Tesla Motors (NASDAQ:TSLA) lost a critical battle last week against the New Jersey Coalition of Automotive Retailers when Gov. Chris Christie's administration unanimously voted to ban direct auto sales in the Garden State. New Jersey's Motor Vehicle Commission passed a rule on March 11 that will force Tesla to stop selling its Model S cars in the state as soon as April 1. Tesla currently operates two retail stores and one service center in New Jersey, which will likely be closed because of this new rule.
However, the skirmish doesn't end there. Many Democratic lawmakers in New Jersey were outraged by the Christie administration's seemingly sudden decision to pass such a rule. Matt Friedman, a writer for the New Jersey Star-Ledger, quoted state Assemblyman John Wisniewski as saying: "From a policy perspective, we ought to be doing things to encourage the sale of electric vehicles in New Jersey. It would strike me that regulations that would have the effect of having fewer electrical vehicles sold is not a long-term public policy in the interest of my constituents or the people of the State of New Jersey."
Wisniewski isn't the only New Jersey lawmaker who's upset with the Tesla ban. Assemblyman Gary Schaer, who chairs the New Jersey budget committee, said the change of heart by the Christie administration contradicts the "governor's public stances in terms of free enterprise and competition," according to the Star-Ledger.
Even state Sen. Raymond Lesniak, who has publicly backed the New Jersey car dealers in the past, now says he plans to amend legislation "to reflect a compromise Tesla reached with the Virginia motor vehicles department," writes Friedman. If you remember, Tesla reached a compromise with the Virginia Department of Motor Vehicles that allowed the company to apply for a license to sell its all-electric cars in Virginia.
The same could still happen in New Jersey, but political maneuvers such as this take time. This is a challenge that Tesla faces in other states as well. Last year, it lost the right to sell cars in Texas. This was a major blow to the EV maker, because Texas is the second largest and second most populous state in the U.S.
With states including Texas, Arizona, and now New Jersey shutting Tesla down, more auto dealer groups could be encouraged to jump on the anti-Tesla bandwagon. It's pretty obvious why Christie's administration and others have chosen to side with powerful car dealer cartels: money.
Shady car salesmen backed by big money
Antiquated state franchise laws prohibit how auto manufacturers such as Tesla can sell their cars. However, what it really comes down to is money. Powerful trade groups spend hundreds of thousands of dollars each year on lobby contracts. The New Jersey Coalition of Automotive Retailers, for example, spent more than $155,000 lobbying last year, according to Bloomberg.
Terrance Dopp reports that people connected with the auto industry gave the Christie campaign contributions at least $64,700 during 2013 electoral campaigns. Of that, about $45,100 collected in the general campaign was matched two-for-one with public funds, for a total of about $135,300, according to Bloomberg. Meanwhile, the dealership cartel in Texas, better known as the Texas Automobile Dealers Association , spent upwards of $2.5 million on legislative elections last year in the Lone Star state.
Unlike these auto dealer cartels, Tesla doesn't have a bottomless stash of political cash. The innovative company is in the early stages of its growth story, and it needs every dollar it has to be reinvested back into the business. What it does have that the dealers do not is a growing support system of key lawmakers and high-profile businessmen in the U.S.
"The car dealers put pressure on the powers-that-be and they tried to kill an industry. That's antithetical to the idea of American free enterprise," Assemblyman Tim Eustace told Bloomberg. As more consumers get behind Tesla's vision for a transparent car-buying experience, it will make it harder for deep-pocketed dealers to get away with this type of back-room politics.
What to watch
Auto manufacturers have sold cars through franchised dealers since Ford introduced the assembly line more than 100 years ago. In the early 20th century, this approach made sense because locally owned dealerships offered a way for auto manufacturers to market and service their cars for consumers in remote areas throughout the country.
However, with the advent of the Internet, information is more widely available to customers. Not to mention, companies such as Tesla are now able to service cars remotely using an Internet connection to run over-the-air updates. Ultimately, dealer franchise laws are outdated. Going forward, investors will want to keep an eye on how Tesla handles similar brawls with dealer groups in Ohio and New York, as it could be years before we start to see real changes in these archaic state laws.
For the time being, Tesla's stock seems to be holding up just fine. Shares climbed more than 4% after the bad news out of New Jersey last week. The stock is currently trading at around $232 a share, which is up 58% so far this year.
Tesla will keep proving the critics wrong
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Tamara Rutter owns shares of Tesla Motors. The Motley Fool recommends and 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.