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Why a Tesla Manufacturing Plant in Texas Makes Sense

By Tamara Walsh – Apr 17, 2013 at 8:15PM

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Last week, Tesla Motors (TSLA 2.23%) CEO Elon Musk teased the idea of building a Tesla manufacturing plant in Texas. There's no denying that this idea seems far-fetched, ludicrous even, given Tesla's resources today. However, if we look five-plus years out, this could not only be a reality for Tesla, but also enable the company to better control costs and boost sales.

The electric-car maker, which currently operates a single factory, located in Fremont, Calif., is facing opposition from the Texas Automobile Dealers Association. It's not surprising than that Musk would attempt to lure lawmakers to his side with the promise of one day opening a factory in Texas for building electric trucks. Nevertheless, I think there's more to this than merely an empty bribe.

An unfair disadvantage
Here's the problem: Tesla needs Texas if the EV maker's disruptive retail strategy is to succeed down the road. As the second-largest and second-most-populous state in the U.S., Texas is a market that Tesla simply can't afford to ignore. Unfortunately, the Lone Star State has strict laws in place that currently prohibit Tesla from selling its cars directly to consumers.

Tesla and its outspoken CEO are up against the Texas Automobile Dealers Association, which claims that allowing Tesla to sell directly to Texas consumers would open the floodgates for other companies to do the same. Come on; is that the best argument they could come up with? An easy workaround would be for Texas legislators to make an exemption for Tesla, rather than amending the franchise laws currently in place.

For now, Musk is making the argument that Tesla isn't, in fact, capable of violating state franchise laws since the company has no franchised dealers. This is an important distinction, particularly because auto giant Ford (F -2.27%) has tried and failed in the past to buy out some of its auto dealers who were underperforming. For a massive auto manufacturer like Ford, one benefit of the franchised model is that it helps Ford reduce inventory-carrying costs, according to a report by Forbes.

While fewer inventories on the balance sheet may be better for a company such as Ford, it's not always better for the customer. In fact, a study by the U.S. Department of Justice found that auto franchises actually increase the cost to purchase a vehicle.

Winning over the lawmakers
Despite the many reasons it makes sense for both consumers and the economy for Tesla to operate in Texas, it won't be easy for the company to get its way this time -- whereas other states, including New York, Florida, New Jersey, California, Colorado, Oregon, Washington, and Massachusetts, have ruled in Tesla's favor.

Perhaps a smarter way for Tesla to win the favor of state lawmakers would be to lay out a plan to build a Texas-based manufacturing plant in the future, thereby investing tens of millions of dollars in Texas. Musk was on the right track when speaking with state legislators in Austin last week; Tesla's CEO highlighted how a Texas-based facility could help the company minimize logistics costs.

However, David Kiley, editor-in-chief of AOL Autos, points out that local dealers, particularly in Texas, are known to spend a significant amount of money on politicians at the state level to keep these franchise laws in place. With Texas dealers holding so much power, it's not surprising that Musk is pushing the possibility of an electric truck and Texas-based manufacturing plant to the table.

To really drive the point home, Musk explained, "if we were allowed to go direct, I think we would make Texas on par with California in terms of emphasis." Musk has so far followed through on every promise he's made at the company, and I don't see why this would be different.

Fool contributor Tamara Rutter proudly owns shares of Tesla Motors. The Motley Fool recommends and owns shares of Ford and Tesla Motors. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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