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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Comments (51)
  1. Dealerships "protecting consumers"? Good reputation? Yeah right!

  2. Beat me to it.

    "It's really, he explained, all about protecting consumers."

    Yes, everyone I know leaves a dealership thinking, gee, that dealership is really interested in protecting me and my interests rather than their own interests.

    Large Animal Droppings.

  3. Good one John. "Large Animal Droppings". Dealers as consumer advocates, Excuse me while I chuckle. I remember when GM dealers franchises were being closed after the market collaspe in late 2008 and 2009. The Dealers were then active in countersuing and non of them mentioned at all that they are advocates of the consumer. They wanted their hands in the TARP funds too. Its amazing how NADA are going out and hiring some high priced Lawyers and are getting up in arms over a relatively minor automotive brand Tesla. They are doing what all will do in their situation. They are looking out for Number one. Hopefully this legal Gerrymandering will not cause Tesla too many Legal and Finacial problems since NADA seems determined to drag them into court

  4. While I'm the first one to admit that many auto dealers suck, the fact is dealers *do* protect consumers, at least indirectly.

    Consider this: If Ford or Toyota owned all of their dealers, do you think you'd ever be able to work one of the dealers against the other to get the lowest price? NO. If you want to buy a new Ford/Toyota/Nissan/whatever, you pay the price they tell you or you leave.

    Now imagine if all dealers were that way...would that be better? Maybe the service wouldn't suck so hard sometimes (*maybe*), but the pricing would undoubtedly be worse.

    One other thing: it's hard to get decent service at my local Sears or Best Buy, both of which are corporate owned. If these were locally owned, they might be more helpful.

  5. @Jason: Saturn customers didn't seem to mind not being able to play dealers off against one another. In fact, fixed pricing was reliably cited as one of the things their buyers loved most about the brand.

    Compare that to this:

  6. John, at this point I'd like to point out that Saturn a) no longer exists and b) their dealers weren't as faithful to the no haggle pricing as is commonly believed.

    Scion is a better example, but much like Saturn, they're a bit player. It's hard to scale that model to the entire industry and assume it will work well.

  7. Saturn's demise can hardly be seen as an indictment of it's business model. In fact it success was largely responsible for it. Most experts agree that it was a major missed opportunity fueled by the failure of GM to adapt to a changing market, too many bad decisions regarding GM's other brands that impacted the Saturn line, an adversarial relationship with the labor union who viewed the brand as the enemy and last but not least dealers of GM's other brands who resented the development dollars that were going into the brand. No, Saturn isn't around today not because it wasn't successful but because it was too successful. It rocked the boat and an industry who refuses to admit that they are operating under a severely flawed business model.

  8. Saturn was doing fine while they were operating independent of the other GM brands. A big part of what messed them up was that they started chasing other segments of the car market and ended up selling rebadged GM designs instead of unique products.

  9. @Jason: Boy, you kicked a hornet's nest. You have to understand most people on this website are not capitalist. They do not understand that dealers provide hundred of thousands of jobs and millions of dollars to local communities. They are use to the government providing hundreds of millions of tax payer money for 100's of jobs to "Green" companies. Good Luck.

  10. @Jason: I have a sneaking suspicion that you work for a dealership. We all know the #1 goal of a New car dealer is to extract the maximum amount of money out of our wallets before the greed sends us to the dealership's exit door! We all get that and it’s O.K. Greed has turned it into an ugly game. And that is O.K. too! To try and tell us that dealerships are in place to "protect us" is a little disingenuous!
    Let’s not lose sight of the real goal here. And that is to maximize the value of the dollar for all parties concerned. If a car dealership can add value to the "next / extra" dollar being spent… they will survive in a free market.

  11. Matt - My bio is readily available. A few years ago (7) I worked at a dealership, but today I do not.

    Perhaps the words "protect us" are inappropriate, but dealers do fill some sort of beneficial role in the industry. They can be played off one another for best pricing, they can be counted on to contribute to the local community (when was the last time a large manufacturer sponsored a local little league team?), and because they are locally owned and managed they're more efficient.

