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Tesla Motors has faced dealership disputes in several U.S. states as a result of local laws. In the United States, direct manufacturer auto sales are prohibited in almost every state by franchise laws requiring that new cars be sold only by independent dealers. The electric car manufacturer Tesla Motors maintains that in order to properly explain to their customers the advantages their cars have over traditional vehicles with an internal combustion engine, they cannot rely on third party dealerships to handle their sales.[1][2]

Corporate strategy

Tesla Motors has an 80% degree of vertical integration in 2016 according to Goldman Sachs. The integration includes own sales channels and proprietary charging infrastructure among others. The high degree is rare in the automotive industry, where companies typically focus on engine manufacturing and vehicle assembly, outsourcing 80%[3] of components to suppliers while letting franchises serve as sales points.[4][5]

Some of Tesla's stated goals are to increase the number and variety of electric vehicles (EVs) available to mainstream consumers by selling its own vehicles in company-owned showrooms and online.[6][7][2] Tesla states that owning stores "creates an information loop from our customers straight into manufacturing and vehicle design".[8] Tesla attempts to not make a profit on servicing cars.[9][10][11]

Sales model

Tesla Motors operates more than 200 stores and galleries around the world, 120 of which are outside the USA. It owns the stores and sells directly to customers via the internet and in non-US stores.[12][13][14][better source needed]

Tesla has a low budget for marketing, and uses a referral program and word of mouth to attract buyers.[15]

US dealerships and automotive dealership disputes

Tesla gallery in Austin, Texas.
External image
image icon Map of direct automaker sales, regarding Tesla conditions. Archive

There are stores and galleries[16][17]—usually located in shopping malls—in 22 US states and Washington DC. Customers cannot buy vehicles from stores,[18][19][20] only from the Tesla Motors website.[21] The stores serve as showrooms that allow people to learn about the company and its vehicles.[2] Some galleries are located in states with restrictive dealership protection laws which prevent discussing price, financing, and test drives, as well as other restrictions. Tesla has set up mobile-shipping-container "stores"[8] and 6 Airstream travel trailers each pulled by a Model X, reaching areas not served by brick-and-mortar shops.[22][23]

Tesla's strategy of direct customer sales and owning stores and service centers is different from the standard dealership model in the US vehicle marketplace.[24] Tesla Motors is the only automaker that sells cars directly to consumers; all other automakers use independently owned dealerships[25][26] (partly due to earlier conflict),[27][28][29] although some automakers provide online configuration and financing.[30][31][32] 48 states have laws that limit or ban manufacturers from selling vehicles directly to consumers,[33][34][35] and although Tesla has no independent dealerships, dealership associations in multiple states have filed numerous lawsuits against Tesla Motors, to prevent the company from selling cars. North Carolina and New Hampshire sided with Tesla, while Virginia and Texas sided with dealers.[36] Lack of outlets and customers reduce the need for service centers. Tesla does not have service centers in 19 states in 2016.[37] Media cited direct sales or lack thereof as reasons when selecting the site for Gigafactory 1.[38][39]

Countries other than USA do not have such laws protecting car dealership.[8] The Federal Trade Commission recommends allowing direct manufacturer sales,[40][41] which analysts believe would save consumers 8% per purchase on average.[28][42] The National Automobile Dealers Association states that franchises (such as offered by its members) offer better value for customers than direct sales.[24][43][44]

Restrictive states

Alabama

Alabama regards manufacturer-owned stores and service centers as "unfair and deceptive trade practices".[45] However, in August 2016 State Senator Tom Whatley introduced Senate Bill 22, assigned to the Senate Tourism and Marketing Committee, which would allow a manufacturer of alternative fuel vehicles to sell and lease its vehicles directly to the public.[46]

Michigan

On October 1, 2014, Michigan House Bill 5606, drafted "to keep automakers from forcing dealers to charge different documentation fees to different customers,"[47] was amended with a section stating that a manufacturer shall not "sell any new motor vehicle directly to a retail customer other than through its franchised dealers." The word "its" was removed, which assumed the manufacturer already had dealerships. Both houses passed the revised bill the next day, with only one nay vote from Tom McMillin in either house of the Michigan Legislature. Tesla argued that the original law would have allowed them to sell, because they did not yet have franchised dealers.[48] On October 21, General Motors released a statement saying that governor Rick Snyder should sign the bill into law because "we believe that House Bill 5606 will help ensure that all automotive manufacturers follow the same rules to operate in the State of Michigan." The same day, Snyder signed the bill. Tesla responded to the GM statement by saying "GM distorts the purpose of the franchise laws which are in place not to cement a monopoly for franchised dealers, but rather to prevent companies with existing franchises from unfairly competing against them."[49] The law in Michigan even ban manufacturers from operating service centers[50] and from giving test drives.[51] According to Tesla, the law was changed to also prohibit galleries.[52] Michigan denied Tesla's request for a gallery in September 2016,[53] and Tesla filed a federal lawsuit against the State.[54] Tesla opened a showroom in the Nordstrom shop in the Somerset shopping mall in Troy, Michigan in December 2016, with a "Not For Sale" sign on the displayed car.[55]

