Memo to the White House From Tesla Motors, Inc.: You Made a Big Mistake

Remember that We The People petition consumers sent to the White House on Tesla's (NASDAQ: TSLA  ) behalf more than a year ago? The White House finally responded, and the reply was just as sad as the amount of time it took them to write a letter. Unsurprisingly, Tesla is unhappy with the response.


Photo: The Motley Fool

The petition
In May 2013, Tesla announced that it had wired $451.8 million to the U.S. government to repay the remaining amount of the Department of Energy loan awarded to the electric-car maker in 2010. The loan was paid off nine years early, making Tesla the only American car company to have fully repaid the government.

The next month, hoping the White House may be more willing to cooperate with Tesla's government loan (plus interest) paid off nine years early, Tesla fans and caring consumers started a petition on behalf of the electric car-maker.

The petition's purpose? Consumers were vying for Tesla to be allowed to sell directly to consumers in all 50 states.

States should not be allowed to prevent Tesla Motors from selling cars directly to customers. The state legislators are trying to unfairly protect automobile dealers in their states from competition. Tesla is providing competition, which is good for consumers.

It took less than a month for Tesla to gather the 100,000 signatures required. By the deadline, the petition amassed 138,000 signatures.

Tesla store. Photo: Tesla Motors

Excuses
Only three sentences in the response from Dan Utech, the Special Assistant to the President for Energy and Climate Change, addressed the petition.

After reminding consumers that the White House supports "the next generation of transportation choices, including the kind of electric vehicles that Tesla and others have developed," the White House politely declined to get involved in the matter.

But as you know, laws regulating auto sales are issues that have traditionally sat with lawmakers at the state level.

We believe in the goal of improving consumer choice for American families, including more vehicles that provide savings at the pump for consumers. However, we understand that pre-empting current state laws on direct-to-consumer auto sales would require an act of Congress.

To wrap up the letter, the White House reiterated what it is already doing to spur innovation for energy-efficient cars. The letter cited standards to increase fuel economy to 54.5 miles per gallon for cars and light-duty trucks by model year 2025, the DOE loan program that Tesla already benefited from, and $45 million in funding for new projects to "improve fuel efficiency, lower transportation costs, and protect the environment."

Tesla doesn't buy it
Tesla didn't hold back in their opinion of the White House's letter. Tesla's vice president of corporate and business development, Diarmuid O'Connell, who often is involved with Tesla's dealer battles, responded harshly:

Rather than seize an opportunity to promote innovation and support the first successful American car company to be started in more than a century, the White House issued a response that was even more timid than its rejection of a petition to begin construction of a Death Star. Instead of showing the sort of leadership exhibited by senior officials at the Federal Trade Commission who declared their support for consumer freedom of choice, the White House merely passed the buck to Congress and trumpeted its advances in promoting vehicle efficiency. Given the economic and environmental principles at stake, we would have hoped for stronger leadership and more action.

Model S. Photo: Tesla Motors.

Tesla's reasons for needing to sell its vehicles directly are clear-cut. Tesla argues that using the dealer model could threaten its business. Here are some of the key reasons central to Tesla's argument for selling its cars directly and bypassing the antiquated franchise system:

  • Dealers make the majority of their money from service, yet Tesla vehicles have a very low service profile thanks to the low-maintenance profile of fully electric vehicles. This means dealers will lack incentive to sell Tesla vehicles.
  • There is a blatant conflict of interest between selling fully electric cars and gas-guzzling internal combustion engine vehicles on the same lot. Tesla explained this point in a blog post in 2012:

Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars. It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business. This would leave the electric car without a fair opportunity to make its case to an unfamiliar public.

  • Locating smaller stores in high foot-traffic areas enables Tesla to educate a large number of consumers about electric cars, something the typical dealership location wouldn't enable Tesla to do.
  • Tesla finds it unethical to profit from service on a product it sold to a customer. In this spirit, Tesla has vowed to never profit from service. With dealers making most of their money from service, this philosophy wouldn't sit well with dealers.

While Tesla's production bottlenecks, particularly related to its lithium-ion batteries, mean the electric car-maker currently has more than enough demand for its luxury sedan, limitations in some states to sell its vehicles directly doesn't yet have an impact on Tesla's potential. But investors should keep an eye on the development of this legal battle, hoping states continue to loosen their laws prohibiting Tesla to sell vehicles directly.

