Why It's Full Speed Ahead for Tesla Motors Despite the New Jersey Bump in the Road

What exactly a direct sales model "ban" means, and why Tesla investors shouldn't be concerned.

Mar 14, 2014 at 9:38PM

Come April 1, consumers won't be able to buy a Tesla Motors (NASDAQ:TSLA) Model S sedan at Tesla retail stores in New Jersey, thanks to the New Jersey Motor Vehicle Commission voting on Tuesday to enact rules that prohibit auto manufacturers from selling directly to consumers. New Jersey marks the third state banning Tesla's direct sales model, joining Texas and Arizona.

The premium electric vehicle maker won't lose any business because of the New Jersey ban, so investors need not concern themselves with this issue, in my opinion. It's the people of New Jersey who will come out on the losing end of this policy. Consumers get a current right taken away, and taxpayers will suffer because New Jersey will lose sales tax on the Model S to the neighboring states of Pennsylvania and New York.

Let's leave the political muck to others, and focus our high beams on the business ramifications of this new regulation.

The exact meaning of a "ban"
These Tesla "bans" don't mean that Tesla can't operate within a given state. If the New Jersey law is enacted in a way similar to the one in Texas, than Tesla will just have to go with a workaround. If Tesla's New Jersey workaround is similar to the one in Texas, than Tesla's two retail stores in New Jersey -- which are in Short Hills and Paramus, both of which are in the northern part of the state and about 20 miles from New York City -- will be rechristened as "galleries." These will be showrooms where potential buyers can look at the Model S, but can't test drive it, nor can employees discuss costs or assist consumers with alternate ways to buy a vehicle.

Tesla Model S Short Hills

Tesla's Short Hills, NJ store. Source: Tesla Motors

In today's connected world, the Internet makes the latter two factors non-issues. Anyone who is shopping for a vehicle -- most especially a high-end one -- surely has access to the Internet, where Tesla's website provides pricing, as well as the opportunity for consumers to order a vehicle online. The only small hitch in ordering online is that Tesla can't deliver to buyers in banned states, so these buyers have to use a third-party delivery service.

As to test driving, Tesla sets up periodic test-driving events open to the public in various parts of Texas. For instance, last Labor Day weekend, folks in the Austin area were able to take a Model S for a 15-minute spin. These events not only serve as a workaround for those who can't test drive a Model S at a "gallery" and don't want to travel to the nearest actual "store," but are good marketing tools, too. The Model S garners glowing praise for its performance and luxury, was named Motor Trend's Car of the Year in 2013, notched a top 99 score by Consumer Reports, and earned top NHSA safety ratings. Test driving such a car will likely turn some casual lookers into buyers, and result in others setting their sights on the more moderately priced "gen III" sedan once it's available. (Tesla's targeting a 2017 launch.)

Most importantly, these bans don't affect Tesla's Supercharger sites, which Tesla continues to aggressively build out, including in Texas. Tesla's goal is to have 90% of the U.S. population and parts of Canada covered by 2015. The company's been rolling out its second-generation Superchargers, which provide the 85kWh Model S (the model with a 265-mile range) with a half charge in 20 minutes, and provide juice for about 200 miles in 30 minutes.

Pennsylvania and New York are a stone's throw from the diminutive Garden State 
Test driving and/or buying a Model S at an out-of-state retail store will generally be much less of an issue for New Jersey residents than it is for those living in Texas and Arizona, given that New Jersey is a very small state geographically.

The vast majority of its residents live within 50-60 miles of either the Pennsylvania or New York state line, and many are considerably closer to one of these state lines, as New Jersey's population is very dense outside New York City and Philadelphia. Tesla already has one store in Pennsylvania -- in the Philadelphia suburbs -- which is easily accessible to New Jersey residents who live in much of the southern half of the state. The company has five New York state stores in the New York City area that are accessible to New Jersey residents who call the northern half of the state home. Additionally, Tesla surely will be building more locations in these states. (Auto dealers in New York are hoping for a direct sales model ban, too, but the political situation seems different, so I'm not sure how likely that is to happen.)

Foolish final thoughts
Tesla investors shouldn't be concerned about these direct sales model bans, as buyers who are spending big bucks for a vehicle are going to buy the exact car they want, even if a little extra effort is involved.

Things should eventually work out in Tesla's favor, as residents of states with these bans aren't likely to take well to having fewer consumer options than those in the vast majority of the other states. In the meantime, I'd imagine Tesla might set up some additional innovative workarounds that would appeal to consumers in states with these bans.

Tesla might actually benefit from these bans, as they could further increase public support for the upstart EV maker. Politicians banning Tesla's direct sales model are coming off as the "big bad guys" who are playing politics, yet again, based upon the many comments I've read on this issue. That, by contrast, puts Tesla in the "good guy" role, and might buy some additional goodwill for the company.

There's no reason that those invested in Tesla for the long term should not stay the course, as long as Tesla continues to deliver on its business plan and delights with its vehicles.

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Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of 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.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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