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- “Plain and simple, Tesla sells and services passenger vehicles to consumers and whether its vehicles are powered by electricity or holy water, it is in the business of retailing automobiles.”
- “Plain and simple, Tesla sells and services passenger vehicles to consumers and whether its vehicles are powered by electricity or holy water, it is in the business of retailing automobiles.”
Elon Musk pronounced last week that
“Like, this is a big deal,” the Tesla chief executive said during a conference call to review first quarter operating results. “And I think it's the right thing to do because what we're trying to do is get as many electric cars on the road as possible. And what's the limiting factor? Well, it's production. Like, how can we scale, and scale efficiently?”
Indeed, it’s a critical question, and there’s no assurance Tesla can scale up that quickly, especially because it is still struggling with the launch of its new Model X.
But there’s another limiting factor Musk did not mention: Tesla is prohibited from selling cars directly to consumers in many states, including Texas and Michigan, where laws protect franchised car dealers.
From the beginning, Tesla has sought to bypass traditional car dealers, claiming its high-tech cars require unique sales efforts by specially trained personnel. But its direct-to-consumer sales model has run into a buzz saw of state franchise laws enacted decades ago, mostly to keep manufacturers from competing with their own dealers.
This is no small issue for the Silicon Valley upstart. Even in its securities filings with the U.S. government, Tesla warns investors of the risk: “We may face regulatory limitations on our ability to sell vehicles directly which could materially and adversely affect our ability to sell our electric vehicles.”
Tesla currently owns and operates stores in 21 states and the District of Columbia. In states like Texas where Tesla is not authorized to sell cars, it has opened “galleries” that serve to educate consumers, but the staff is prohibited from talking about price or offering test drives. Worldwide, it operates 215 locations, which includes at least 118 service centers. Anyone can buy a Tesla on the internet.
Physical stores have an advantage, however, and Tesla has been battling on a state-by-state basis to change the laws, or to seek an exemption for its company-owned stores. In a few states, such as New Jersey, New York, Ohio and Pennsylvania, Tesla won permission to operate a handful of retail locations, and no more. But dealer trade groups are objecting. In some states, they’ve filed suit to block retail licenses granted to Tesla; in others, they’ve proposed legislation that would prevent Tesla from obtaining such licenses.
An ongoing case in Virginia offers a rare glimpse into the battle strategy for both sides. Tesla wants to open a store in Richmond, Va., and is asking the state’s Department of Motor Vehicles for an exemption to its existing law that bans any manufacturer from operating a dealership. (Tesla already operates one store in Vienna, Va., under a 30-month trial negotiated with the DMV.) There is some wiggle room in the statute, if Tesla can convince the DMV commissioner that there is no “dealer independent of [Tesla] available in the community or trade area who can own and operate the franchise in a manner consistent with the public interest.”
So what’s in the public interest? Tesla and the state’s auto dealers association each hired a battalion of highly paid “expert” witnesses to make their respective cases.
Ordinarily such written testimony is not made public, at least according to one of those experts, Patrick L. Anderson, whose firm, Anderson Economic Group, is often hired to provide economic analysis or confidential business valuations in legal cases. But in this case, the testimony wasn’t sealed. And what’s clear from reading their reports is that “experts” can look at the same facts and come up with diametrically opposed opinions.
For example, Tesla’s witnesses -- Fiona Scott Morton, a professor of economics at Yale University, and Herbert Walter, an automotive financial consultant – both said it would not be economically viable for an independent dealer to sell Tesla cars. Their argument is based on Tesla selling its cars to dealers at the same uniform, “no-haggle” price it sells cars to retail customers. Therefore, argues Morton, an independent dealer wouldn’t be able to earn a profit and “would inevitably fail.”
The experts hired by the Virginia dealer group pounced on that argument, with Anderson saying such assertions “are illogical, lack evidence and are contradicted by the facts” since manufacturers normally sell vehicles, parts and other services to their dealers at wholesale prices, which enables both the dealer and the manufacturer to profit.
“This disingenuous claim is based solely on Tesla’s unwillingness to act in a commercially reasonable manner and instead profit as if the dealer were a retail customer from the Tesla dealer’s investment,” said industry consultant Maryann Keller, a former Wall Street analyst also retained by the Virginia dealer group.
The experts also disagreed on whether Tesla vehicles are so special that they require unique sales methods.
Yale’s Morton wrote that “because the product (and the company) is new and novel, Tesla requires different selling behavior, different selling skills, and a different environment than other manufacturers.” Customers need time to have their many questions answers in a non-pressure environment, for example, she argued.
Anderson wrote that while Teslas do offer some novel features, they compete against similar luxury vehicles from
“For electric vehicles as a whole, (he counts gas-electric hybrids), this assertion has been rebutted approximately 1 million times in the past two years.”
Keller’s rebuttal was even more to the point: “Plain and simple, Tesla sells and services passenger vehicles to consumers and whether its vehicles are powered by electricity or holy water, it is in the business of retailing automobiles.”
Tesla’s experts also argued that franchised dealerships would be inclined to steer customers to traditional gasoline-powered cars in their showroom rather than take the time to explain the advanced technology behind a Tesla.
Keller called that argument “nonsense,” saying there would not be competing vehicles in a Tesla showroom and that Tesla has the right to establish specific standards for its franchised dealer so that the customer would see little difference between an independently owned Tesla franchise and a company-owned store.
Both Anderson and Keller added that having independently owned stores would serve the public interest by providing continued service and support for Tesla vehicles should the company go out of business.
It’s up to an administrative law judge to sort through these and other arguments, and then make a recommendation to Virginia’s DMV Commissioner about whether it’s in the public interest to let Tesla operate its own stores.
For what it's worth, Tesla Chief Executive Elon Musk told analysts last week that distribution issues would not be a constraint on its aggressive growth plan, but from a practical standpoint, it seems like Tesla is going to have to budge eventually. It’s unlikely it will be able to overturn dealer franchise laws in all 50 states, and a limited exemption here or there won’t suffice as Tesla enters into mass-market, high-volume segments while also trying to service a larger and aging fleet of Tesla vehicles.
Musk acknowledged as much during an onstage interview at the Automotive News World Congress last year: “Before considering taking on any franchised dealers, we first need to establish a solid base with our own stores… I just think it’s very important to have our destiny in our hands in the early stage. Then we can transition later if we can find the right partner. We’d only do this if we can be sure the customer would have a really good experience.”
There are at least 11 independent car dealers in Virginia who are willing to give it a try.
