Tesla (TSLA) is truly remarkable. Over 90 years ago, Chrysler was the last American car startup to see success. Tesla has made it through the most challenging phase of its journey, creating electric automobiles that people wanted and loved.
Everything else is a piece of cake: appeasing investors, resolving legal issues, getting the vehicles delivered, and finally obtaining authorization to sell them all.
That’s correct. Tesla is not authorized to open dealerships in several states.
Connecticut is one of them. I signed up for the Tesla Model 3 waiting list two years ago and eventually picked it up in New York City this summer. As I drove back across the state line to Connecticut, I questioned why the state would want to pass over the sales tax I had just paid to a competitor state.
Finding the answer proved to be a complex and twisting journey.
States where Tesla is prohibited
It’s impossible to say how many states oppose Tesla’s dealerships. The laws against this exist in sixteen states, but Tesla hasn’t challenged them in any of those states yet. I’ll get to it in a minute.
These are the states: Alabama, Arkansas, Connecticut, Iowa, Kansas, Kentucky, Louisiana, Michigan, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Carolina, South Dakota, and Texas.
Another nine states restrict the number of Tesla stores that can be opened: Colorado (1), North Carolina (1), Virginia (2), Georgia (5), Maryland (4), New Jersey (4), New York (5), Ohio (3), and Pennsylvania (5). In some regions, Tesla has created “galleries,” where you may see the vehicles and ask questions. Still, you can’t even begin to think about purchasing one.
There is an inherent paradox in a capitalist society where a state may try to stop a famous corporation from building a store. What’s not to like about startups? Isn’t it true that they’re a source of property and sales taxes? Do they not indicate an increase in the number of local jobs?
Don’t you think bringing a significant player into the electric vehicle market would help these states achieve their sustainability objectives? The government of Connecticut, for example, has set a goal of reducing emissions by 45 percent by 2030.
Aren’t we supposed to be supporting American manufacturing?
Here’s why:
Franchising regulations
The primary reason for the restrictions is that Tesla refuses to give franchises like General Motors, Ford, Toyota, Honda, and others, preferring to run its showrooms.
On Tesla’s website, CEO Elon Musk says that “Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars,”
Tesla also emphasizes that its pricing is predetermined and that its salespeople are compensated mainly with salaries rather than commissions. As a result, “customers will never be pressured into making a purchase, debate over the car’s price or question whether they might obtain a lower price somewhere else, or struggle with complicated add-on goods like GAP insurance or rust-proofing.”
Tod Maron, Tesla’s general attorney, told me, “We consider that we have to have a direct interaction with our consumers.”. “Our stores serve as educational resources for the community. We see our salesmen as instructors who can properly answer all of our customers’ inquiries.”
In the 1930s, automakers implemented this strategy to focus on manufacturing vehicles while franchisees handled sales and repairs.
On the other hand, the franchisees sought early protection from their state governments. With the threat of big auto corporations opening up their dealerships across the street, they feared the franchise would be crushed like a bug.
The government addressed this misuse by enacting “dealer franchise laws” in all 50 states. The dealerships were safeguarded in various ways, including prohibiting any automobile manufacturer from retailing directly to customers.
Such laws were enacted much before the modern age ever began. Naturally, what they intended to say was that “no vehicle manufacturer that has franchisees may sell directly to customers.”
This is a common misconception. They didn’t consider businesses without franchises because none existed at the time.
Since its inception, Tesla’s legal team has made several trips to state legislatures, arguing for the need to update this legislation. Sometimes they were successful.
In some states, on the other hand, Tesla sees a more formidable challenge.
Protectionist policies
Technically, elected authorities in the various states are preventing Tesla from participating. But they’re doing it at the urging of another group: franchise owners of other auto companies.
Selling a new automobile is a low-profit endeavor for traditional car dealers. Service is the primary source of their revenue. According to a National Automobile Dealers Association representative, dealers make three times as much money from servicing as they do from new car sales.
When it comes to a battery-powered automobile, there is no engine or gearbox. It does not have timing belts, spark plugs, air filters, fan belts, or cylinder heads. It doesn’t need to be serviced for tune-ups, oil changes, or emissions inspections. Lifting your foot off the accelerator slows the automobile, so you don’t have to change your brake pads for years (by recharging the batteries).
Because of this, auto dealers perceive electric vehicles as a danger to the viability of their servicing operations. These vehicle dealerships are unwilling to give up this source of income.
Suppose the direct-to-customer store model takes root and becomes a popular structure. In that case, they fear that other automakers like GM and Ford would follow suit and cut out dealerships. They’ve been threatened on a personal level.
Connecticut Automotive Retailers Association president James Fleming and the organization’s board of directors are known to oppose direct to consumers sales in Connecticut. He was the brains behind the now-defunct 2015 website TeslaCrash.com, which featured headlines like “Owning A Tesla Is Awesome, Until You Get In An Accident” and “Person Buys Tesla, Person Immediately Crashes Tesla.”
Since 2014, each legislative session in Connecticut has studied the possibility of allowing Tesla to open a store in the state. Still, Fleming has been successful in preventing this from happening. However, he argues that the purpose is not to maintain the profit margins of the dealership repair centers.
“Parts and service are only one of several profit centers in a dealership,” he explains. As a result, instead of fighting Tesla dealerships, he claims, he’s doing so to ensure that you don’t end up with a lemon.
The lobbying campaign
Regardless of their true objectives, the dealers are strongly resisting.
