Compromises in several states allow Tesla to sell cars, despite dealership opposition

Electric vehicle manufacturer Tesla continues to battle state by state to launch its new storefront-based sales model despite opposition from dealer associations. The company has also begun selling cars in China, and is building out its service and vehicle-charging infrastructure.

Despite strong and well-funded efforts by dealership groups to prevent the company's direct sales model from entering a number of states, Tesla got a bit of a boost earlier this year when three Federal Trade Commission (FTC) regulators posted a statement on the FTC website supporting Tesla's model. According to the release, moves by state legislators to protect dealerships are "bad policy" because they are stifling innovation.

The FTC release was penned by Andy Gavil, director of the Office of Policy Planning; Debbie Feinstein, director of the Bureau of Competition; and Marty Gaynor, director of the Bureau of Economics.

The FTC statement also noted that Tesla only sold 22,000 of the 15 million vehicles sold in the U.S. in 2013, and that the company "hardly presents a serious competitive threat to established dealers. What it could represent is a real change to the way cars are sold that might allow Tesla to expand in the future and prove attractive to other manufacturers, whether established or new ones that have yet to emerge, and consumers."

The statement from Gavil, Feinstein and Baynor closes by noting that change is a critical component of healthy competition. "Such change can sometimes be difficult for established competitors that are used to operating in a particular way, but consumers can benefit from change that also challenges longstanding competitors. Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated. We hope lawmakers will recognize efforts by auto dealers and others to bar new sources of competition for what they are – expressions of a lack of confidence in the competitive process that can only make consumers worse off."

The Tesla model is in dispute in at least 14 states, with Texas and Arizona having already banned its stores, while compromises have been hammered out between Tesla and dealers in other states. In New York, Tesla will be allowed to operate its five existing sales locations, but can't open any new outlets unless they are owned and operated by an independent dealer.

In Ohio, where dealerships lobbied the state legislature to ban Tesla's model and sued the Ohio Bureau of Motor Vehicle's to pull Tesla's existing dealer licenses, lawmakers came up with a compromise that allows Tesla to operate three sales locations (two existing and one new), while blocking Tesla (and other OEMs) from obtaining any future direct sales licenses.

In New Jersey, the state's Motor Vehicle Commission blocked Tesla. The company already operated two showrooms there, which would have had to be closed. At the end of April, compromise legislation was proposed that would have allowed the company to have four stores in the state while requiring it to open a second service station. 

Dealers worry about consumer protections

The dealership groups have raised questions about how direct sales would remove consumer protections related to warranty and service issues that are created by licensed and regulated independent dealerships. Tesla founder Elon Musk has consistently said he's avoiding the dealership model because the existing dealer base is so married to selling gasoline-powered cars that they wouldn't devote enough resources to promoting his electric vehicles.

As Tesla expands its operations, its service model is also shaping up. Like the company's sales model, the service operation will also take a highly personal, almost boutique approach that may offer a glimpse of how other OEMs will approach service in the future. Over-the-air software updates will remotely fix most issues. If a vehicle requires physical service, owners can bring it to the service center or have a mobile technician (a Tesla Ranger) come to their home or office. Owners also get a fully loaded Model S Performance 85 loaner while their vehicle is in the shop.

In Cathedral City, Calif., the company is setting up shop in a former Volkswagen and Hyundai dealership, where customers can order cars via a point of sale kiosk (you can't just drive on the lot), and have their vehicles serviced.

The company is gradually building out it infrastructure so that buyers will be within a reasonable distance from its service facilities and have adequate charging stations.

In China, where the company recently delivered its first eight vehicles, the company made sure customers had charging stations installed in their homes or offices before making the cars available. The company is partnering with two major electric grid operators in China to help build out the charging infrastructure.

According to the company, nine out of 10 Tesla owners in North America are within 100 miles of a Tesla service center. The bulk of those service centers are in Tesla's home state of California, and a number are still listed as "coming soon" in locales ranging from New Orleans to Alaska.

Musk has stated multiple times that he doesn't think service should be a profit center for the company, so the bulk of what Tesla will do on the service side is either free or very low cost. It offers a number of optional service plans (above and beyond the warranty) that range in cost from $600 to $4,800.

In a blog post about the dustup in New Jersey, Musk stated that service profits represent a conflict of interest for dealers because they "make most of their profit from service, but electric cars require much less service than gasoline cars. There are no oil, spark plug or fuel filter changes, no tune-ups and no smog checks needed for an electric car," Musk said. "Also, all Tesla Model S vehicles are capable of over-the-air updates to upgrade the software, just like your phone or computer, so no visit to the service center is required for that either."

But despite Musk's statements, there is some evidence that Tesla may drop this posture. According to reports, James Chen, Tesla's vice president of regulatory affairs, speaking at a forum organized by the National Association of Motor Vehicle Boards and Commissions, indicated that once the company reaches a certain sales volume, it will likely have to migrate to a traditional franchised dealer model. And as many dealer associations have pointed out, Tesla could operate the type of stores it currently has in just about every state (with separate service facilities and non-negotiable pricing), provided they were owned by a third-party investor/dealer. Tesla has so far resisted doing so, even though it could potentially reduce its own costs and increase its rate of expansion.

In the meantime, Tesla continues to make its case in the court of public opinion, along with adopting some good old-fashioned wheel greasing. While Texas has banned the company's stores, the state is on the short list for Tesla's new $5 billion battery factory. In March, Texas Governor Rick Perry told Fox Business Network that it may be time to revisit the state's franchise and licensing laws.

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