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Why Tesla Motors Is at War With Car Dealers

By John Rosevear - Apr 15, 2013 at 7:00PM

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Tesla CEO Elon Musk says that traditional franchised dealers are wrong for his business.

Tesla Motors (TSLA -0.57%) has been lobbying legislators and fighting auto dealers in several states, trying to secure the right to sell its electric cars via factory-owned stores, Apple-style.

That battle has been costing the upstart Silicon Valley automaker a substantial amount of money. It's also costing a substantial amount of time – CEO Elon Musk was in Texas last week, lobbying the legislature for an exemption from the state's tough dealer-protection laws.

Now Musk is saying that a Federal-level effort may be needed for the company to secure the right to sell cars via its own stores.

But why won't Tesla just do what all the other automakers do, and set up some franchised dealerships? And why are the dealers fighting so hard against a company that only sold about 4,750 cars last quarter?

Why the dealers are scared of Tesla
Auto dealer associations say that Tesla's factory-store model violates laws designed to protect dealers – and supposedly, consumers – in many states. Dealers in Texas, for example, have said that allowing automakers to sell directly to consumers would inflate the cost of vehicles (by reducing competition) and limit free enterprise, and dealer groups have successfully lobbied state legislators around the country for decades to get laws in place that protect their business model.

This Fool says that those claims are awfully dubious, to say the least, and that most of these laws likely have more to do with dealers' campaign contributions than with genuine consumer protections. But those are the arguments they're making, and those arguments are reflected in many states' laws protecting dealers.

Dealers say they fear that letting Tesla have an exemption would open the door to other competitors, such as Chinese automakers, to enter the U.S. market without having to use the traditional dealer network.

But as Musk told Automotive News last week: "If franchised dealers really believe what they say when they say they're the ones best able to sell and they can do a better job, then they should not fear competition."

Why Tesla doesn't want dealers
Tesla, for its part, says that the dealer model won't work for electric cars, at least not now. Musk argues that it's impossible for a dealer to be trusted to persuasively make the case for the company's electric cars while simultaneously selling gas-powered cars from other automakers.

In fact, Musk told Automotive News last week that he believes the use of traditional dealers was a key factor behind the downfall of Fisker Automotive, another green-car start-up that recently laid off most of its staff.

Musk isn't totally opposed to the idea of franchised dealers. He says that once Tesla's U.S. sales volumes get big enough – around 1% of the market, or around 150,000 U.S. sales a year – then using dealers would start to make more sense.

But meanwhile, Tesla is going to keep battling – at the Federal level, if necessary – for the right to sell its cars directly to customers. Stay tuned.

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