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Will Tesla’s New York Deal Solve its Dealership Problem?

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Tesla (NASDAQ: TSLA  )  has managed to score a win in New York, but at what cost?

This past weekend the electric car company reached a compromise with the Empire State against detractors who claim the company's selling practices circumvent existing automotive sales laws. Agreeing that future locations (with the exception of currently existing sales locations) will all utilize dealerships as points of sale, the company seems to be trading potential sales for a different sales philosophy.

With all other automakers relying on independently owned dealerships to move their product, Tesla has been causing a great deal of controversy by directly selling to the consumer and cutting out the middle man.

Considering how powerful the automotive dealership lobby is, this has led to the company being embroiled in disputes in 15 states and not allowed to sell in three more. With only four states allowing Tesla to sell directly to buyers, the company has been forced to the negotiating table to secure its market share.

Tesla's argument against market expectations

Tesla's reasoning behind this sales philosophy makes sense, from a certain point of view. The electric car market is still somewhat a niche sector. Despite the advances in electric automotive manufacturing, electric car prices have remained stubbornly high. Tesla's Model S retails at $69,000, placing it at a distinct disadvantage against similar quality gas-powered cars that sell for much less.

Tesla spokespersons claim that dealers will do just that and steer consumers to less pricey cars. Doing so will in turn remove the company's opportunity to explain the advantages of electric over gas cars, resulting in a diminished market share in at least the short term (if not longer).

The argument does have proponents who claim the company is only taking the path of least resistance and the sales strategy is both fair and equitable in an automotive industry driven by a price "race to the bottom" (puns not intended).

Naturally, established dealerships see things differently. Historically, automotive sales models have tended toward the price wars mentioned above. Usually protected by legislation to help dealers compete with manufacturers (who can, of course, win any potential price wars), the Tesla sales model removes any potential for dealership sales. 

Will the New York deal matter nationwide?

Tesla's concession to utilizing dealerships in New York may indicate a shift in the company's priorities. Then again, allowing the compromise may turn out to be a market strategy to paint the company in a positive light. While the manufacturer is negotiating in New York, other states seem to be more sympathetic.

New Jersey, expected to place a sales ban on Tesla vehicles on April 1, has shifted the ban back two weeks to April 15. Policymakers such as Democratic state Senator Raymond Lesniak state that "(markets) need to give electric cars the ability to get a foothold in the market... I think that's a fair compromise."

Comments like Lesniak's are not restricted to New Jersey. Given that many of those speaking in support of electric cars have been generally allies of dealerships, the deal negotiated in New York may not mean a whole lot nationwide. Tesla's recent sales expectations (targeted at 500,000 cars per year by 2020) have already encouraged acceptance of the dealership sales model.

While this may remove the company's current unique sales model, this could also mean that car markets are ready to accept electric cars as a legitimate market product. One thing is for sure: Tesla did not given anything up in New York that they were not prepared for already.

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Read/Post Comments (4) | Recommend This Article (0)

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 31, 2014, at 11:21 AM, mrshep wrote:

    how will the recall of 15,000 cars due to battery fires impact Tesla?

  • Report this Comment On March 31, 2014, at 3:34 PM, Ustauber wrote:

    Not as much of the 9 million cars by GM, or the 7 million by Nissan or the 11 million by Toyota.

  • Report this Comment On March 31, 2014, at 4:34 PM, maguro01 wrote:

    It is understood that car dealers make their money servicing cars and selling used cars. They can't live on selling new ones. An electric car, done right, will not need enough service to keep a service department alive though, of course, they can hardly be perfect. Tesla's business model is disintermediation for dealers and they know it. But if they succeed then the large companies mostly in brick and mortar will be next in line at state legislatures to get rid of Web sales like Amazon and so on.

    The dealer's efforts in the respective states are a good example of the world famous US Pay-To-Play political system at the state capitol level.

    Tesla could still do things more or less as presently with showrooms, Web site sales, and district service. Prepped cars could be delivered at the showrooms. But the showrooms can be a locally owned business with a profit per vehicle plus accessories and so on. Tesla could presumably do a deal with a chain to run their distribution in a state. The problem would be the chain's likely demand for price protection so that buyers wouldn't just buy the cars in a neighboring state to arbitrage differences.

    People in the existing car industry like to talk up Capitalism and Free Markets on the 4th of July, but they hate to actually operate in such an environment. They are hardly the only ones.

  • Report this Comment On March 31, 2014, at 5:19 PM, StanO6 wrote:

    @MrShep, there is no recall. Owner's discretion to have additional parts added to battery pack. The previous OTA update to raise ride height was more than enough.

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Kurt Avard

A January 2014 addition to the Motley Fool team, Kurt Avard prefers to focus on the "dark" side of business and how it interacts with politics. Rarely writing on the same thing twice, he feels that, if he manages to convince you that the two are inexorably linked, he has adequately done his job. Follow him on Twitter @kurtsavard

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