Should Tesla Motors Inc. Investors Care About the New Jersey Effect?

In recent years, the National Automobile Dealers Association, or NADA, and certain states having been pushing back against Tesla Motors'  (NASDAQ: TSLA  ) direct-sales model, saying that it would undermine competition and leave consumers out in the cold. Faulty logic for sure, but dealerships have lobbying power and aren't afraid to strong-arm their way into the legal process. New Jersey is the most recent battleground in Tesla CEO Elon Musk's much larger war. How much does the Garden State matter to Tesla's story and just how worried should shareholders be?

Jersey's ban
New Jersey's decision earlier this month made it illegal for Tesla to renew its license to sell vehicles without entering into a franchise agreement between the electric-car maker and independent dealers. The New Jersey Motor Vehicle Commission went further, stating that, even if Tesla chose to comply and begins to franchise, its current salesrooms still wouldn't meet the new minimum dealership requirements. Namely, dealer showrooms must be no smaller than 1,000 square feet, have to be attached to service facilities, and must have a minimum of two cars on display. Tesla's current showrooms and galleries don't fit any of these requirements; in fact, they are by design meant to be sleek and boutique in nature.

Source: Tesla website

What's the big deal?
The implication of New Jersey's new regulations could threaten Tesla's presence in the U.S. auto market, especially if other states follow suit. This proves to be a very real risk indeed, as the electric-car company has had to fight off these archaic laws for almost as long as it has been operating, and the battle doesn't look to be slowing down anytime soon. In fact, New York and Ohio both have similar legislation on their schedules. This trend seems to be building momentum and could snowball if Tesla doesn't get a win sometime soon.

Go to the mattresses
In order to become successful in the U.S., Tesla will need to keep fighting these states and the out-of-date laws that promote dealership monopolies and discourage the entrepreneurial spirit. But allocating the resources necessary to make sustainable change within the auto market will start to drain on Tesla at some point. NADA states that 48 states have restrictions that limit direct sales. According to Musk, about 20 of those will be difficult to overcome and about six will be "extremely difficult." Musk has also been quoted as saying that if the existing laws are amended to further restrict Tesla's sales model (like New Jersey has), then it is likely that the company will have to turn to federal action.

So, yes, looking at the bigger picture, New Jersey matters to the Tesla story, a lot. But that's not all that shareholders should consider when thinking about the electric-car company's narrative.

Source: Tesla website

Moving out
These laws present a disincentive to one of the most innovative American car companies of our time by hindering its ability to actually operate on its home turf. The U.S. is the only country with these laws on the books, thereby making Tesla's expansion into the European and Chinese market seem like a breath of fresh air for the company. Tesla's growth potential in these markets, matched with the company's intention to expand its product line to include stationary power storage, somewhat negates the legislative risk.

Shareholders should be watching Tesla's legal proceedings with a cautious eye. It's not likely that the naysaying states will break the company's stride, but historically they have slowed Tesla's roll. When considering the New Jersey factor, shareholders should take into consideration that, although it is a small market when compared to Europe and China, the implications of Gov. Christie's restrictions expand beyond the Garden State and could snowball into a much larger, federal fight.

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