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Tesla’s sales route too direct for rivals

Dealers claim role of buyer protector

- The Washington Times - Thursday, March 20, 2014

Trendy electric car maker Tesla is trying to take a side road that bypasses the business model for selling cars that has dominated the market for decades.

But the company is locking bumpers with angry and politically potent car dealers, with Ohio the latest battleground over whether the direct-to-consumer sales model will be allowed.

The California-based Tesla is a fully packaged auto business that runs the design, development, manufacturing and selling of its electric-powered luxury cars.

Instead of drawing a line between the automobile manufacturer and locally owned car dealerships with big outdoor lots, Tesla does the selling in its own stores, many in high-traffic retail malls.

Tesla says its business model, which the industry is watching, gives it a closer connection to customers and makes the buying process more enjoyable.

But dealers and many states say Tesla owner Elon Musk is challenging a system that has provided needed protections for consumers in what is often one of the biggest purchases of their lives.

"The distinctly different roles of dealers and manufacturers act as a system of checks and balances to ensure that warranty and other service issues are administered fairly," Joe Cannon, a lobbyist for the Ohio Automobile Dealers Association, said in testimony before Ohio lawmakers last week.

Ohio is seeking to do what states such as Texas, New Jersey and Arizona have done: impose a legal ban on the sale of vehicles by their manufacturer.

As Tesla counters established standards, lawmakers are strengthening state laws to make sure the business model doesn't become a trend among independent car manufacturers.

"All states have laws and regulations on the sale of new motor vehicles. Some allow automakers to sell directly, while others require dealers as an additional layer of accountability," the National Automobile Dealers Association said in an emailed statement to The Washington Times. "It is up to each state to decide whether Tesla or any manufacturer is complying with the laws regulating the sale of new cars and light trucks."

While states say they are acting in defense of locally owned and independent businesses, Tesla spokesman Patrick Jones said his company isn't affecting those dealerships.

"From the beginning, Tesla's business model has been to sell direct to consumer, so in no way are we displacing long-established businesses that are locally owned and operated," he said in an email statement.

Mr. Jones said Tesla sold 22,000 vehicles last year, compared with "larger manufacturers which pump out hundreds of thousands of cars each year."

In states that have banned the sale of automobiles directly from the manufacturer, Tesla is transforming its stores into galleries and operating with a "look, but don't touch" policy. Representatives can talk about the cars, but they will not offer test drives or talk about prices.

Since Texas enacted its law, residents can buy Teslas only out of state or by using the company's Internet-based order and delivery system.

"Consumer awareness of Tesla and interest in Model S continues to grow, but there's no doubt that banning our ability to provide test drives and give pricing information will be major obstacles for our sales advisers," Mr. Jones said.

In a blog post to the people of New Jersey, where lawmakers closed down Tesla's sales operations, the company's CEO said dealers often do not have a manufacturer's interest at heart, especially with a technology that threatens the bulk of their business.

"The reason that we did not choose to [sell through franchised dealers] is that the auto dealers have a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none," Mr. Musk said.

"Moreover, it is much harder to sell a new technology car from a new company when people are so used to the old. Inevitably, they revert to selling what's easy and it is game over for the new company," he said.

Ken Elias, a partner at Maryann Keller and Associates, a management and consulting firm for the automotive industry, dismissed this argument. He said Tesla's interests would be protected by creating a dealership network that sells only its vehicles, exactly as every other manufacturer has done.

"That's a completely specious argument because Tesla would never be sold in a Mercedes store," he said.

The separation between the manufacturer and dealer has become a tense issue in a state with 830 franchised automobile dealerships and a $2 billion payroll to 50,000 Ohioans.

The bill in Ohio is meant to reinforce long-held standards between manufacturers and dealerships, said Mr. Cannon of the Ohio auto dealers group.

He noted that the dealership system has not blunted automotive innovation because, for example, Toyota sells its electric-engine Prius side by side with its gas-powered Camrys and other models, plus hybrid versions of those models.

"Nothing in the legislation stands in the way of innovation," he said. "Our current competitive system has encouraged investment and innovation from all of our manufacturers, whether is it the development of alternative fuel vehicles or the latest entertainment and communication technologies that are a must for today's buyers."

The National Automobile Dealers Association also noted in its statement that a vehicle purchase is not like buying a computer or any other off-the-shelf product, so someone other than the manufacturer is more likely to defend the consumer than the manufacturer is.

"It's easy to see the rationale for state laws that foster a well-capitalized, dealer network. A new-vehicle purchase usually requires financing and often involves a trade-in," the association said.

In his blog post to the people of New Jersey, Mr. Musk said this "consumer protection" argument, which was cited by New Jersey Gov. Chris Christie in defense of his state's law, is merely an excuse for dealers to rip off consumers via their service and repair departments.

"As anyone who has been through the conventional auto dealer purchase process knows, consumer protection is pretty much the furthest thing from the typical car dealer's mind," he said while taking a shot at Mr. Christie and the political culture of New Jersey.

"The rationale given for the regulation change that requires auto companies to sell through dealers is that it ensures 'consumer protection,'" he said. "If you believe this, Gov. Christie has a bridge closure he wants to sell you. Unless they are referring to the mafia version of 'protection,' this is obviously untrue."

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