Auto Dealer Groups Escalate Battle Against Tesla Stores

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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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