Auto Dealers vs. Tesla and Almost Everyone Else

Tesla's business model is being threatened by laws that vast majority of citizens oppose.

Mar 18, 2014 at 11:20PM

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.

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Alexander MacLennan owns shares of Tesla Motors. The Motley Fool recommends Ford, General Motors, and Tesla Motors and owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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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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