New Jersey

On March 10, 2014, it was announced that New Jersey Motor Vehicle Commission and Governor Chris Christie's administration would be holding a meeting to pass a new proposal into law. This new proposal, PRN 2013-138, was announced one day before it was to be put into law. Tesla Motors responded by saying that the proposal "seeks to impose stringent licensing rules that would, among other things, require all new motor vehicles to be sold through middlemen and block Tesla's direct sales model," and that "[Governor Christie's] Administration has decided to go outside the legislative process by expediting a rule proposal that would completely change the law in New Jersey."[56] The law was passed, and "Tesla will no longer [be able to] sell electric cars in New Jersey, effective April 1". Diarmuid O'Connell, Tesla Vice President of Business Development, said, "Worse, it has done so without any reasonable notice or even a public hearing."[57] Forbes contributor Mark Rogosky said, "The state's new rules protect its auto dealers from having to compete with Tesla's direct sales model"; he points out that this is a direct contrast from what Christie said earlier, "We are for a free-market society that allows your effort and ingenuity to determine your success, not the cold, hard hand of the government."[58] Kevin Roberts, a spokesman for the Christie administration, responded by saying "it was the [Tesla Motors] company, not the governor's office, that was attempting to bypass normal procedures.".[56][59] In March 2015, the ban on Tesla Motor's operations in New Jersey was lifted, but with restrictions (maximum of 4 locations, and 1 service center).[60]

Texas

Texas law states "Except as provided by this section, a manufacturer or distributor may not directly or indirectly:(1) own an interest in a franchised or nonfranchised dealer or dealership;(2) operate or control a franchised or nonfranchised dealer or dealership; or(3) act in the capacity of a franchised or nonfranchised dealer. (Tex. Occ. Code Ann. § 2301.476) and "A motor vehicle shall not be advertised for sale in any manner that creates the impression that it is being offered for sale by the manufacturer or distributor of the vehicle. An advertisement shall not contain terms such as “factory sale,” “fleet prices,” “wholesale prices,” “factory approved,” “factory sponsored,” “manufacturer sale,” use a manufacturer's name or abbreviation in any manner calculated or likely to create an impression that the vehicle is being offered for sale by the manufacturer or distributor, or use any other similar terms which indicate sales other than retail sales from the dealer" (43 Tex. Admin. Code § 215.261).

These laws make it difficult to buy a car from Tesla Motors in person, at a Tesla Gallery. Thus, all Texas orders are taken via the internet or over the phone. Texas residents can still easily buy a car from Tesla, but the purchase is handled as an out-of-state transaction. This may mean that the loan will not include Texas state sales tax, which instead must be paid when the buyer registers the car with the state. Also, the buyer cannot have the car delivered to their home or office, but must pick it up from a Tesla Service Center in another state. In 2015, Tesla lobbied the Texas Legislature to modify the law[61] to allow Tesla to sell directly to consumers, and specifically allow Tesla employees to discuss "financing, leasing, or purchasing options" at the firm's existing stores in Austin, Dallas, and Houston.[62] Texas considered legislation in 2015 to allow Tesla to operate in the state[63] but legislation was not passed.[64]

As of 2016, most of the GOP delegates support direct sales while Governor Abbott prefer the current system. According to Texans for Public Justice, Tesla spends $1.3m on lobbyists while dealerships spend $1m.[65]

Utah

Utah also bans direct auto sales. In connection with Tesla's request in 2016 that the Utah Supreme Court reverse the state's ban on direct auto sales, the automobile dealers filed documents to the court that was interpreted as supporting Tesla's case by stating: 'Tesla builds a car. It has four wheels. You press a pedal with your foot to make it go, and you turn the steering wheel to change direction. That you plug it in rather than gas it up is a trifle'.[66][67]

Virginia

In Virginia Tesla has obtained license from the Department of Motor Vehicles (DMV) for a single direct sales dealership (Tysons Corner). Upon learning of Tesla's attempt to obtain a second dealership in the state, the Virginia Automobile Dealers Association filed a lawsuit in March 2016 against both Tesla and the DMV to prevent the licensing of the second dealership.[68] In September 2016, the Virginia Department of Motor Vehicles (VDMV) recommended ending Tesla direct sales, as at least 11 dealerships were interested in selling Tesla vehicles.[69] The VDMV later allowed Tesla to open another shop (Richmond), as Tesla has no dealerships to compete against;[70] the 11 interested dealerships would not be able to compete on undiscounted prices, as Tesla has the same price online and in shops.[71][72] Third-party profits could come from servicing as is traditional, but Tesla already has satisfactory servicing.[72][73]

Others

West Virginia does not allow Tesla-owned stores or showrooms.[74]

Indiana allows a service center[75][76] and manufacturer sales for 30 months, ending direct Tesla sales by the end of 2017.[77]

Arizona and Connecticut does not allow direct sales. A Missouri circuit court ruled in 2016 to end direct sales.[78]

Permissive states

In September 2014, Massachusetts allowed Tesla to sell directly.[79] Georgia laws are favorable[clarification needed] to Tesla.[74][80]

In May 2015, Maryland approved, through House Bill 235,[81] direct Tesla sales to consumers beginning in October 2015, allowing four stores statewide. The legislation was crafted specifically for Tesla.[82][83]

Surveys

In 2014, Consumer Reports performed a mystery shopper survey of 19 secret shoppers in 85 dealerships, querying electric vehicles (EV). Most shoppers found it to be a positive experience, although 35 dealerships recommended petrol cars instead, and 13 discouraged EVs. The most knowledgeable dealerships were Chevrolet, and the least were Toyota.[84]

In 2016, two shopper surveys showed contrasting shopping experiences between Tesla and traditional dealerships. One performed by the environmental organization Sierra Club found that in 14% of traditional dealerships, their electric cars were not charged to test drive, and 33% did not discuss $7,500 tax credits.[85][78]

Another study by industry analyst Pied Piper using mystery shoppers found that Tesla sales stores (not galleries) differed among each other on sales techniques, and many stores were reluctant to engage in closing a sale.[86]

Customers generally view car shopping as a challenging experience.[87]

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