    As for your larger "it's all just economics" argument, that's only true if manufacturers create franchises. If they don't, dealers can exist.

    Finally, I would argue that - much like politics - consumers get the dealerships they deserve.

  12. The Apple Stores provide the best service in any industry. It's well beyond any other computer dealership. The pricing for all Apple products is the same at the store as it is at a Apple reseller. Car dealerships suck. They charge $80 to change a light bulb. Apple retail margins are only 11%. The relationship between the consumer, dealer and car company is so filled with bogus incentives that can they can offer $10,000 in rebates on a purchase, that is ridiculous. Obviously the car is not worth $40k it is only $30k. The dealer channel offers the car companies a buffer of bullish!t that leads them to implement these strategies. INstead of just making great products and selling them for a reasonable set price.

  13. I have to disagree with your contention that dealerships will provide a better price. There is a huge mark-up in all vehicles at the dealership level. They have to pay for their building, their staff, the commission to the sales force, a tidy profit to the dealership itself, interest on the loans for their inventory, property taxes, inventory taxes, etc. The fact that you can negotiate a much lower price from a dealership at times just shows the amazing markup they have in each vehicle. As to service, I would contend that if the service for Tesla's cars doesn't meet consumer requirements, than the company will fail. Lets not legislate higher prices by protecting a special interest group with a horrible reputation among consumers.

  14. There are more comments in this thread
  15. Greed. No other description necessary. Fight on Tesla.

  16. First they ignore you,
    then they ridicule you,
    then they fight you,

  17. then you win.

    Go Tesla!!

  18. Mr. Jackson is just doing his job protecting the bottom line for the traditional auto dealers. Tesla is trying to do a great thing by getting the middle-man out of the supply chain to bring us vehicles at a lower cost.

    Dealerships protecting consumers!? Please! Am I the only one that thinks this doesn't pass the smell test? This from the industry that sells you unnecessary warranties and special under-coatings.

    Traditional auto makers are just a bunch of hypocritical whiners, and are the true party guilty of anti-competitive practices. Our laws should not be protecting them at the consumer's expense.

  19. I love that NADA is maintaining that they are there to protect the consumer. That's analogous to saying we need to get rid of farmer markets and require all shopping be done at grocery stores, 'to protect the consumer'.

    We all know what NADA is protecting, and it's not the consumer. This is an association funded by dealerships, not funded by consumers. The arrogance of trying to tell us they are just watching out for our best interests is stunning.

  20. I really really hope Tesla will keep up and dealers won't succeede in this battle.
    Go Tesla!

  21. When it comes to petroleum, those conservative that says they hate big Government meddling in the "free market" and "too much regulations" are never voicing their voice! Never. Only too happy to defend big oil and trying to shutdown start-up companies trying to make the car of the future, a green car, today... hypocrites. Tesla Go, without you, Nissan Leaf and Chevy Volt would not have been developed and we would still continue to ear that the polluting Full Cell is "the only future".

  22. One of the best replies here...thank you

  23. You are so off the mark here. Tesla is a company that makes a great product for a market that can afford the premium price. It is not asking the government to help it. It's stock is shooting through the roof and it is on the road to being very profitable. I am a conservative and if I could afford one it would be in my driveway today.

    I support what they are doing and want the car dealerships to stop trying to kill their competition in the crib and back off.

  24. So one of their justifications is concern for how Tesla has chosen to invest its' money? I had to clean coffee off my computer screen after that one. It took "concern trolling" to new levels. At least it had entertainment value.

  25. In a similar way Better Place have found out that expecting the existing lease companies to sell an Electric car alongside their petrol ones doesn't work. Selling to the few private buyers, Better Place does well with its full time staff and sales office combined with visitor centre that does not sell any other model.

    In this Tesla are correct and it's a key problem for Nissan asking most dealers to sell a Leaf. Doubt many Leafs are sold, they are requested by determined customers.

  26. My experience completely matches yours.

    I visited many Nissan dealers early this year in the hope to find a discounted 2011 Leaf. Salesperson are between clueless and blatantly biased against this car. I was repeatedly offered "alternatives" (ICE), etc. Dreadful experience.

