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Saturday, July 19, 2014

Why Tesla Motors can't sell cars in most of the United States

Tesla Route Completed
Tesla Motors makes beautiful, quality electric automobiles. Don't just take it from us; Consumer Reports rated the Tesla Model S the "best overall" car in its 2014 Top Picks report (which includes all non-electric
cars as well). Yet, despite Tesla CEO Elon Musk's ongoing effort to
expand his EV empire, state after state in the United States is pushing
back. Not because those states are against electronic vehicles, Musk or
even Tesla; it's about the way Tesla wants to sell its cars. Specifically, it's about money.


You know how Apple has stores where it sells its computers, tablets,
phones and other stuff? "Apple stores?" you ask. Yes, Apple stores.
Tesla wants to do that. This is Tesla's business model:

  1. Make things.
  2. Sell those things directly to consumers in stores owned and operated by Tesla.
The first part of that business model isn't the problem; it's the second bit. Specifically, Tesla wanting to both own and operate
stores -- rather, dealerships -- in the United States. When it comes to
new cars, the concept of "direct-to-consumer sales" is illegal in many
US states. Some states are even adding provisions to ban them: This past
March, New Jersey Governor Chris Christie signed into law a bill that specifically makes direct-to-consumer car sales illegal.


Why do so many states have provisions against direct-to-consumer car
sales? Because of the way the car dealership system works. Early in the
automotive industry, carmakers needed individual franchise owners to
invest and set up a system for consumers to buy vehicles. Without
highways, transporting vehicles was difficult. Additionally, cars
required far more maintenance early on. Thus, the franchise model was

R.L. Taylor Chevrolet
The companies making cars -- Ford, GM, etc. -- negotiated deals with car dealers. As The New Yorker explained in a 2009 piece, those early deals were weighted heavily against car dealers:

"In 1920, for instance, the US economy went into a deep recession.
But Henry Ford kept his factories running at full tilt, and forced
thousands of Ford dealers around the country to buy new cars that they
had little chance of selling. The dealers knew that if they said no
they'd never see a Model T again, so they ate the inventory. A decade
later, when the Great Depression hit, Ford and GM used the same strategy
to help keep the production lines going. They turned their dealers into
a cushion against hard times."

To protect themselves, car dealers formed associations. Laws were
enacted, and it's those laws -- meant to protect car dealers -- that are
interfering with Tesla's ability to sell cars directly to consumers.
Here's the logic of the argument against Tesla: If Tesla can sell cars
directly to consumers, what stops the rest of the car industry from
doing that? That is the heart of this, so let's be totally clear:

The entire argument against Tesla selling cars directly to consumers is that car dealers might have to face competition from the companies they currently represent.

That's it. It's not really about Tesla, or electric cars. It's about
money. It's an argument against competition that may or may not even
manifest in reality.

On the flipside, Tesla could go the franchise route and give in. But
should it have to? Shouldn't Tesla be able to sell its cars directly to
consumers? This side of the argument is also about money, no doubt, but
there's a control aspect as well. If Tesla gives in to the franchise
model, it also gives in to all the restrictions that come with it. And
50 years of political lobbying have added quite a few restrictions,
largely in favor of the franchisee. Tesla doesn't want anything to do
with it. Musk put it succinctly in a March 2014 company blog post:

"The reason that we did not choose to do this is that the auto
dealers have a fundamental conflict of interest between promoting
gasoline cars, which constitute virtually all of their revenue, and
electric cars, which constitute virtually none. Moreover, it is much
harder to sell a new technology car from a new company when people are
so used to the old. Inevitably, they revert to selling what's easy and
it is game over for the new company."


You've likely guessed already, right? It's the auto dealers
associations. Not only is the National Automobile Dealers Association
(NADA) number 19 on the top all-time political donations list, but sales from auto dealers account for about 15 percent of all retail sales in the US (according to 2012 data from NADA).
When an industry accounts for more than one-seventh of the country's
total retail sales, that industry has some political clout. When that
industry also has a heavy-hitting political lobby arm in Washington, DC,
it's far more powerful.

Last May, when Tesla fought a bill (and won)
in North Carolina that would ban direct-to-consumer car sales, North
Carolina Automobile Dealers Association President Bob Glaser argued in
favor of it to the Associated Press.
"It's a consumer protection," he said. "And why we say that is a dealer
who has invested a significant amount of capital in a community is more
committed to taking care of that area's customers."

President Barack Obama and Tesla CEO Elon Musk at Kennedy Space Center in 2010

As for the White House, the Obama Administration responded to a We the People petition
last Friday afternoon regarding direct-to-consumer car sales. The
petition specifically asked President Obama to "allow Tesla Motors to
sell directly to consumers in all 50 states."

Special assistant to the president for energy and climate change, Dan Utech, wrote,
"Laws regulating auto sales are issues that have traditionally sat with
lawmakers at the state level. We believe in the goal of improving
consumer choice for American families, including more vehicles that
provide savings at the pump for consumers. However, we understand that
pre-empting current state laws on direct-to-consumer auto sales would
require an act of Congress."

Not exactly reassuring, though technically accurate: The White House
isn't able to do much legally without Congress first introducing a bill,
passing it and giving it to the president to sign. Obama could, of
course, rally for such a bill either in private or public. At the very
least, it looks like he's not doing much in public.


Back in 2010, the Obama Administration helped secure government-backed loans for Tesla to the tune of $465 million. The loan has since been paid and Tesla's Model S is a success both critically and commercially.
But with the threat of a war of attrition as Tesla makes its case from
state to state, the next few years will be critical for Musk's company
in the US.

Having created recharging "corridors" along both coasts and enabled coast-to-coast driving with its "Supercharger" centers, it's easier than ever to own a Tesla car. But will you be able to buy one?

[Image credit: AP Photo/Eric Risberg (lead image), Bill on
Capitol Hill/Flickr (Old Chevrolet ad), and AP Photo/Alex Brandon

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