Sat May 18, 2013
Tesla Rides High, But Faces Formidable Foe: Car Dealers
Tesla Motors, the American maker of luxury electric cars, has been riding a wave of good publicity.
Its Model S sedan (base priced at $62,400, after federal tax credits) was just named Motor Trend Car of the Year. Reviewers at Consumer Reports gave the lithium-ion battery powered vehicle a rave.
And the company, headed by billionaire innovator Elon Musk, 41, posted a profit for the first time in its 10-year history — powered in part by zero-emission environmental credits.
But Tesla also finds itself, and its business model, under sustained attack by a formidable foe: the National Automobile Dealers Association, one of the most powerful lobbying groups in Washington with a strong network of state chapters.
The dealers say they have no quibble with the quality and allure of Tesla's products. What they object to is the Palo Alto-based manufacturer's efforts to sell the electric car directly to consumers rather than through independently owned dealer franchises.
Tesla's model is often compared to the one used by consumer electronics giant Apple.
"We want to cut out the middleman," says Diarmuid O'Connell, vice president for business development at Tesla. "We're a bad fit for the dealer system."
The dealers' response?
"Buying an iPad is not buying a car," says David Hyatt of the national association, which, along with member chapters, has taken their franchise fight to the courts and to state legislatures across the nation.
It's a battle between a deep-pocketed interest group, which last year contributed more than $3.2 million to candidates, and a fearless entrepreneur.
And it's just heating up.
Battles Emerge State By State
A bill being considered in North Carolina, where there are currently 80 Teslas on the road and another 60 expected, would prevent the company from selling vehicles online. In Virginia, the state denied the company a dealer license to open a store.
Texas lawmakers are expected to ignore an effort by Tesla to gain an exception to strict franchise laws that prohibit factory-owned dealerships. Last year, there were only 43 registered Teslas in the state.
In both Massachusetts and New York, legal efforts by franchise dealers to block Tesla's efforts were rejected — including attempts to shut down three Tesla stores and two service centers in New York.
Wrote New York Supreme Court Justice Raymond J. Elliott III: "Dealers cannot utilize the Franchised Dealer Act as a means to sue their competitors."
An effort in Minnesota to rewrite franchise law to prevent vehicle manufacturers from operating a dealership died in the Legislature.
But these are expected to be the early rounds.
The franchise fight in Massachusetts has moved to the Legislature. Minnesota dealers plan to submit new legislation next year. And there are also private battles about which O'Connell declined to elaborate.
"We don't underestimate the dealers," he said. "The franchise dealer system was, at its inception, set up to protect the dealers from manufacturers coming in and competing with them."
Tesla, which paid off early a $465 million low-interest government loan it received in 2009, insists that it presents little competition to the dealers. O'Connell characterizes the 10,000 to 15,000 cars it will sell this year domestically a "rounding error" for the big guys.
"This is absurd on its face," he said.
The company currently has 37 stores and galleries worldwide, 27 of them in the U.S., says Tesla spokeswoman Shanna Hendriks. It plans to open about 15 more locations this year with about half the openings in Europe and Asia.
It also has 24 service centers in the U.S. and 41 worldwide. Hendriks says the company plans to add approximately 30 service locations worldwide in 2013 – about half in the U.S.
Tesla argues that its electric product would get lost on a combustion engine lot; that its service needs are low and different than those at traditional franchises; its employees specifically trained and immersed in the car's technology; and its one-price, no-haggle policy anathema to the franchisee legacy.
"Ultimately," O'Connell says, "our ambition is to build a great car company, and our mission is to catalyze a mass market for electric vehicles."
"Why is it the [dealer franchise] market needs to be protected in this absolutist fashion?" he says. "There's a future out there where we might sell our product through a franchise dealer, but we're not there yet."
The Dealers Choice
Road & Track magazine describes the advent of the franchise system of independently owned and operated auto dealers as a way to enable "early automakers to get paid as soon as they shipped vehicles to the dealer."
The system long worked well, with dealers selling at a markup that brought healthy profits, according to the magazine, and the birth of muscular state laws preventing manufacturers from directly competing with the dealers.
And though the nature of the nation's economy has changed dramatically (why can't consumers buy cars online like everything else, Tesla asks), the dealers are holding tight to a structure as American as apple pie and essential to the health of communities.
"If manufacturers control dealership networks, there won't be dealerships in small towns — they'd just be where the big box stores are," says Bill Wolters, longtime head of the Texas Automobile Dealers Association. "Every year, there are bills that would weaken the franchise laws." Tesla's effort to change a state statute that prohibits manufacturers of new motor vehicles from operating a dealership, he says, is just the latest.
But perhaps the most persistent.
Both sides are not underestimating the determination of the other to prevail.
"I sat down in Palo Alto with Elon Musk, hat in hand, and said we want to partner with you, you can have it exactly as you want it — 'Tesla of Austin,' " said Wolters of the Texas dealers association. "You can do it just as you want to, within our law, you just can't own the showroom."
Musk, Wolters recalled, didn't cotton to the suggestion, leaving the room quickly, but not before pledging to spend an inordinate amount of money to battle automobile franchise laws.
Wolters noted, however, that he was taken for a nice drive in one of Musk's Teslas before heading back to Texas.
"He's just determined to do it his own way," Wolters says.