Auto Dealers vs. Tesla and Almost Everyone Else

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Disagreements from citizens making up the left and right of the political spectrum find themselves in health care, taxation, and almost everything in between. But public polls show people from all sorts of political leanings support Tesla Motors' (NASDAQ: TSLA  ) ability to sell their vehicles through company-owned stores (86% of people, according to a poll conducted by the Austin Business Journal).

Yet the fight over Tesla stores and dealer franchise laws continues and is both holding Tesla back and creating some rather interesting situations.

Origins and auto dealers
In contrast to their use today, dealer franchise laws actually served a pressing need when they were first enacted after the Second World War. With major auto manufacturers like General Motors (NYSE: GM  ) and Ford (NYSE: F  ) bigger than ever, state legislatures were concerned that the manufacturers themselves would open their own dealerships and undercut existing franchises whose owners had worked so hard to create. In response, legislatures passed franchise laws to protect these dealers from having major manufacturers take over their businesses. GM and Ford largely accepted this and have worked with a dealership model ever since.

But today, the franchise laws are being used to keep out a company that has no existing dealer network and has a unique product that would see itself at a disadvantage under a franchise structure.

Nonetheless, auto dealers have put the pressure on governments of several states to expand or not amend existing dealer franchise laws. The most recent example comes from New Jersey, where Tesla will have to stop using its stores and instead convert them to "galleries" (more on this later).

Tesla is also out of luck in Arizona, Texas, Maryland, and Virginia, which have also banned its stores. And it appears the wave of franchise laws is not over, with additional restrictions possible in Ohio and New York.

Cars as art
While many states are restricting Tesla's ability to sell its cars through stores, Tesla has been able to find a way around this by opening what it calls "galleries." Arizona, Texas, Maryland, and Virginia all have Tesla galleries, since operating Tesla stores would violate local laws.

But what makes a gallery different? Try asking the employees about pricing. If they are doing their job correctly, they won't answer your question. Same goes for ordering. In short, having a Tesla gallery is like going to a car dealership and not being able to get a straight answer from anyone. Of course this isn't Tesla's fault; it's not legally allowed to do anything more. But it does put the company at a major disadvantage for attracting first-time buyers when compared with established automakers.

For fans and investors
Both Tesla's fans and investors want the company to succeed, so the battle over the stores is an important one. Already, fans have shown their efforts in helping Tesla to beat back pro-franchise legislation in North Carolina and Minnesota. Fans also collected more than 100,000 signatures for a pro-Tesla petition on the White House's We The People website.

Fans have done everything possible short of standing outside Tesla galleries and answering the questions Tesla employees themselves are not allowed to answer. Tesla investors should realize that the restrictions on Tesla stores are a hindrance to the company going forward. Those investors who are opposed to the dealer franchise laws and want to support their own investment should seriously consider contacting their state elected officials. As we have seen in the North Carolina and Minnesota examples, this can get results and has helped Tesla to build a larger store base to more effectively compete for market share.

Tesla and politics
Normally, I try not to mix politics with investing, but the dealer franchise issue has a broad consensus across the political spectrum based on public opinion polls. Tesla investors who disagree with these laws should make their voices heard as informed citizens in a representative government.

Lastly, investors and fans alike should continue to monitor the progress of Tesla in combating these franchise laws, as the extent to which Tesla is able to protect its business model could have a major bearing on the company's future success as a mass-market automaker.

Buying a car: what you don't know
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Read/Post Comments (5) | Recommend This Article (5)

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 March 19, 2014, at 5:28 AM, Jblee wrote:

    Planned to buy a Cadillac before, but I have changed my mind to go for Tesla, just because what NJ government tried to do with Tesla.

    Btw, I am a resident of New Jersey.

  • Report this Comment On March 19, 2014, at 11:15 PM, Nodakbug wrote:

    Why should Tesla hjave an advantage over other car companies. Everyone should play by the same rules. Why would anyone pay 70,000for a battery operated car.

  • Report this Comment On March 19, 2014, at 11:28 PM, LazyCapitalist wrote:


    Technically they are doing it to Cadillac as well (as they have for decades). If GM wanted to open their own Cadillac dealership in New Jersey and sell directly to customers, they also aren't allowed.

  • Report this Comment On March 19, 2014, at 11:41 PM, colincmacfarlane wrote:

    Agree that every company needs to play on one level field. In spite of my love for Tesla's innovation, I don't think an exception should be made.

  • Report this Comment On March 20, 2014, at 3:39 AM, kbergh wrote:

    Caveat: read the list of ingredients before consuming the CoolAid:

    Tesla's business model calls for achieving a 25 per cent profit margin for the company by eliminating franchised dealers - there is little reason to believe that this will result in lower prices for consumers.

    There is no logic which suggests that a different distribution system is required because a vehicle consumes volts instead of gasoline or diesel. If that were the case, Toyota, Nissan and Honda would have established such alternative channels years ago.

    I believe in alternative propulsion vehicles and I am impressed with Tesla's accomplishments, but the press and investment advisors alike have so overhyped this company that its share price bears no discernible connection to reality.

    Ford is by far the best U.S. auto company. It is consistently highly profitable, unlike Tesla. Ford at around $15.50 or Tesla around $ 240? Ford's longterm value is indisputably much higher, but of course Tesla has been an excellent short-term play.

    Full disclosure: I am an auto dealer who sells both traditional and alternative propulsion vehicles.

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Alexander MacLennan

Alexander MacLennan is a Fool contributor covering Industrials, Airlines, and Financial companies. He is always ready for a good growth or turnaround story and tries to find them before the market does.

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