History Shows Despite New Jersey Ban, Tesla Will Win in the End

Why Tesla Motors should not worry.

Mar 25, 2014 at 2:48PM

Tesla Motors (NASDAQ:TSLA) is currently engaged in a fight across multiple states over its direct-sales business model. Although two stores have already been operating in New Jersey for two years, thanks in part to the efforts of a powerful dealer group that doesn't want to be cut out of the process, those stores will be forced to close down by April 1. There are also rumors that New York and Massachusetts will be next in line to ban the direct-selling model, to add on to the six that already do. New Jersey Governor Chris Christie has decided to bypass the regular process for checking whether car companies have a majority vote to sell directly in a state.

The question that needs to be asked here is why? To answer this, I'll take you back to the reason the (recently implemented) law in New Jersey originated.

Years ago, the large automakers sold franchises, and the franchisees then put their money into building their businesses. The franchises then engaged in a bit of a power play in pressuring the franchisees to sell the dealerships back to them at a rock bottom price. Naturally, the franchisees sought protection from the state. The state naturally felt the need to flex its muscle and bend this law, something Tesla CEO Elon Musk is criticizing them of doing.

The thing is though, that traditional dealerships are currently designed to service (and sell) gasoline-powered cars, and electric cars require a whole new set of maintenance checkups. Surely, it would be easier for Ohio, New Jersey, and others to let Tesla continue doing what it is doing elsewhere -- having small display stores, cars sent direct from the factory, and regional service centers.

Unfortunately, whenever a radical innovation, or even something moderately different from the norm, is proposed, transitions are often littered with bumps in the road. It was true when the Internet began. Famously, when Musk was starting his first company, Zip2, he had a Yellow Pages thrown in his face by a top business CEO who told him, "Do you think the Internet will ever replace this?"

Notably for Tesla, this was also the case in the infamous 'war of the currents,' i.e. Nikola Tesla's Alternating Electrical Current vs. Thomas Edison's Direct Current. Edison tried many, sometimes horrendous things to prevent the success of Alternating Current; eventually though, he must have figured that it was easier to acquire the patent for Tesla's idea and run with it himself.

History remembers the winners

The main point I would like to make about the war of the currents though, is that eventually Alternating Current won. Sure, who profited off it maybe wasn't who should of, but the benefits of it were far greater than with Direct Current. We also know that the Internet has essentially replaced the yellow pages, as it has proven to be more efficient for finding information quickly.

Eventually the Tesla direct-sales model will win. There is no telling how long public figures such as Christie will feel the need to flex their muscle. At the end of the day though, traditional dealerships are made to sell and service gasoline cars. Direct sales of Tesla vehicles are the most efficient method for all. Beyond providing a slightly cheaper car, the consumer can receive top-class information about the product, rather than (comparatively) haphazard information from someone at a general dealership.

Elon Musk, as always, seems undaunted by the banning. He knows all about history's lessons. Indeed he named Tesla after Nikola.

For the share price and business bottom line, this may also create a bump, or rather, a pothole, and with the recent share price fall, one would expect it has already done so. But Tesla investors must remember that disrupting companies will inevitably encounter bumps and potholes. But as Warren Buffett often states, events like this (and macro ones such as the current troubles in Ukraine) often create little damage to the long-term company fundamentals.

As Tesla (and Elon Musk) both learn from and honor the past, investors should seek to do the same. Tesla is certainly a company with the potential to disrupt the automotive world on a grand scale. But that doesn't mean it will necessarily do so. As happened with Nikola Tesla, the powers that be may not work in their favor. But the company does have a brilliant management team with proven success at superb strategy implementation ... something old Nikola sadly didn't have.

Current and prospective Tesla investors should make decisions based not on short-term paper gains or losses, but instead on whether they want to be part of the ride. Personally, I will remain buckled in. I know it's going to be a bit of a rollercoaster, but that doesn't worry me.

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thaddeus mccarthy 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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