Is Tesla Motors being Napsterized by the Automobile Dealers Associations?

Is the fate of Napster connected to the eventual fate of Tesla Motors?  Even though Tesla Motors is flying pretty high, there is legal action underway that could derail the whole Tesla Motors story, and doom their project to bring a new kind of automobile to the public.

Napster, of course, was a high-flying music sharing service in the late 90’s and was sued out of existence by the Music Industry.  Rather than develop online music distribution in the 90’s, and take an innovative strategy that embraced the future, the Music Industry chose lawsuits and to preserve the existing order.

Many think this set back development of online music services by years.

Tesla Motors is in the early phases of facing a similar assault by the existing order.  The National Automobile Dealers Association and several state-level ADA’s are seeking to block Tesla from operating stores and selling cars.

Tesla Model S

Red Tesla Model S in the mountains

The reason given is that the NADA is seeking to protect consumers, but the effect would likely to be preservation of the existing order.

Across the U.S. are laws governing the requirements of a business that sells cars.  The requirements spell out conditions that result in the typical car dealership – the vast parking lot full of cars, the corner for used car sales, and the service center in the back.  The requirements also say that automobile manufacturers cannot sell direct to the public, but must sell to independent car dealers, and they are the ones who sell to the public.  The laws were made in reaction to some anti-competitive actions attempted by automakers a few decades ago, meaning that there is some rational basis for the regulations.

Tesla Motors is taking a different approach.  They sell cars directly to the public.  Their show-rooms are not set in a typical car dealership, but in high traffic shopping malls.  The service center isn’t behind the show-room, but in a facility somewhere in the urban region.  As for used cars, the gasoline cars that come into Tesla’s possession are handed over to 3rd party used car companies, and the Tesla branded cars are refurbished and sold as reconditioned cars below original sticker price.

Tesla’s management says they have to take an approach like this, and point to the failures of Coda Automotive and Fisker Automotive as the case in point.  The latter two both gave franchise arrangements to regular automobile dealers, neither had much sales success, and both are crumbling into bankruptcy.

While Tesla has a point in that comparison, it’s not quite an apples-to-apples comparison.  Coda, for example, simply was not well enough known by the public to make much headway, and many panned the Coda electric car for its dated style and features.  Fisker, on the other hand, was better known, but had their own quality problems, and the company was woefully late in getting to market.

The NADA contention is that Tesla should act in compliance with existing law, and grant franchises to existing dealers.  Tesla’s response is to claim if they were to do so, the dealers would have no incentive to push Tesla’s electric cars.  Why?  Because to sell the public on an electric car undermines the whole sales proposal of gasoline powered cars.  As a result, the typical car dealership is going to (according to Tesla) put the electric car in the back of the lot and not do anything to push sales.

Maybe that’s true for typical car dealerships, but there are plenty of Nissan and Chevy dealerships who are going overboard to promote the Nissan Leaf and Chevy Volt.  Therefore, Tesla’s contention is not true of all car dealerships.

The consumer freedom issue is an interesting angle.  The system as it exists forces consumers to buy at car dealerships, and there’s little freedom to buy through a different model.

But what about the freedom to get car service from any autoshop, or even perform service on your own?  Gas car buyers often like to get their hands greasy (shade tree mechanics) and there’s also a huge array of car repair shops of all shapes and sizes servicing gasoline cars.  There isn’t an equivalent system for electric car service, and Tesla’s cars in particular are so specialized that service of the main components can only be done at Tesla Service Centers.  Is this a problem?  Will Tesla ever turn evil and start gouging customers in a major way, given the exclusive service arrangement?

In an answer given by Elon Musk in the 2013 Tesla Shareholders meeting last week, Elon sounded like he was not 100% opposed to a franchise arrangement if there were enough safeguards in the agreement.  He was asked about sales in Mexico or other areas in Central and South America.  His answer talked about the possibility to make a franchise agreement, if there were sales numbers targets and the like.

Specifically, Musk said:  “We definitely want to sell Tesla cars in Mexico, and other countries.  You should expect that we’ll do that.  I think the most likely outcome is that we would go direct.  It’s not as though I’m hellbent only on going direct, but when people have proposed that we give them an exclusive distributorship they generally don’t agree that should come with some sales commitment.  (laugh) Which seems a little silly.  (mocking) Okay, why would we do that?  (returning to seriousness) We would only agree to an exclusive distributorship if they committed to a certain sales volume, otherwise we would cut ourselves off from the ability to sell products in that region.”

In other words, it’s about sales volume and the ability to sell in a given region.  We should also note a parallel with Apple Computer that was present in the question.  Apple had trouble getting traditional PC dealerships to sell their products and switched to a direct sales model.  Ever since Apple has been tremendously successful, and just a few months ago was the most highly valued company on the stock market.

The story is rapidly unfolding and the fight is happening in several states in the U.S.  In Texas a law which would have granted an exemption to companies like Tesla was defeated.  North Carolina is seeking an outright ban on direct car sales.  The Virginia DMV has banned Tesla from opening a store in Tysons Corners, an area that would obviously see huge sales of the Model S given the number of high net worth individuals living in the Northern Virginia suburbs of Washington DC.

Here’s some links collected over the last few months

Tesla Motors might make federal case out of dealership fight in Texas and elsewhere

Elon Musk pitches Texas legislature on right to sell Tesla Model S in Texas

Coda Automotive furloughs more employees to bolster finances

Fisker workers on temporary furlough to conserve cash while seeking rescue

Fisker’s horrible year leading to Henrik Fisker’s resignation

March 2013 electric car sales best ever according to EDTA, led by Leaf and Model S sales

Tesla Motors shows strong sales, big revenue growth for Q1 2013

Dealers Fight Tesla Via Legislatures

Tesla Loses Their “No Dealership” Selling Plans In Texas, 2nd State To Be Defeated In
Tesla CEO fights for new electric-car sales model in U.S.

Pro-Tesla Motors bill dies in Texas House

Hearing On Tesla Selling Cars In North Carolina Set For May 9th, But You Can Take Action

Houston car dealer supporting direct car sales exemption for Tesla Motors

Tesla’s challenge to dealerships sputters in Texas

Virginia Denies Tesla Motors Request to Open Store in State

DMV denies Tesla request to run its own dealership in Fairfax

Tesla gains legal ground in New York dealer fight

North Carolina:

Law would stop Tesla electric car sales in NC

Read more here:

North Carolina Wants To Make It Illegal For Tesla To E-Mail Customers

About David Herron

David Herron is a writer and software engineer living in Silicon Valley. He primarily writes about electric vehicles, clean energy systems, climate change, peak oil and related issues. When not writing he indulges in software projects and is sometimes employed as a software engineer. David has written for sites like PlugInCars and TorqueNews, and worked for companies like Sun Microsystems and Yahoo.
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About David Herron

David Herron is a writer and software engineer living in Silicon Valley. He primarily writes about electric vehicles, clean energy systems, climate change, peak oil and related issues. When not writing he indulges in software projects and is sometimes employed as a software engineer. David has written for sites like PlugInCars and TorqueNews, and worked for companies like Sun Microsystems and Yahoo.

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