How do you buy a car? The answer, with few exceptions (including Ferrari invitation-only sales), is that you go to the dealership. How do you buy Motor Trend’s 2013 Car of the Year, the Tesla Model S? Unfortunately, the answer is, “it depends.” Tesla Motors, operated by famed CEO Elon Musk, is currently pitted in a nationwide state-by-state battle for the right to legally sell its cars. The national lobby group for automotive dealerships, the Automobile Dealers Association, has spent recent years duking it out with the innovative electric car producer. The problem? Tesla wants to sell its cars direct to consumers, and the Dealers Association, through state franchise laws, is attempting to require Tesla to utilize independently owned dealerships.
Under most state franchise laws, car manufacturers are prohibited from selling new vehicles directly to consumers. According to Road and Track, the push for such laws occurred early on when the auto industry was still establishing itself in the domestic consumer market. At this time, third party dealerships were often used to “float the manufacturers by financing the inventory they bought.” Over time, as the dealership industry grew in size, dealers “convinced most state legislatures to pass strong laws that protected their business model by preventing the manufacturers from directly competing with them.”
Tesla has won a few small victories in its battle against these laws, including a recent victory in New York that disallows dealerships from utilizing the state dealership laws to sue competitors. However, some states, most notably Texas, have stuck to their proverbial guns by refusing to amend current strict franchise laws to allow Tesla to sell direct. As a result, Tesla “sales” staff in Texas locations are forbidden from any sort of sales activity, including offering details on pricing or any sort of information regarding how to purchase a vehicle.
If you crave evidence of Tesla’s battles, look no further than the Tesla website, which openly shows its scars from lost legal battles with franchise laws. Under the site’s “find us” tab, States sticking to strict franchise laws are listed as having Tesla “Galleries” rather than “Stores.”
Musk asserts that for the company to survive it must cut out the middleman and sell direct to consumers. This seems reasonable considering the sheer difference in size of the company when compared to most carmakers that utilize dealerships. Even Ferrari currently offers five models of cars, a surprisingly large number when compared to Tesla’s one, the Model S. Tesla’s size alone may require a more order-based system for its cars, as opposed to building the sort of inventory a dealership network would require. The initial capital investment required to build inventory sufficient for a successful dealership network could potentially drive Tesla deeply into debt. Is it wise to saddle a new company with debt, especially considering it was just less than a year ago that Tesla paid its immense debt to the government?
So what is the next move for Tesla? It’s very likely, as Musk agrees, it’s to seek nationwide reform. Legal battles are costly, especially for an emerging company such as Tesla. With around a dozen states making Tesla’s sales model “extremely difficult,” only time will tell if the costs of litigation compel Musk to head to Capitol Hill. It would be a true shame to see Tesla fall merely due to legal roadblocks preventing it from reaching nationwide distribution.