Will This Ban Crush Auto Sales for Tesla Motors Inc.?

More and more states appear to be protecting their auto dealers by banning the direct sale of automobiles to consumers. Of course, this has the most affect on Tesla Motors (NASDAQ: TSLA  ) , the automaker who only sells directly to consumers and has no dealerships. 

While on a state-by-state basis, it may not seem like a big deal to hear that New Jersey or Missouri is banning direct auto sales, it may be quite damaging if other states follow in rapid succession.

Here is great graphic put together by MojoMotors:

Source: MojoMotors

MojoMotors CEO Paul Nadjarian elaborated on the situation, explaining that "in many states, Tesla has service centers, superchargers, and showrooms, but they can't sell cars according to state law. Sales people in the Tesla showrooms can't even discuss prices." 

So what implications does a direct-sales ban have on Tesla?
There's two ways to look at this, in my opinion:

  1. Consumers who want to buy a Tesla, will ultimately find a way to buy a Tesla, regardless of a ban.
  2. Sales will slump significantly if more and more states begin banning direct auto sales.

There's no reason that both of those things cannot occur, just at different times. I think that in the short term, the second point matters very little, as demand for Tesla's Model S is extremely high. Currently, Tesla's sales, volume-wise, are too small to be dramatically effected by the state bans, with only 6,457 vehicles delivered in its latest earnings quarter.

Also, if you go to the company's website today to order a new Model S, don't expect the delivery until late September. This demonstrates that demand for the vehicle is still extremely high and in the short term should be unaffected by any state ban. 

However, the second point above seems as though it could have some merit in the longer term, perhaps when prices for a Tesla vehicle come down, and the broader public begins to become more interested in the all-electric automaker. 

Source: Tesla Motors

What about consumers' thoughts and wants?
Many have been arguing that it's not fair for states to ban direct auto sales, since it is preventing consumers from buying the car of their choice. Many feel as though they should be able to buy any car they'd like, from any automaker.

While in theory this true, those who support the ban will argue that it's in place in order to protect the consumer. When cars break down or are recalled, a dealership will need to assist customers in having their vehicle fixed, and as we have discussed, Tesla has no dealerships. 

I'm of the personal opinion that this ban is not necessary. Tesla has service centers and could easily expand its coverage to remedy such problems, without having to open up dealerships in every state for every location it plans to sell its cars. 

I think the ban is more of a political battle than anything else. The dealerships for big automakers -- think General Motors, Ford, Fiat Chrysler, and Toyota Motors, to name a few -- have a lot of leverage.

Ultimately, I think, the consumer will get access to these vehicles in most, if not all states in the future. That just seems like the "American" way. Provided that Tesla can prove that it can service all of its vehicles, then I think there will likely be a deal worked out between each state and Tesla. A deal could be negotiated where Tesla will only open a certain number of galleries so long as there are certain number of service centers, or something along those lines. 

So will these state bans "crush" sales of Tesla?
Right now, I don't think the state bans will hurt Tesla. That is, in the short term there is still more demand than supply, and Tesla can't produce fast enough to keep up with its orders. But in the longer term, when Tesla can keep pace with its order demand, then these state bans could weigh on its financial performance. 

Meaning that, when Tesla finally reaches the production capacity to meet, or even exceed, current demand, then it will need to rely on higher sales results to fuel further growth. The problem is that, if these state bans are still in place, and the number of states banning direct sales increases over time, then there will potentially be fewer buyers interested, aware of, or able to purchase new Tesla vehicles. 

CEO Elon Musk seems more than willing to fight this "mafia version" ban, possibly even at the federal level. Even so, I just can't picture American consumers being told they can't buy something that they want -- especially with the type of reviews and safety ratings the Model S has -- because the governing bodies are trying to protect them.

As much legal muscle as this country's dealerships may be able to flex, I just don't see this ban being upheld without providing some flexibility in favor of Tesla. Unfortunately, it is likely to get worse for the automaker before it gets better, in regards to the state bans. Tesla will likely have to increase the number of service centers to an acceptable number, and if it does, I see no reason why direct sales bans should hold up.

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Read/Post Comments (11) | Recommend This Article (0)

Comments from our Foolish Readers

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  • Report this Comment On June 18, 2014, at 1:30 PM, txfilmguy wrote:

    It doesn't make any difference. People in banned states just buy it online as if they were buying from Amazon.