    Selling EVs (or supporting them in any way, by offering charging for example) is a direct conflict of interest for any dealership with a service department.

    Nissan will have to address this somehow.
    Avoiding the issue entirely is a very smart move for Tesla indeed.

  27. We went to multiple Chevy dealerships to purchase a Volt.(We were very clear on this point at all the dealerships!).. I was consistently steered away! They were more interested in trying to sell us a Malibu!

  28. There's a little back story there; there's likely an incentive to dump Malibu's because it was such an embarrassing failure. They shortened the wheelbase, took away trunk space to due to batteries AND other conventionally powered vehicles get equal or better gas mileage.

    Generally, the newest car in a class wins the Car and Driver "showdown". Well, the new Malibu actually did worse than the OLD Malibu, now GM is stuck with that design for the next 5 years. This is why we had to bail out GM; they have become more like a government run, inefficient albatross. There is NOTHING innovative at GM. I can't remember the last time I looked at a Chevy and thought, "Hey, that's a nice looking car". It's all about unions and money.

  29. Right now they are selling EV's at a lose which most likely means that they make very little commission on EV's. That is the sum total of why a commissioned sales person will steer you away from an EV.

  30. They should just leave the stores alone, as Elon points out there is a need to educate consumers on all things electric. But I do like the sales service found at dealerships. I have found that luxury car dealers tend to be less aggressive then say a Toyota dealer for example. I think the thing people hate the most are pushy salesman, which is a problem brought on by commission based sales. But on the other hand you'd think all consumers would want to be a little more car smart simply because of the huge amount of money cars cost so they can make a smart decision. I've also seen people almost punch service reps just because they want to get out of repair bills.

  31. But I don't think stores are the answer. The store can only point you to the Internet where you have no choice but to pay a set price the stores take away the ability to shop around. Plus they carry no inventory, so you can't pick a car, make a deal (hopefully), and then drive home in your new car the same day. And the store personnel can't sell you the one thing the store is all about, the car, so really they can only help you to a point. And older people who are not computer savvy will not want to go home and buy a car off their computer. Yes the entire system need an overhaul but I'm sure that stores and online sales are not the best way or they at least shouldn't be the only way.

  32. The answer to what? The debate here is whether or not stores should be "outlawed", not whether or not you personally like the idea. You still have the option of NOT buying a Tesla.

  33. If you notice most of the posted comments are about dealers. This story is about dealers going after Tesla and the legality of the Tesla Stores. So I can say what I think about the stores because at some point someone is going to be passing judgement on this situation and Tesla may have to close some of the stores. I'd like to see the stores survive because I agree with Elon Musk that education is needed to help consumers understand EVs. And I want a Model S the other options are only a backup plan if I decide that I'm sick of waiting for a Model S.

  34. P R Stunts are not geared up like that they are a lure for investors and buyers who will soon be left in the lurch, along with spacex, and solar city

  35. Dealers protecting consumers by adding their franchise markup.. hmmmmmmmmm.

  36. go tesla

  37. I bought a Tesla Model S and I prefer all the profits go to Tesla than sharing it with a dealer who has done nothing for EVs. Elon has risked HIS money and he should be allowed to choose how to risk it. The purchase process with Tesla was 100% better than buying from a dealer. GO TESLA!!!!!

  38. I have read a couple of posts defending the argument that competing dealerships allow you to shop around and get the best deal. Please keep in mind that these dealerships are purchasing from the same manufacturer and presumably have to pay the same price. All you are haggling over is the profit made by the dealership. You do not get the opportunity to get a discount from the manufacturer. If you buy direct from Tesla you likewise do not get an opportunity to haggle for a discount from the manufacturer.

    Tesla pricing is based on their costs, and desires to compete. They want to sell for enough profit, but at the same time have to sell low enough to gain market share. That is your bargaining point, think it is too pricey? Buy another brand.

