at length with Green Car Reports on dealers' reasons for opposing the Tesla model and fighting its stores.

It's really, he explained, all about protecting consumers. He offered three different reasons for the group's action.


 
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