  • Report this Comment On June 18, 2014, at 1:50 PM, JRP3 wrote:

    Apparently the author missed the news yesterday that both NJ and NY have passed legislation allowing Tesla direct sales.

  • Report this Comment On June 18, 2014, at 2:19 PM, dimestop wrote:

    so you "jump a jet" and drive back...

    big "f'n deal..."

    plus big TESLA sales WILL BE IN CHINA AND EUROPE (in Europe ...average price of gasoline has been $8. a gallon for quite a while... and the mid-east rampin' up... is just gonna make gasoline "more and more" expensive "worldwide" including here in U.S.

  • Report this Comment On June 18, 2014, at 3:07 PM, NCIC wrote:

    @JPR3, yah, he should have edited his article, but then it would have lost a lot of steam. With the exception of Texas, the rest of these states are strong-holds of Detroit/Japanese manufacturing sites, so they probably will be slow to adopt competition. Virginia and Texas will be a couple of hard fights for Tesla, but I see Texas back-peddling in the near future with Gigafactory lobbying from Rick Perry and seeing him driving into Sacramento in a Model S.

    I live in Texas, bought my Model S off the website and spent $900 to have it shipped to my front door. That's about the same price I pay for delivery charges on a Chevy at my local dealer.

    Tesla isn't in any hurry to open up more states since they are struggling to keep up with demand even before they start advertising their vehicle.

    All is good Bret. Time to dump your shorts!

  • Report this Comment On June 18, 2014, at 4:46 PM, Bkenwell wrote:

    Hey guys --

    First I just want to throw out there that at the time I submitted the article, the NJ news was not out. That is good news for Tesla though.

    Also, to NCIC, I have no shorts in TSLA, and in fact, never have!

    Thanks for reading/commenting!

    -Bret

  • Report this Comment On June 18, 2014, at 4:48 PM, Bkenwell wrote:

    Also, I'd just like to add that there are a lot of red states on the chart above, and that with or without the ban in NJ, there are still a lot of other states to consider!

  • Report this Comment On June 18, 2014, at 11:26 PM, Haggy wrote:

    This map reminds me of political maps with red states and blue states that stress land area over population. Aside from Texas, it seems as if every state on the map either allows Tesla sales or borders on a state that does. And aside from Texas, many of the red states are lower in population that most.

    As long as there are showrooms where people can see the vehicles and test drive them, the rest isn't all that important. The on-line price isn't different from the showroom price. If the showrooms simply let customers use a terminal to access the Internet, the customers could take a list of options from the advisor and key in a configuration to get the prices or even order the vehicle.

    I ended up ordering over the phone when I called an advisor to ask questions. He already knew which options I wanted from a showroom visit. So my question is whether any state could stop an advisor from asking a customer for his cell phone number, keying it into a computer, and having an advisor in another state call potential customers to discuss prices. Or perhaps the advisor could hand a phone number to a customer. I don't see how they could expect the person at the other end to have caller ID before the person decides whether to answer questions.

  • Report this Comment On June 19, 2014, at 4:56 AM, Urpani wrote:

    Update yourself ! NJ has released it's ban and others states will follow. This is just a piece of bad publicity to put people off Tesla.

  • Report this Comment On June 19, 2014, at 10:57 AM, ffbj wrote:

    A good, well written and measured article.

  • Report this Comment On June 19, 2014, at 11:43 PM, adrianrf wrote:

    Haggy's comment is right on.

    As is txfilmguy's; NCIC's; Bkenwell's; and ffbj's.

    I'm a tech industry insider, with a marketing background.

    I currently lease a 2013 Nissan Leaf, which is 220% fueled by a 3.2kW PV array on the roof of our house in rainy Portland OR. Time to break-even on the solar array installation: 3.1 years.

    Tesla has its sh*t together, big time.

  • Report this Comment On June 21, 2014, at 1:56 AM, nswanberg2 wrote:

    I thought the point of dealerships was to insulate the customer from the manufacturer? In Tesla's case their cars will need much less service and warranty work so direct sales make sense. Still waiting for 250 mile range and a 10 minute charge. Will it ever happen?

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