Texas: Tesla’s Two Showrooms Threaten the Entire Existence of Car Dealerships
State franchise laws barring automakers from selling cars directly to consumers have thwarted Tesla’s sales strategy for the second time when an exemption from Texas’ stringent car sales laws failed to win over the legislature in the state; the defeat follows a similar decision in Virginia a month earlier. Telsa will not have another chance to fight for a special exception until 2015, the next time the state’s Congress is scheduled to meet. Tesla has won the right to sell cars through company-operated dealerships in Massachusetts and New York, but is currently facing challenges in North Carolina, where it also may be prohibited from selling its cars via the Internet despite a physical service center located in the state capital of Raleigh.
In Texas, the exemption to the current law failed to reach the floor of the Senate or House for debate or vote. It was opposed by the Texas Automobile Dealers Association, which lobbies the Texas Congress on behalf of Texas’ franchised dealers (this will prove to be a common thread between the situation in Texas and other states).
Currently, Tesla operates dealerships across America, but in certain states, including Arizona, Massachusetts, Texas, and Virginia, the automaker does not sell cars, and can only show the Model S sedan in “Galleries.” Interested customers are directed to Tesla’s website, where they can customize and order a Model S and await delivery to their home.
The North Carolina legislature is considering a bill that would prohibit car sales through any means other than a dealership. This includes sales over the Internet, which is currently the only way residents of North Carolina can purchase a Tesla vehicle. As in Texas, the entity that lobbies for dealerships, dubbed the North Carolina Auto Dealers Association, has opposed the bill in conjunction with North Carolina’s State Commerce Committee. That committee is headed by Co-Chair Richard Gunn, Jr., who has received $9,500 over the last few years from the NCADA, which has also contributed $40,000 to committee member Harry Brown over the last 9 years.
The proposed North Carolina bill would not allow prospective buyers to buy a car through Tesla’s website; if the bill passes, it would effectively force Tesla to choose between exiting the state, or allowing a third party to sell Teslas to consumers. Tesla’s attitude toward the latter option suggests that this isn’t the direction the company would take; Diarmuid O’Connell, Tesla’s VP of Business Development, likened selling the Model S alongside SUVs to hawking Dom Perignon in a mall food court. In addition to being completely at odds with Tesla’s delivery system, establishing a franchised dealership that exclusively sold Teslas would be costly and inefficient, not to mention likely unsustainable.
There have been victories for Tesla, however, in New York and Massachusetts, and a lobbying firm dropped an opposing bill in Minnesota. Courts in both New York and Massachusetts found that opposition to Tesla sales in those states had little to no legal grounding ; New York Supreme Court Justice Raymond J. Elliot III struck down the bid, stating, “an increase in business competition is insufficient to confer standing.”
While a bill was filed by the Minnesota Dealers Association in that state in March, the bill was recalled by the organization before it made it permanently onto the House’s agenda. The automaker operates a service center in the Minneapolis, and is reportedly in negotiations for a Store location at the Mall of America in Bloomington.
While Tesla itself provides very little competition for franchised dealers, their business model challenges the existence of the car dealership as a concept, and that’s what worries the franchisees themselves, who individually act as an intermediary between the auto manufacturer and the end user. They fear that if the circumvention of independent dealerships works for Tesla, other major automakers could follow suit.
The new car market totals more than $390 billion in sales (2011 figures), slightly more than half of all cars sold in the United States. Before-tax profits of all cars as a total of all sales is 2.3%, making the new car market worth roughly $8.98 billion in profits for dealers (the real number is slightly less, as used car profits are higher than new car profits. Before-tax profits of only new cars was not provided in the source documents). With nearly $9 billion up for grabs by new car dealerships, it’s no wonder that franchisees are allocating huge amounts of money to spend Tesla away, but it will be hard to debate the merits of a monopoly system that provides little, if any, benefit to buyers.
One of the main reasons that Tesla chose a nontraditional sales route anyway was to limit the haggling and frustration that comes with buying a new car. As a brainchild of Silicon Valley magnate Elon Musk, the buying experience is often compared to Apple, whose stores feature products that can be touched and examined, featuring prices that rarely go on sale. By encouraging buyers to customize their cars rather than buy from a dealer, Tesla does not have to lease a large amount of space to store inventory at any Store, and the elimination of incentives paid to the dealership for meeting sales quotas as in a typical arrangement is theoretically reflected in a lower price to the consumer.
At the moment, Tesla does not provide serious competition to any franchised dealership or network of dealerships, but setting a legal precedent is making franchisees very nervous, as exemplified by the numerous bills piling up on state senators’ desks. Creating laws by contributing to political coffers is a time-honored tradition for conglomerates with deep pockets, but in Tesla’s case, it appears that sound logic is trumping blank checks in several cases.
Figures provided by the National Automobile Dealers Association.