Is Tesla's retail road a dead end?
For all the trailblazing Tesla Motors has done in its relatively short life span, one trail will be very difficult for anyone else to follow: its retail model.
Though Tesla has been relatively successful in battling state legislatures, dealer groups and legacy automakers such as General Motors, the company’s approach of avoiding franchised dealers and selling directly to consumers is no more secure for other startups, or even Tesla itself.
In fact, the next company to try direct sales in the U.S. will face a much tougher fight thanks to the dust Tesla kicked up in its battles.
That potential list includes a wide range of companies, including French giant PSA — which is considering a return to U.S. sales after 2020 — upstarts such as Faraday Future, Atieva and Elio; and Chinese automakers eyeing the lucrative market.
In some key markets, such newcomers would have to pry open the doors that closed behind Tesla if they wanted to explore direct sales. At least six state laws that were amended to allow Tesla to sell directly are backdated and so tightly written that they effectively grandfathered in Tesla, while preventing others. Several other states don’t specify a date, but do specify that the type of vehicle sold directly must be powered by alternative fuel.
Meanwhile, Tesla’s position is getting more precarious. Michigan, which tightened the language of its ban on direct sales in 2014, fully barred the door on Tesla’s request for a dealer license last month after negotiations sputtered. In Missouri, a state judge on Aug. 31 effectively voided a dealer license granted to Tesla, saying it had been granted in violation of the state’s franchise laws; in that case, Tesla had applied to be its own franchisee. The Missouri ruling bars the state from renewing or granting any licenses to manufacturers.
And some of the 23 states in which Tesla is allowed to sell directly are expected to start reconsidering their openness in light of the higher-volume, lower-cost Model 3 and subsequent Model Y crossover. Indiana is in that camp.
Tesla is still fighting state by state for its direct-sales model, and other startups are sure to have a harder time.
• Michigan: State tightened its franchise laws in 2014 and rejected Tesla’s request for a dealer license. Tesla filed a federal lawsuit against state officials, challenging the prohibition on direct sales as protectionist and unconstitutional.
• Missouri: A state judge ruled Aug. 31 that a dealer license Tesla received in 2014 was granted in violation of the state’s franchise laws because Tesla had applied to be its own franchisee. The ruling bars the state from renewing or granting any licenses to manufacturers.
• Indiana: A General Motors-backed bill pending in the legislature would put a 30-month expiration date on any manufacturer’s current dealer license and ban any additional manufacturers from getting a dealer license.
• Arizona: State last month granted Tesla a license to sell directly to consumers, following a judge’s July 29 ruling that a previous application was wrongfully denied.
• New Jersey, Ohio, New York, Nevada, Washington and Georgia allow franchise-law exemptions only to companies operating in the state as of a specific date.
For years, state lawmakers have been torn between two competing views of dealers’ role in an electric-car marketplace. On one hand, dealer groups and other defenders of the franchise system say state franchise laws should apply equally to all manufacturers, regardless of what’s under the hood.
Tesla, for its part, says being forced to use traditional franchises would put its electric cars at an unfair disadvantage because dealers offering multiple brands would rather steer customers to gasoline vehicles that produce more business for their service departments. (Tesla notes that its vehicles require no oil changes, spark plugs or emission checks.)
Tesla’s Model 3, expected to sell for about $35,000, raises the stakes on both sides.
States with franchise-law exemptions that effectively allow Tesla but no one else include New Jersey, Ohio, New York, Nevada, Washington and Georgia. In each of these states, the exemption applies only to companies operating in the state as of a specific date (for example, in New York, it’s March 26, 2014; for Ohio it’s Jan. 1, 2014).
There’s no evidence that Tesla asked for the backdating, according to multiple legislators, dealer group representatives and advocates for and against Tesla familiar with the crafting of the legislation.
Instead, the political compromise was the result of negotiations between dealer groups standing up for franchise laws and legislators who didn’t want to seem unfriendly to a business such as Tesla that in some cases had already opened a store.
Enabling that compromise was the fact that Tesla’s first two models, the Model S and Model X, hardly seemed worth a pitched battle, given their narrow audience and relatively low volume. Many dealer groups and state legislatures have been content to let Tesla and its roughly 90 sales outlets and galleries do their thing.
