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Why Tesla Motors Is at War With Car Dealers

Tesla Motors (NASDAQ: TSLA  ) has been lobbying legislators and fighting auto dealers in several states, trying to secure the right to sell its electric cars via factory-owned stores, Apple-style.

That battle has been costing the upstart Silicon Valley automaker a substantial amount of money. It's also costing a substantial amount of time – CEO Elon Musk was in Texas last week, lobbying the legislature for an exemption from the state's tough dealer-protection laws.

Now Musk is saying that a Federal-level effort may be needed for the company to secure the right to sell cars via its own stores.

But why won't Tesla just do what all the other automakers do, and set up some franchised dealerships? And why are the dealers fighting so hard against a company that only sold about 4,750 cars last quarter?

Why the dealers are scared of Tesla
Auto dealer associations say that Tesla's factory-store model violates laws designed to protect dealers – and supposedly, consumers – in many states. Dealers in Texas, for example, have said that allowing automakers to sell directly to consumers would inflate the cost of vehicles (by reducing competition) and limit free enterprise, and dealer groups have successfully lobbied state legislators around the country for decades to get laws in place that protect their business model.

This Fool says that those claims are awfully dubious, to say the least, and that most of these laws likely have more to do with dealers' campaign contributions than with genuine consumer protections. But those are the arguments they're making, and those arguments are reflected in many states' laws protecting dealers.

Dealers say they fear that letting Tesla have an exemption would open the door to other competitors, such as Chinese automakers, to enter the U.S. market without having to use the traditional dealer network.

But as Musk told Automotive News last week: "If franchised dealers really believe what they say when they say they're the ones best able to sell and they can do a better job, then they should not fear competition."

Why Tesla doesn't want dealers
Tesla, for its part, says that the dealer model won't work for electric cars, at least not now. Musk argues that it's impossible for a dealer to be trusted to persuasively make the case for the company's electric cars while simultaneously selling gas-powered cars from other automakers.

In fact, Musk told Automotive News last week that he believes the use of traditional dealers was a key factor behind the downfall of Fisker Automotive, another green-car start-up that recently laid off most of its staff.

Musk isn't totally opposed to the idea of franchised dealers. He says that once Tesla's U.S. sales volumes get big enough – around 1% of the market, or around 150,000 U.S. sales a year – then using dealers would start to make more sense.

But meanwhile, Tesla is going to keep battling – at the Federal level, if necessary – for the right to sell its cars directly to customers. Stay tuned.

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Comments from our Foolish Readers

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  • Report this Comment On April 16, 2013, at 7:10 AM, nonqual wrote:

    Dealers pay local property taxes and provide a local presence for redressing wrongs in the local justice system. Tesla is a pay now and we'll perform later (if you can catch us) type of outfit.

    All you fans who bought the Model S, ever wonder why Tesla is so slow in installing a Supercharger in your state? Remember the provocative EV that would sell under $50k? That got cancelled. Next will be the right hand drive version, but Musk needs to hold on to the reservation paymnets awhile longer.

    Musk could set up his own network of exclusively EV franchisees, but because of expensive batteries, EVs don't make economic sense and he needs government intervention. Watch what happens to 2014 sales now that he has admitted the X has been delayed (if not also cancelled.)

    Near perfect execution? You jest!

  • Report this Comment On April 16, 2013, at 9:42 AM, SleepingDog355 wrote:

    It's amazing that it's illegal in the U.S. to simply sell a product simply because you manufactured it.

  • Report this Comment On April 16, 2013, at 5:26 PM, sdrx wrote:

    nonqual is an example of a puppet against EV. Just look at the guy's comment history.

    Provocative under 50k model cancelled? Yeah, that's still on the way. What was cancelled was the base model for the Model S because everyone wanted the larger battery package.

    Battery technology has jumped leaps and bounds in the past decade. Just take a look at your modern cellphone. Anyone who doesn't think it won't improve in the next decade for improved performance and lower cost is shortsighted.

  • Report this Comment On April 22, 2013, at 1:58 PM, truenorth00 wrote:


    Sorry. Don't buy that. Tesla's galleries also pay property taxes or they pay rent to malls which pay property taxes.

    Car dealerships are simply an outdated sales model allowing rent-seekers to remain in the sales transaction. Getting rid of them would actually improve the sales experience.

    Imagine a dealership where you go and just test drive the car. There's no pressure. When it comes time to buy, you don't negotiate. You fill out the order form. And the car is delivered to your house.

    In this day and age, that's how it should work. Instead, we get the "Let me take that offer to my manager." faux negotiation epxerience. Nobody buys that crap. And indeed, younger buyers are buying even less of it, choosing to skip out on car buying altogether.

    Among many moves required to save the auto industry is the elimination of dealerships and the move to corporate run stores.

    Keep in mind there's a whole generation of shoppers coming that are using to shopping at the Levis and Apple store instead of buying jeans and iPods at department stores. They aren't likely to find much value in talking to some middle man. And they have good reasons for that point of view.

    As for your other tosh. Nowhere in your purchase agreement for a Model S is there any specific commitment to provide a specific density of superchargers. And sales? You can't be serious. Sales are going up. They've already raised production forecasts for 2013 by 20%. And they may yet raise production again. It's quite clear that they delayed the Model X to capitalize on Model S demand. Lastly, the Model S is already starting to sell out the BMW 7 Series, the Mercedes S Class and the Audi A8. That should tell you where sales are going.

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