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Tesla Takes on the Dealers

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I live in one of only two states in the nation where it's illegal for me to pump my own gas, which is why you'll see bumper stickers proudly proclaiming: "Jersey girls don't pump gas." I'm not even sure of the rationale behind the continued existence of such an anachronism, though it has its benefits on rainy days.

The auto industry itself has its own archaic systems (OK, it probably has a lot of legacy issues that stifle innovation), but the advent of the electric car has highlighted one in particular: in 48 states it is illegal for a carmaker to sell directly to the consumer. Instead, under state franchise laws, Ford (NYSE: F  ) and General Motors (NYSE: GM  ) must first sell the cars to a dealership who in turn sell them to the public.

Maybe in some bygone era it was meant to somehow save the car buying public money, promote competition, and foster the creation of small businesses, but in this day and age it only serves to raise costs and add an additional layer of expense to the purchasing process.

Look, but don't touch
The National Automobile Dealers Association alleges Tesla Motors (Nasdaq: TSLA  ) is illegally selling cars directly to the public through its showrooms, though as the electric carmaker is quick to point out, you can't actually buy a car there. You go in and "oooh!" and "aaah!" over the Roadster and S models then go home and order one online (OK, you can use a kiosk in the store to place your order). It's then shipped directly to your house or you can go to the factory in Fremont, Calif., and drive it off the assembly line.

Same difference, say the dealers, who have been among the noisiest bunch during the auto industry restructuring. They lobbied for the wasteful "Cash for Clunkers" program and tax credits for vehicle purchases, along with their own bailout of taxpayer-backed loan guarantees. And let's not forget the overpriced cost of having your car serviced at a dealer. These people hardly have your well-being in mind.

Motor meltdown
When it comes to electric cars, I'm one who believes they're not yet ready for prime time. The technology that powers the Chevy Volt and the Nissan (NASDAQOTH: NSANY.PK) Leaf has some great potential, but they still have a lot of work to do to make them available for a mass audience. Lower costs for one and extended range for another. The massive subsidies that went to battery makers Ener1, A123 Systems, and Valence Technology only to see them all go bankrupt is an indication that demand isn't there to meet supply, when that supply isn't also faulty. Exploding batteries and car fires turning your $100,000 Roadster into a $40,000 brick if the battery fails, and the recalls to deal with all the problems, dampened enthusiasm.

Yet if a technological revolution is going to occur in selling the cars to the public, then the carmakers themselves need to be free to experiment in innovative ways. But characteristic of the sclerotic nature of the industry, change and innovation will only come through fits and starts and a fight.

A seized engine
Tesla only has 17 showrooms across 10 states but already faces lawsuits in four of them. What the dealers fear most is that Ford, GM, Honda (NYSE: HMC  ) , and Toyota (NYSE: TM  ) will see Tesla's experiment as a success and try to model their own sales after that. They note that Daewoo once tried to sell cars directly, but were quickly beaten into submission.

Innovative models need experimenting with including selling cars just like you'd sell computers. Confronted with high-priced cars in a low-cost world, adding layers of inefficiency on top of that will hardly make Tesla's cars competitive let alone allow the company to be profitable.

No doubt dealers were devastated by the industry's restructuring, particularly GM's, which saw thousands of dealerships disappear. Yet it was a problem of their own creation that fueled many of the problems the industry faced. Change is always difficult, but for GM to have hopes of surviving, for Ford or Tesla even to thrive, it's also necessary.

One large automaker that has set off down the road of innovation is Ford. How has Ford adapted to the current state of the auto industry? Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford's stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.


Rich Duprey has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford and Tesla Motors. Motley Fool newsletter services recommend Ford, General Motors Company, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 11, 2012, at 1:04 PM, jjf3851 wrote:

    RE: Illegal to pump gas... Don't forget about Oregon!

  • Report this Comment On October 11, 2012, at 1:11 PM, TMFCop wrote:

    Heh! I thought Oregon had repealed that. Apparently not! I correct the article, thanks!


  • Report this Comment On October 11, 2012, at 1:15 PM, ConstructFoolio wrote:

    Yes, Oregon too. ..beat me to the punch.

  • Report this Comment On October 11, 2012, at 1:43 PM, ejazz2095 wrote:

    It's illegal to pump gas in NJ because of the almighty unions, plain and simple. How do I know? I live there.

  • Report this Comment On October 11, 2012, at 3:06 PM, neilfeier wrote:

    Valence did not receive any government loans or subsidies. They managed to go bankrupt all by themselves without any help from the government.

  • Report this Comment On October 11, 2012, at 4:14 PM, rtichy wrote:

    Mmmm. Rich, I don't think you have thought through all the reasons why car dealers were/are forced to be "in state" businesses, historically/currently.

    1) State sales taxes. Car dealers located close to borders between states sign up with both states to register cars and collect/remit sales taxes, and license fees.

    2) Checking for liability insurance that meets the state's requirements.

    3) By forcing the transaction to occur in state, the buyer is protected by the laws of his/her state.

    Now, maybe these issues aren't much of a concern in NJ, because the only time I tried to buy some capital equipment from a firm in NJ, they took my deposit, never delivered the goods and I had to make a complaint through the NJ attorney's office, who got me half my deposit back. (Nice operation you're running out there!)

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