But Tesla’s next round of models — the Model 3 and Model Y — could change that. A Tesla that would cost $35,000 and be built by the hundreds of thousands raises the stakes on both sides of the argument.
To achieve the volume needed to make those products successful and profitable, Tesla will need as broad a retail and service network as it can assemble, and it’s determined to own those stores. But dealer groups and legacy automakers — particularly GM, which has its own long-range EV debuting late this year — are wary of what might happen if a wider swath of the public is exposed to the idea of buying a car without a middleman, whether it’s Tesla or something else.
“With the Model 3, the stakes go way up,” Dan Crane, senior professor of law at the University of Michigan and an advocate for direct sales, told Automotive News. “This is the next battle, and it’s not remotely over.”
Indeed, in Indiana, a GM-backed bill pending in a legislative committee would effectively take the state’s open outlook on direct sales from 60 to 0, putting a 30-month expiration date on any manufacturer’s current dealer license and banning any additional manufacturers from getting a dealer license.
A key reason cited during a committee meeting last month was the Model 3.
“The issue is what’s the right public policy and what is the minimum to protect the public in a very, very expensive purchase that is now not going to be an expensive sports car but is now going to be available to the average consumer,” state Rep. Ed Soliday, chairman of the committee, said during the meeting. “When it was a $100,000-plus car it didn’t get a lot of attention.”
Tesla has faced its stiffest challenges in Texas, Michigan and Connecticut; so far the company has been unable to crack the political strength of dealer groups and legacy automakers in those states’ legislatures. Tesla has galleries in Texas and Connecticut, but can’t sell cars through them. Michigan won’t allow even a gallery.
With these markets off-limits, and other doors potentially closing, Tesla is escalating its battle. Last month the EV maker sued top Michigan officials in federal court, challenging the prohibition on direct sales as protectionist and unconstitutional. The suit came a week after Michigan’s secretary of state ruled out a dealer’s license for Tesla, and after Tesla, legislators and dealer groups failed to reach a compromise earlier in the year.
Michigan Gov. Rick Snyder told Automotive News that Tesla hasn’t yet presented a viable argument to state officials and lawmakers for being allowed to sell its vehicles directly to consumers.
“I’m always open to having that discussion,” said Snyder, a former executive at Gateway, a direct seller of personal computers. “It’s just that Tesla and the other people who want to do that need to present their case to the legislature and see if they get people interested in moving on something like that.”
By taking things to the federal level, Tesla will face a tough fight since those courts are often wary of second-guessing long-established state policies, Crane said.
But the automaker sees a precedent in a unanimous ruling in 2002 by the 6th U.S. Circuit Court of Appeals — whose purview includes Michigan — that found that the government can’t use protectionist regulations to restrict someone’s right to earn an honest living. The original ruling pertained to casket makers in Tennessee who were initially barred from selling their wares directly to customers without a state funeral director’s license.
Tesla is also encouraged by a similar ruling — also involving direct casket sales — that was upheld in 2013 by the 5th U.S. Circuit Court of Appeals. The biggest state in that court’s jurisdiction? Texas, where Tesla has been fighting for years to sell directly to consumers.
Regardless of what Tesla accomplishes in the federal courts, it’s unclear whether its business model will be able to survive as is, or evolve into a hybrid of direct and franchised sales. Many dealership groups and associations across the country have made it clear they’d love the opportunity to sell Teslas.
Todd Maron, Tesla’s general counsel, told Automotive News that the company has no plans to adopt any other business model, regardless of future volumes or types of vehicle sold. But Tesla’s critics and supporters think it’s inevitable.
Even Tesla CEO Elon Musk left the door open to a hybrid system once Tesla has an established base of customers.
“We would only do this if we were sure that the customer would have a really good experience,” Musk said at the 2015 Automotive News World Congress.
But for direct-sales critics salivating at the thought of having a Tesla franchise, he had this warning: “If you’re a jerk to us, we’re not going to turn around and try to do a partnership later.”
Katie Burke contributed to this report.