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Comments from our Foolish Readers

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  • Report this Comment On July 15, 2014, at 5:00 PM, JackB125 wrote:

    I too was very disappointed by the administration's response to the Tesla petition. Over a year in waiting for a response and we only get 3 sentences that manage to be on topic. The rest of the response was just rah-rah noise. OK, I admit that I support that rah-rah; but, it was annoying having it as off-topic noise in a response for which I've been waiting quite a while.

    And, the pertinent part of the response...

    "But as you know, laws regulating auto sales are issues that have traditionally sat with lawmakers at the state level.

    We believe in the goal of improving consumer choice for American families, including more vehicles that provide savings at the pump for consumers. However, we understand that pre-empting current state laws on direct-to-consumer auto sales would require an act of Congress."

    Pretty lame. When I signed the petition, I (and I expect most of the other signatories) already knew that the offending regulations were state laws, and that the most logical federal remedy would, of course, be an act of Congress. With my signature, I was asking for LEADERSHIP on the issue, not some sort of Executive fiat that would likely be struck down.

    I was also disappointed that the response completely ignored the recent FTC blog from three of the FTC's directors -- "Who decides how consumers should shop?" at http://www.ftc.gov/news-events/blogs/competition-matters/201... . The FTC falls under the Executive branch & the blog is dead straight on topic! Yet, it was not mentioned at all.

    But, even though the administration's response to the petition was essentially a zero, I think that the dealerships and their various associations are finding that by fighting Tesla on this issue, they are running straight into powerful opposing market forces and strong consumer sentiment for more choices in the purchasing of new vehicles -- a very potent combination. I've certainly noticed that the dealership groups seemed to have adopted a lower profile on this conflict as of late. Perhaps Tesla (and all the auto manufacturers) can win these state-by-state battles without the administration's help. Perhaps such an outcome is already inevitable in the long run.

  • Report this Comment On July 15, 2014, at 11:12 PM, Chatkhan wrote:

    What a shame for this White House to stay away

    from the fight for the future of the energy revolution

    epitomized by efforts of Tesla and Solar City!

    Even Bill O'Riley on Fox News urged all the conservatives

    to root for Tesla.

    You just lost my vote.

  • Report this Comment On July 15, 2014, at 11:15 PM, parteaga wrote:

    At the same time, it is good that they leave this decision to be taken at a state level.

  • Report this Comment On July 16, 2014, at 10:54 AM, TXObjectivist75 wrote:

    Apparently this is the only time in 6 years the administration acknowledges states' rights and stays out of it.

  • Report this Comment On July 16, 2014, at 11:01 AM, ETFsRule wrote:

    It would have been a lot smarter if the petition had been sent to congress in order to force them to respond.

  • Report this Comment On July 16, 2014, at 4:52 PM, JackB125 wrote:

    @parteaga, I respectfully disagree that it is a good thing to leave this issue at the state level. If I could find one clear benefit that the state automobile franchise laws provide, then perhaps I would agree with you. But, I honestly cannot come up with one. Nor can I see any harm in repealing the franchise laws.

    The problems with these rent-seeking franchise laws are numerous. Double marginalization, stagnated business models, consumer dissatisfaction, distribution inefficiencies, the list goes on. Also, recent polls show a supermajority of state constituents do not support these laws; yet, they somehow stay in place year after year. This is, of course, achieved via political contributions and special interest lobbying.

    Goldman Sachs and Department of Justice studies estimate that these laws add about 8% to the prices that we pay for new vehicles. A portion of this 8% funds the dealership political expenditures. This money ultimately comes from the consumer of course. So, we have a system mandated by state law that incurs unnecessary additional expenses on the consumer. And, that very same consumer ends up funding the politics that protects the system he/she loathes.

    Let's look at the other side for a moment. What happens if the laws are repealed? Is the independent franchise system dismantled? Absolutely not. The dealerships will have to compete with new distribution and sales models like manufacturer direct stores. But, even that may not happen with some brands. I.e., I suspect that some brands may not want to change their current setup with their dealerships. And, for those dealerships that do encounter new competition? As long as they can provide true value to the process of purchasing and maintaining new vehicles at competitive prices, they should do just fine in the newly competitive market.

    And how about quality of service? If a good set of new competition does materialize with the repeals, I suspect the dreaded car sales shenanigans common to the "hard-sell" dealerships may come to an abrupt end.

    In summary, with the current failures of the state legislatures to do right thing, both policy-wise as well as serving their constituents clear wishes -- yes, in this instance, I believe a federal remedy would be the best and quickest solution to a problem that should have been fixed 30 years ago.

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