It's legislation season again in Texas, and Tesla Motors (NASDAQ:TSLA) is back to push for changes to the state's auto dealer laws. The electric automaker lost last time it messed with Texas, but its back now and bringing more resources to bear.
Unlike in many other states, where Tesla can sell directly to customers, Texas has laws in place that require automotive manufacturers to sell through franchised dealerships, therefore blocking the automaker's direct sales method.
Currently, Tesla vehicles are made available for display in galleries in Austin, Houston, and Dallas. But employees are not allowed to assist customers in purchasing the cars, or even to discuss pricing. Instead, customers must order the car online and have it delivered, at which point they will have to unwrap it themselves since Tesla's workers are not allowed to do it for them.
Now, Tesla is pushing for legislation to allow direct sales to customers in Texas, holding rallies of fans and owners as well as spending between $625,000 and $1.8 million on lobbyists according to The Texas Tribune -- a sharp increase over previous lobbying spending of $170,000 to $370,000.
So far, two new bills have been put forth by state legislators, and they have received some bipartisan support. According to The Texas Tribune, each bill would allow Tesla to operate a limited number of stores modeling after policies in Ohio, New York, and Pennsylvania.
Clearly, some stores are better than none, and the fact that the bills are a compromise could make them more acceptable to the dealers association, which has its own lobbyists in the legislature (more on this later).
The Texas Tribune has noted that there have been many attempts by dealerships to obtain the rights to a Tesla franchise, yet Tesla remains committed to direct sales to customers. Tesla CEO Elon Musk has explained this by claiming that Tesla employees would be the best ones to sell the cars since they are the most knowledgeable about them and have an incentive to sell electric cars.
Musk has also questioned whether a franchised dealership could make money on Teslas since dealers rely on service revenue, and electric cars don't require as much servicing.
But maintaining direct customer sales is also core to how Tesla wants to be perceived. The automaker has branded itself as a different type of car company, and the customer buying experience goes a long way to developing that brand. The automaker wants to offer a buying experience unique to the automotive world by using Apple-esque stores and online ordering.
Texas and beyond
There are battles in other states as well. Just recently, a bill in Utah has been proposed to allow Tesla to sell directly to customers and there is fierce debate in Connecticut over allowing such sales. Legislation has also been proposed in Arizona to open up direct Tesla sales there.
Currently, 35 states have given Tesla the go-ahead for allowing direct sales, although some states have limits on the number of stores the electric automaker can open. But while Tesla is still pushing for changes in the remaining states, Texas is still the biggest prize on Tesla's radar.
The fight to sell cars directly to consumers in Texas may seem like a battle for just one state, but this state is the second largest for automotive sales in the nation. Based on data from the National Auto Dealers Association, sales in Texas account for about a 10th of nationwide car sales, making this market highly valuable for all car companies.
Tesla now seems willing to compromise, rather than losing out completely.
As previously mentioned, the Texas bill would still place limits on the number of stores Tesla could operate in the state, following in the paths of New York, Ohio, and Pennsylvania. Now, the Connecticut proposal also contains similar limits, and the automaker is supporting it as well.
Because of the sharp divide between Tesla and the dealers associations, these compromise agreements are likely to become the standard for future legislation.
Will it work?
The next question is whether Tesla can function properly under these store limit agreements. So far, the automaker is signaling it can by pushing legislation to allow this in several states.
From a strategic point of view, it could work. Since there is not as much servicing required on electric cars, there would not be a need to build as many stores and service centers as traditional auto dealers have built. And even when a Tesla needs servicing, the company offers service from its mobile rangers, negating the need for as many trips to a service center.
Tesla also has a heavy online presence and allows vehicles to be ordered directly online. While many customers will still want to see the car in person and test-drive it, those already decided on what they want can order online, further reducing the need for as many stores.
The bottom line
While the compromise agreements being drawn up in many states will limit the numbers of Tesla stores, the automaker's business model should allow it to function properly with fewer stores than rivals.
Going forward, investors should keep watching for developments in possible changes to dealership laws in more states, as they could provide more sales to Tesla from areas with currently difficult selling conditions.