Published October 24, 2012
By Pete Brissette
With two lawsuits filed recently against Tesla Motors alleging violation of state laws prohibiting factory owned dealerships, the company’s chairman and CEO is attempting to set the record straight regarding Tesla’s retail business model.
Elon Musk offered these views via an enthusiast blog post saying Tesla’s stores haven’t any provision for selling a vehicle on site. Musk said also the only thing the “Product Specialists” at Tesla stores can do is “get you to consider placing a reservation.”
As for the lawsuits, these are not the first, and issues have been brewing for a while now. One of two suits filed in New York Oct. 16 mirrors one in that same state from 2010 that was thrown out due to a missed statute of limitations deadline. This latest attempt is again by the Greater New York Automobile Dealers Association, along with one its dealer members.
The New York suit says Tesla violated state franchise law by opening a store in Westchester county. As was the case previously, the October suit also names the New York Department of Motor Vehicles as a defendant for granting Tesla the dealership license.
Similarly, on the same date, the Massachusetts State Automobile Dealers Association and some of its dealers filed suit, seeking to shut down Tesla's store in the Boston area.
According to the National Automobile Dealers Association (NADA), 48 states have laws prohibiting or restricting factory owned dealerships.
Citing the obvious differences between an all-electric vehicle and a car with a traditional internal combustion engine, as well as the greater public’s lack of knowledge of EVs, Musk explained that Tesla is at an immediate disadvantage in a traditional car dealership setting:
“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. It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business. This would leave the electric car without a fair opportunity to make its case to an unfamiliar public.”
According to Musk, Tesla’s company owned stores serve more as a venue to educate consumers about Tesla vehicles, as well as electric vehicles in general, saying Product Specialists and the company’s stores are nothing like a traditional dealer:
“They are not on commission and they will never pressure you to buy a car … Our stores are designed to be informative and interactive in a delightful way and are simply unlike the traditional dealership with several hundred cars in inventory that a commissioned salesperson is tasked with selling. Our technology is different, our car is different, and, as a result, our stores are intentionally different.”
Robert O'Koniewski, executive vice president of the Massachusetts dealer association, isn’t buying Musk’s rationale. "They claim they're operating under the guise of a nonsales showroom, and we call that out as an outright scam.”
But in Musk’s expressed view, auto consumers are a hard nut to crack, at least for now, when shopping through the usual channels:
“By the time most people decide to head to their local dealer, they have already pretty much decided what car they want to buy, which is usually the same make as their old car. At that point it is largely just a matter of negotiating with the dealer on price. Tesla, as a new carmaker, would therefore rarely have the opportunity to educate potential customers about Model S if we were positioned in typical auto dealer locations.
That is why we are deliberately positioning our store and gallery locations in high foot traffic, high visibility retail venues, like malls and shopping streets that people regularly visit in a relatively open-minded buying mood. This allows us to interact with potential customers and have them learn about our cars from Tesla Product Specialists before they have decided which new car to buy.”
Part of the dealer associations’ concerns stem from the idea that a manufacturer has the capital to outspend dealers in the areas of marketing and advertising, creating an unfair playing field for franchised dealers. However, Musk highlighted a technicality about franchise laws, saying that Tesla hasn’t violated such laws because it hasn’t granted a single franchise:
“Automotive franchise laws were put in place decades ago to prevent a manufacturer from unfairly opening stores in direct competition with an existing franchise dealer that had already invested time, money and effort to open and promote their business. That would, of course, be wrong, but Tesla does not have this issue. We have granted no franchises anywhere in the world that will be harmed by us opening stores.”
Musk added to his defense of Tesla’s business model by downplaying plans to deploy company stores in light of intentions to open more service centers, even in places where no Tesla retail locations exist. The idea here, according to Musk, is to emphasize customer service over sales.
The company currently operates nine service centers, but by year’s end Musk says 26 centers will exist, putting 85 percent of Model S reservation holders within 50 miles of a service center and 92 percent within 100 miles.
Growing a network of retail locations if not outright dealerships is of obvious benefit to Tesla, however, and it was implied motives deeper than merely ensuring everyone plays by state franchise rules may lay behind the New York and Massachusetts associations’ lawsuits.
Tesla believes the suits "are starkly contrary to the spirit and the letter of the law," Musk said. "This is supported by the nature of the plaintiffs, where one is a Fisker dealer and the other is an auto group that has repeatedly demanded that it be granted a Tesla franchise. They will have considerable difficulty explaining to the court why Tesla opening a store in Boston is somehow contrary to the best interests of fair commerce or the public."
Hybridcars.com is looking into questions surrounding the legal confrontation, and will follow up as further details become available.
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