Fighting on Various Fronts, Tesla Defends Its Retailing System

When it comes to selling electric cars, it is not business as usual for Tesla. That has a lot of dealers up in arms.

State dealer associations across the U.S. are going to court and state legislatures are claiming Tesla violates franchise laws by operating factory-owned stores. That goes against the traditional dealership network that’s protected in varying degrees by franchise laws in all states.

Tesla has faced legal challenges in Massachusetts, New York, New Jersey, Illinois, Georgia, Minnesota, Ohio, Washington state, North Carolina, Texas and Virginia.

Tesla has won some and lost some. It recently lost in New Jersey when the state Motor Vehicle Commission unanimously approved a regulation requiring all new-car dealerships to obtain franchise agreements. It essentially bars companies such as Tesla from using a direct-sales model that eliminates the middleman.  

Tesla has two retail outlets in New Jersey. It says it shuns the traditional dealer model because the automaker is not focused on high-volume sales.

Last year, Tesla won in North Carolina with the rejection of a bill that attempted to block the automaker from selling directly to customers.

The Palo Alto, CA, company claims gasoline-engine technology is easier to understand and sell for dealerships, so EVs get left behind in the traditional retail process. 

Tesla executives talk of expanding sales and its model lineup, but currently the company only offers one vehicle, the Model S that starts at $59,900, before tax credits. It debuted in 2012.

“With only 22,500 Tesla vehicles sold in 2013, there simply isn’t enough volume for profitability for dealers,” says Jim Chen, Tesla’s vice president-regulatory affairs, adding, “There’s no incentive for dealers to push EVs.”

But National Automobile Dealers Assn. 2013 Chairman David Westcott says:  “Franchise dealers have sold more than 500,000 electric and other alternative-powered vehicles so far this year.”

He adds, “All 50 states have enacted some form of a dealer franchise law.” NADA’s position regarding Tesla is to let state associations deal with it.

Responding to Ohio lawsuits, Chen says dealer fears about Tesla are unfounded.

Tesla sold only 122 vehicles in the state last year. “Dealers have to sell other products to be profitable,” he says.

Proposed legislation in Ohio would thwart Tesla’s direct factory-sales approach.

“We’re concerned because it’s an impediment to the industry and consumers as well,” says Joe Cannon, Ohio Automobile Dealers Assn.’s vice president- government relations. “Dealers and manufacturers have heavily invested in the dealer-franchise system that works for everyone.”

In Washington, a green state with two Tesla stores, dealers are not anti-EV or alternative-fuel technology, says the Washington State Automobile Dealers Assn.

What they oppose is operating outside the dealer system.

“Franchised auto dealers have sold and will continue to sell alternative-fuel vehicles that customers want to buy,” says Vicki Giles Fabre, the association’s executive vice president.

“Franchise legislation has nothing to do with technology. It’s about providing the driving public with the best system and infrastructure for effective and convenient sales and service in communities distributed across the state,” she says.

Fabre adds: “The franchise bill is about preserving and strengthening what has proven to be the best way to provide a widespread network of sales, service, recall and warranty repair locations for Washington drivers while also empowering small local businesses.”

Company-owned dealerships present unfair competition to franchised dealers, says Mark Schienberg, president of the 450-member Greater New York Automobile Dealers Assn.

Amid the opposition, Tesla is trying to ramp up its global and U.S. retail operations.

Tesla currently has 41 company-owned stores and galleries in North America, including 35 in the U.S. and Canadian outlets in Toronto, Quebec and Vancouver, says Will Nicholas, a Tesla regional manager. Sales and service operations are run separately.

He describes Tesla operations as “a work in progress.”  About 70% of its stores are at shopping malls. The King of Prussia, PA, outlet is next to an Apple store, considered a good fit.

“We currently have 81 stores opened worldwide, with 24 coming soon, along with 66 service centers and 41 new locations in the planning stages,” says Tesla communications manager Patrick Jones.

Tesla operates so-called galleries at “locations where we cannot conduct sales or give pricing information,” he says. “Some states have restrictions against auto companies selling direct from manufacturer to consumer, and we must comply with the laws that are in place.”

Customers can look at models and obtain product information at those sites. Then they can go online to place a purchase order.

Tesla is doing nothing legally wrong in the way it sells cars, Jones says. “Auto dealer associations in various states have attacked Tesla’s business model of selling direct from manufacturer to consumer. But Tesla operates under full compliance with laws.”

Adds Chen, “Tesla is fighting for the right to sell the product we’ve innovated, invented and built in the free market.”

Tesla says it has fended off legal efforts against it in New York, Massachusetts, Ohio and Minnesota, but it acknowledges some states could revisit what it considers anti-Tesla legislation.

With about 850 franchise dealers, Ohio is a test ground.

“We welcome innovation and investment from all manufacturers,” says Joe Cannon, the Ohio Auto Dealers Assn.’s vice president-government relations. “We’re not trying to limit sales of vehicles, but to reinforce a standard set of rules here.”

In Massachusetts, a judge denied a requested preliminary injunction against Tesla, thus allowing the automaker to continue operations at its suburban Boston store.

The Massachusetts State Automobile Dealers Assn. had sued Tesla, claiming the EV maker violated state licensing, consumer-protection and franchise laws.

Tesla CEO Elon Musk praises the ruling while touting the way his firm sells cars.

“We’re confident that other states will also come to this same conclusion and look forward to following through on our commitment to introduce consumers to electric-vehicle technology in an open, friendly, no-pressure environment,” he says in a statement.

In contrast, Tesla calls the New Jersey Motor Vehicle Commission’s unanimous decision against it “an affront to the very concept of a free market.” Musk refers to it as “a backroom deal.”

Musk is a “master of P.R.,” says Bill Wolters, president of the Texas Automobile Dealers Assn. “What puzzles me is that he has never tried the franchise system, yet he insists it won’t work for him.”

The debut of a second Tesla, the Model X CUV is planned for later this year. There’s also talk that a more affordable EV for the masses will be available by 2017.

Jerome Guillen, Tesla's vice president-worldwide sales and service, said at the Detroit auto show in January that Tesla engineers are working to complete the coming Model X in its U.S. factory. The Model X failed to appear at the Detroit show. 

Tesla builds its vehicles in a Fremont, CA, plant, formerly known as New United Motor Manufacturing, a joint General Motors-Toyota venture.

Musk once outlined Tesla’s business strategy this way: “Enter at the high end of the market, where customers are prepared to pay a premium, and then drive downmarket as fast as possible to higher unit volume and lower prices with each successive model.”