  39. Yes but do you think one reson Tesla is doing this is to keep the Model S's price as low as possible? If you build out a car on a manufacturers website the price your given is the same as what you find at the dealer the MSRP on the car and options doesn't change. On the other hand I have seen dealers add things like pin stripes, door guards, and mud flaps to cars in their inventory and then posting a second price for the car not in keeping with the manufacturer. So yes some dealers try to rip you off. But like I've said if your going out to spend the kind of money it takes to buy a car it pays to be car smart. Know what you want and if you don't like the dealer or sales people simply leave and find one you can work with.

  40. 10 years, 4,000 so-called cars BRICKS, billions of money spirited away, in a NOT future world, claiming it produces and sells 500 cars a week, when in Nov. it was less than 100, It goes to show you that you can read anything n the internet, especially when a company spends more money on P R Stunts than engineering design, manufacturing, or service

  41. That is what I am forced to do, but another brand until Tesla comes up with a car with the range and the price low enough for us peons forget the bells and whistles....range and price.

  42. Very disappointed to see that NADA thinks were a bunch of morons who will buy this line. I could respect them more if they would just come out and say they were trying to squash a competing business model that threatens to replace the current one before it has a chance to get a foothold.

  43. The entire Tesla experience is one of creative disruption. Here's a company that has produced an amazing vehicle outside the confines of the big three automakers. They are building their own charging stations and will send a mechanic to your home or office. They don't need dealers to add an additional layer of overhead and profit. Next the gas stations will be screaming because Tesla has their own charging facilities.

    I say, "Go Tesla!" The auto industry needs competition.

  44. The existing franchise laws were clearly written to prevent the manufacturer from competing with it's own franchisees. Franchises are strictly regulated to prevent unfair competition, etc.

    This model is much more like the Apple business model; corporate-owned stores therefore no unfair competition. This is just a bunch of union-driven failures using strong-arm tactics to stifle competition. When it comes to GM, it's the only way they can win, they clearly don't know how to produce a competitive product or run a business.

  45. When one's product is well engineered , service is of little consequence. Right on, Mr Musk !

  46. The dealership laws are horribly archaic. The public can buy TVs from the corner department store... stoves, ovens, microwaves, etc. No dealership needed. Allowing the public more direct access to the product and less dealership BS is what WE the buyer wants...

    Of course, the guy who yells at you on TV about how this dealership or the next is willing to GIVE you a car... might need to look for a new job.

  47. Sears roebuck sold cars through their catalogue back in the fifties. It was a Kaiser Henry J that had Sears trim.

  48. Tesla has a great concept and car design. Note in the article, one of those protesting is a auto group that wanted a Tesla franchise, the other is Fisker, an electric/gas charger competitor to Tesla although Tesla is pure electric. I hope this lawsuit educates a lot of people and then the NADA is re-educated themselves when they lose in court. If there are no dealerships for the Tesla, how can the factory be in competition with dealerships that doesn't exist! That was the reason for the law, so it's irrelevant! Go Tesla! After a few years shakeout, I'll want one myself.

  49. tsla motors are not sellig or building 500 cars a week as elon claims, as his other ventures, Spacex, originator mueller with his merlin engine, tesla originator, eberhardt, solar city all are faced with government defunding, the phony IPO's will see americas taxpayers and investors fund elon bankruptcy expert proceedings, as the lies will be exposed and he will slink off into who knows, where unless he is connected to the world class mafia who will keep him around for show and further cons

  50. @Jackie: I see you have returned, as four anti-Tesla comments in a row showed up in our spam filtering system.

    It will help your case significantly if you provide backup for your opinions. News stories or government statements supporting the notion that the laundry list of companies above is "faced with government defunding" might be a good start, for instance.

  51. I missed "protecting customers" argument here.
    I read all the words here but wasn't convinced. Did Tim Jackson ever take debate in college? Do car dealership guys go to college? I though car dealership guys just want you to pay as much for your car and constant service as they can.

    They hope customers don't get screwed my the automakers. That's their turf!

    Does anyone feel "protected" by them? Just the opposite. I feel I better be on my guard when I'm at the car dealership or I'm definitely going to get screwed!

    I think this all has to do more with Elon saying that customers should not have to pay for servicing their cars.


    Good by $1200 water pump my sister-in-law had to pay for her Audi!

    Car dealers invented: "BUYER BEWARE!"

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