In a handful of states, Tesla (NASDAQ:TSLA) is still threatened by lobby-backed legislation that opposes the electric car-maker's direct sales model in favor of the franchise system. The latest updates come from New York and New Jersey.
Last month, New Jersey took Tesla by surprise when Gov. Chris Christie suddenly decided to support an auto dealer lobby group's efforts to ban Tesla from selling vehicles directly in the state. Swiftly approving new regulation that required all new car dealers to obtain franchise agreements, Tesla had until April 1 to comply before Tesla would be forced to shut down its retail operations there.
But April 1 came and went, and Tesla is still selling vehicles directly at its Tesla-branded retail stores. It turns out, Gov. Chris Christie's administration granted Tesla a last-minute extension to acquire its dealer license.
Of course, Tesla won't be obtaining a license, and Christie probably knows this; the underlying reason for the extension was likely to provide time for a new bill submitted by state assemblyman Tim Eustace to get approval. The new bill would allow dealers to sell cars directly in the state under the conditions that they sell only zero-emission vehicles and vehicle sales in the state make up less than 4% of total vehicles sold -- two conditions Tesla easily qualifies for.
While New York was already allowing Tesla to sell its vehicles directly in the state, proposed legislation was set to block Tesla's efforts for direct sales. But a March 28 agreement between Tesla Motors and the New York State Automobile Dealer Association will enable Tesla to continue to sell vehicles directly at its five retail locations in the state.
The agreement, of course, is not without conditions. Any new stores beyond the current five must "be established under a strengthened dealer franchise law." Whatever the strengthened dealer franchise law entails is not clear yet. New York says the legislation will be introduced in the near future.
"Today's agreement reaffirms New York's long-standing commitment to the dealer franchise system, while making sure New York remains a leader in spurring innovative businesses and encouraging zero emissions vehicle sales," said New York Governor Andrew Cuomo in the statement outlining the new agreement. "The agreement is a win-win for consumers, for the franchised auto dealers and manufacturers who play such a vital role in New York's economy, and for cutting edge companies like Tesla."
Small steps in a long journey
As Tesla grows, objections from dealers will likely continue. While Tesla investors should at least keep an eye on the progress of Tesla's effort to sell cars directly in the U.S., investors shouldn't fret about a disappointing outcome. Given that it's mostly dealer lobby groups and not consumer groups protesting Tesla's attempt to sell vehicles directly, Tesla will likely continue to win small battles, one at a time.
As Tesla has repeatedly argued,selling its vehicles through the franchise model wouldn't work. Given that dealers make the majority of their money from service and Tesla's electric cars require very little service, dealers wouldn't have fair incentives to sell Tesla's vehicles. Further, selling an electric car requires a car salesperson to educate the consumer -- a step that has certain conflicts of interest with selling gas-powered cars on the same lot.