Each time legislation allowing Tesla to sell cars directly to consumers is up for debate, the dealerships launch a massive public relations and advertising effort. Although they claim that allowing this will destroy hundreds of jobs, they do not present any proof to back up their claim.
As a last resort, CARA has vowed to put up a candidate against any elected officials who don’t share their views on issues.
In other states, there are similar activities taking place. One of the most generous political donors in Arizona is a car salesman. When Doug Ducey was elected governor, he gave $150k to help him win the election. He also served on the governor’s inaugural committee, which included just five individuals.
And it’s much worse in Michigan, the state home to most of the country’s gas-powered automobile manufacturers. At one time, the law in Michigan specified: “A manufacturer shall not…sell any new motor vehicle directly to a retail customer other than through its franchised dealers.”
“Its,” which means “manufacturer’s franchised dealers,” is the keyword. As a result of this regulation, Tesla should be exempt because it does not have any dealers.
Joe Hune’s wife is a registered lobbyist for the business that represents Michigan auto dealers, so he added an amendment to Michigan H.B. 5606 in October of 2014, “bowing to the demands of car makers and vehicle dealers,” according to a Cato Institute report.
The only modification was the omission of the preposition “its.” “A manufacturer shall not…sell any new motor vehicle directly to a retail customer other than through franchised dealers,” according to the new sentence.
Although this amendment was proposed just hours before the legislature was set to dissolve, it was enacted with no discussion, input from legislators, and committee procedure. Hune amendment supporters stated they had no idea what it was intended to accomplish or that it was designed to force Tesla away from the Michigan economy.
The Michigan dealer association, auto manufacturers, and state lawmakers met with Tesla’s general counsel Todd Maron in June 2016 to seek a solution that may allow Tesla to sell and repair its cars in Michigan. Tesla came away from that conversation knowing precisely how much power the automobile industry wields over legislators.
“The Michigan dealers do not want you here,” lawmaker Jason Sheppard told Maron. “The local manufacturers do not want you here. So you’re not going to be here.”
By filing litigation against the state, Tesla has requested that it be tried before a judge and jury.
Are gas-car dealerships interested in selling electric vehicles?
It’s James Fleming of CARA who has a proposal for Tesla. Musk’s agents have been notified for the past five years that he is welcome to open a franchise in Connecticut, according to the spokesman. “Put it to the test and see whether it works!”
Since gas-car franchise owners are terrible at selling electric automobiles, Tesla claims that will never happen. All of them have financial interests to direct you toward a gas automobile, whether they’re ignorant or deliberately attempting to persuade you out of it.
According to a Consumer Reports investigation in 2014, 19 secret shoppers were deployed to 85 dealerships across four states to pose as possible EV purchasers. Almost no one in the sales department could answer queries concerning battery life and warranties, and even fewer were aware of the state tax benefits that could be available. The Prius Plugin-battery has to be replaced “every couple of years,” according to one Toyota sales representative. A Ford sales manager told one shopper that an electric Focus does not exist.
In addition, 41% of dealerships actively discouraged potential customers from purchasing an electric vehicle.
The Sierra Club conducted similar research in 2016, involving 174 covert shoppers who visited or called 308 dealerships in 10 different states. There were no significant differences in the outcomes. Electric vehicles with dead batteries were on the lot in 14% of the dealerships. More than one in three salespeople did not disclose the $10,000 or more in federal and state EV subsidies. In 42 percent of the parking spaces, it was necessary to scout around for electric vehicles before finding them.
In several cases, undercover buyers went to franchised dealerships. They asked to test-drive an EV, and the dealer has done everything to hide the vehicle from the buyer. To make the sale, they’ll have to deal with a lot of inquiries, and they’ll be unfamiliar with the product as well.
Fleming, a lobbyist for automobile dealerships, disputes the idea that dealerships are unwilling to sell electric vehicles.
He claims: “They say dealers don’t want to sell these.” The dealer has already purchased the vehicle by the time it is placed on their lot; therefore, that’s a ludicrous argument. They are the owners. Because of this, there are related costs. The automobile has to be moved! Whether it’s an EV, internal combustion, or a fuel cell vehicle, they gotta move those vehicles off the lot.”
Aside from Tesla, he claims that 44 other automakers produce electric vehicles, and its franchisees have no trouble promoting and selling them. “There are Bolts and Volts, and Volvo is talking about becoming completely electric in the next five to ten years. So I don’t believe that argument has any weight.”
What does this mean for us?
Each side is confident of its victory.
“There is a chance Tesla will disappear if they don’t get their act together. Or they’ll be bought by someone who accepts the franchise system.” Fleming claims.
The fight goes on in Connecticut. “These entrenched special interests have pushed hard, and they appear to be more entrenched every year,” Senator Boucher said.
Bruce Becker, executive director of the EV Club, said that banning Tesla “is not a viable long-term plan.” People are still buying Teslas—just it’s that they’re doing it from out of state now.
No dealers have gone out of business due to Tesla’s, Maron claims. “Since our founding, we’ve been permitted to operate alongside other vehicle dealerships in all of the other states and countries where we’ve done business. The only way to win is to compete, and that’s something everyone does.”
He claims that this is why Tesla has been instrumental in improving the dealer-franchise legislation in various states, allowing Tesla to build at least some storefronts.
“If we can get those laws altered in the courts or the legislature, it’s only going to take a little while,” he adds. “We’ll never give up on this problem, which is fundamental to our identity.”
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